This situation applies to me. I have a single-member LLC that loans money to real estate investors. The LLC's primary source of income is the interest earned on those loans. I filed this income on the "Other Income" section of the Schedule C. For those of you who have said you filed this way last year and have not heard anything from the IRS, it's been my experience that it takes the IRS about 3 years to catch up to you. The reason I'm on this board right now posting about this is because I just recently got a letter from the IRS stating I under-reported for 2018 and that I need to pay. About 1 months ago I put all my documentation together showing I put this income on Schedule C and faxed that to the IRS. I have yet to hear back.
I've gone back into TurboTax 2018, 2019, and 2020 (I filed in Feb) and moved the income from Sch C to Sch B just to see what would happen. For 2018 my Fed taxes owed increased by $31 and my State taxes owed increased by $727. For 2019 my Fed taxes remained the same, $0 change. My state taxes owed increased by $1003. For 2020, my Fed taxes owed decreased by $324 (refund) and my State taxes increased by $264.
Without digging into the forms, I have absolutely no idea why this is happening. The only consistent thing is that I will owe more to NJ each year if I report on Sch B instead of Sch C.
If the IRS accepts my explanation for reporting the 2018 interest income on Sch C, I guess I'll have to do my taxes both ways each year to see which one nets me the biggest return. For 2020, it seems like I should file an amended return and swap the income from Sch C to Sch B, I'll net $140 between Fed (+$324) and State (-$284).
It seems that some who have posted here have been successful explaining this to the IRS. Have any of you been contacted by your States? Anyone have any idea what's happening here?
