Thanks everyone for the detailed responses! This has been incredibly helpful. Just to clarify my situation based on what I've learned here - my primary residence mortgage of $780k means I can only deduct interest on $750k of that debt. But the rental property mortgage interest gets deducted on Schedule E as a business expense, so it doesn't count against that $750k personal residence limit at all. I'm going to double-check my mortgage documents to see the exact dates and amounts to make sure I'm calculating this correctly. The grandfathering rules that Natasha mentioned are interesting too - I need to verify if any of our debt qualifies for the old $1M limit. Has anyone used the mortgage interest limitation worksheet in Publication 936? I'm still finding it confusing even with all this great advice. Might end up trying one of those AI tools or calling the IRS directly if I can't figure out the exact calculation.

I just went through this exact situation last year when I bought my first home over the $750k limit! One thing that really helped me was keeping detailed records of exactly when each mortgage was originated and what the funds were used for. For your primary residence at $780k, you're right that only $750k worth of interest is deductible on Schedule A. But here's something I learned the hard way - make sure you're calculating the percentage correctly. It's not just $750k/$780k of your total interest. You need to look at the actual loan balance throughout the year since it changes with each payment. The rental property being on Schedule E is definitely the way to go - that was a relief when I figured that out since it doesn't eat into your personal residence limit. One more tip: if you're using TurboTax, there's a section where it walks you through the mortgage interest limitation calculation step by step. It's much clearer than trying to work through Publication 936 manually. Just make sure you have all your 1098 forms and original loan documents ready before you start!

I've been following this thread and wanted to add my experience with code P distributions since I see a lot of confusion about timing and reporting requirements. I had a similar situation where I received a 1099-R with code P from my previous employer's Roth 401(k). The key thing that saved me a lot of headache was understanding that the IRS uses the "date of payment or distribution" shown on the form to determine which tax year it belongs to - not when you physically received the 1099-R document. In my case, the distribution happened in late December but I didn't get the form until February. Since the distribution date was in December, it belonged on that year's tax return. I had already filed my taxes, so I needed to file an amended return (Form 1040-X). The good news is that even though I had to amend, there was no additional tax owed since code P indicates a qualified Roth distribution. But the IRS still needs you to report it for their records matching system. One tip: if you're unsure about your specific situation, many retirement account providers have specialized tax support lines during tax season. They can usually explain exactly why your distribution received code P and confirm the reporting requirements. It's worth the phone call to get clarity rather than guessing and potentially filing incorrectly. Also, keep all your 1099-R forms and related documentation - if there's ever a question from the IRS later, having the paper trail makes everything much easier to resolve.

I can totally relate to your confusion with code P - I had the exact same panic when I first saw it! After dealing with this last year, here's what I learned that might help: Code P means it's a qualified distribution from a Roth account (either Roth IRA or Roth 401k), which is generally non-taxable. The key is to look at the actual distribution date on your 1099-R form, not when you received the document. If the distribution happened in December 2024, it goes on your 2024 return even though you're just getting the form now. Since you mentioned it's from an old 401(k), this was likely a Roth 401(k) that you either rolled over or took a distribution from. The $28,500 amount suggests it might have been the full account value. Even though code P distributions are typically tax-free, you absolutely must report it on your return. The IRS gets copies of all 1099-R forms and will send you a notice if there's a mismatch between what they have and what you reported. Your tax software should handle it fine once you enter all the information exactly as shown on the form. Don't overthink it - just input the details and let the software do the calculations. Most likely you won't owe any additional tax, but you'll have properly documented the distribution for IRS records. If you're still unsure, I'd recommend calling your retirement account administrator to confirm exactly what type of distribution this was and why it received code P. They usually have tax specialists available during filing season who can clarify these situations.

This is a great question that many small business owners face! I went through something similar with my marketing consultancy when I considered sponsoring my nephew's little league team. The key thing I learned is that the IRS really focuses on the business purpose test. You need to be able to demonstrate that: 1. Your target customers would actually see this advertising (are race fans your potential clients?) 2. The amount you're paying is reasonable for the advertising value received 3. You're treating this as a genuine business transaction, not family support One thing I'd add to what others have said - consider the timing and how it looks on your return. Since you mentioned this is only your second year in business, the IRS might scrutinize unusual expenses more closely. Make sure you can show this fits within your overall marketing strategy and budget. Also, think about whether there are other, more traditional advertising options that might give you better ROI. Sometimes the "family connection" aspect can cloud our judgment about whether it's actually good marketing for our business. Document everything meticulously if you move forward - treat your brother like any other vendor you'd hire for advertising services.

Just wanted to share my experience as someone who's been through this exact situation. I'm a small business owner (home renovation services) and put my logo on my brother-in-law's dirt track car three years ago. The documentation requirements everyone mentioned are absolutely critical, but I'd also suggest thinking about the optics from an audit perspective. When I set this up, I made sure to: 1. Pay the same rate other local businesses were paying for similar car sponsorships (I called around to get comparable rates) 2. Create a separate "advertising" line item in my books rather than burying it in general expenses 3. Take photos not just of the logo, but of the crowds at races to show potential audience size 4. Keep a simple log of any business inquiries that mentioned seeing my logo at the track The IRS did select me for an audit two years later (unrelated issue), but when they reviewed this expense, they had no problems with it because I had treated it like any other business advertising contract. The auditor actually commented that my documentation was better than most legitimate advertising expenses they see. One tip: consider starting smaller your first year and scaling up if it proves effective. Shows business judgment rather than just writing a big check to family. Good luck!

This thread has been incredibly helpful! I'm in a similar situation with my S Corp and was actually leaning toward the contractor approach until reading all these responses. The consensus is crystal clear - it's not worth the audit risk and actually defeats the purpose of having an S Corp structure. What strikes me most is how this seems like it should be a viable option on the surface, but the tax code and IRS guidance make it clear that owner-employees can't simply reclassify themselves as contractors to avoid payroll taxes. The whole reasonable compensation requirement exists specifically to prevent this kind of arrangement. I think the key takeaway for anyone considering this is that the S Corp tax advantages come from the proper balance of salary and distributions, not from trying to work around the employment relationship. Better to stay compliant and optimize within the established framework than risk penalties and back taxes from an audit.

Great discussion everyone! As someone who's been through multiple IRS audits with my S Corp, I can confirm that owner-contractor arrangements are absolutely a red flag they look for. During my last audit in 2022, the agent specifically asked about my compensation structure and whether I had ever tried to pay myself as a contractor. What many people don't realize is that the IRS has gotten much more sophisticated in detecting these arrangements through automated screening systems. They can easily cross-reference your 1120S with your personal return to spot inconsistencies in how you're reporting income from your own corporation. The "reasonable compensation" requirement isn't just a suggestion - it's mandatory for any S Corp owner who provides services to their business. The penalty for getting this wrong isn't just back taxes, it's also interest and potential fraud penalties if they determine you were deliberately trying to avoid payroll taxes. Stick with the tried-and-true approach: take a reasonable W-2 salary for the services you provide, then take additional profits as distributions. It's compliant, defensible, and gives you the tax benefits you're looking for without the audit risk.

The Additional Medicare Tax at $200k is definitely a curveball that catches a lot of people off guard. I went through this exact situation two years ago when my income jumped from $185k to $230k due to a promotion and larger bonus structure. Here's what I learned the hard way: the key is to treat your base salary and bonus as separate withholding calculations. For your regular paychecks, you can use the IRS withholding calculator to determine the right additional amount for line 4(c) of your W-4. I ended up adding $312 per biweekly paycheck to cover the additional tax burden. For the bonus component, since it's taxed as supplemental income at the flat 22% rate (plus the 0.9% Additional Medicare Tax on amounts over $200k), you need to calculate if that withholding will be sufficient. In most cases with a 25% bonus component, you'll need additional withholding from your regular paychecks to cover the shortfall. One strategy that worked well for me was to calculate my total expected tax liability in January, subtract all expected withholding (including the flat rates on bonuses), then divide the difference by my remaining pay periods. This gave me a specific dollar amount to add to each regular paycheck. Also consider maxing out your 401(k) early in the year if possible - this reduces your taxable income during regular pay periods and gives you more take-home pay when you need it most, before the bonus hits.

I'm dealing with a very similar situation and wanted to share what's been working for me so far. I crossed $200k for the first time this year (base salary $165k plus quarterly bonuses that will likely total around $50k). What I found helpful was using the IRS withholding estimator quarterly rather than just once at the beginning of the year. Since your bonus amount can vary, I recalculate my withholding needs after each quarter based on actual YTD income and update my W-4 accordingly. For the Additional Medicare Tax specifically, I learned that your employer will automatically start withholding the extra 0.9% once your YTD wages exceed $200k, but they don't look at your projected annual income. So if you get a large bonus early in the year that pushes you over $200k, you might have too much Additional Medicare Tax withheld if your total annual income ends up being closer to the threshold. I've been setting aside 30% of each bonus payment in a separate account, then making estimated tax payments quarterly based on where my projections stand. This gives me more control than trying to perfectly calibrate payroll withholding, especially with the variable bonus component. One thing I wish someone had told me earlier: the $200k threshold is per person, not household. So if you're married filing jointly, each spouse gets their own $200k threshold for the Additional Medicare Tax (though it's $250k combined for other purposes).