This is an excellent thread with lots of practical insights! As someone who's dealt with similar S Corp home office situations, I wanted to add a perspective on the timing considerations for making this decision. If your client has been consistently using the Schedule E rental approach for several years, switching to an accountable plan mid-stream requires careful consideration of the tax implications. You'll want to look at the cumulative depreciation taken on Schedule E, as this affects the basis in their home and potential recapture issues down the road. One approach I've successfully used is to run both scenarios (continuing with Schedule E vs. switching to accountable plan) to see the net tax impact over a 3-5 year period, including factoring in potential sale of the residence. Sometimes the depreciation recapture issue makes it worthwhile to stick with the current approach, especially if the rental income has been minimal. For the 2023 correction question, I'd recommend calculating both methods and only amending if there's a significant benefit. The IRS tends to scrutinize frequent changes in methodology, so you want to make sure you're settling on the approach you'll stick with long-term. Also worth noting: if your client is planning to expand their business use of the home or potentially move the business out of their residence in the near future, that could influence which approach makes more sense from a long-term planning perspective.

This has been an incredibly thorough discussion with excellent practical insights from everyone! I'm particularly impressed by the depth of analysis regarding the long-term implications of each approach. One additional consideration I'd like to add for practitioners dealing with these situations: documentation timing and consistency across related returns. When implementing an accountable plan, ensure that the corporate minutes reflecting the adoption of the plan are dated before the first reimbursements occur. I've seen situations where the IRS challenged accountable plan treatment because the formal documentation was created after the fact. Also, if your client has been taking home office deductions on their personal return (Schedule C) for any portion of their business activities, you'll need to carefully coordinate this with either the Schedule E rental or accountable plan approach to avoid double-dipping on deductions. For those considering the accountable plan route, remember that the plan should specify maximum reimbursement amounts and require pre-approval for larger expenses to maintain the business connection requirement. This is especially important for repairs and maintenance expenses, which can vary significantly from month to month. Finally, I'd recommend creating a simple annual review process with clients using either approach to ensure the business use percentage remains accurate as their operations evolve. Many taxpayers set this up initially and then forget to adjust it as their business grows or changes location within the home. The key takeaway from this discussion seems to be that both approaches can work, but proper documentation and consistent long-term application are critical regardless of which path you choose.

One thing nobody has mentioned yet is that the form 8962 repayment limitation is income-based, so it varies depending on your household income as a % of the federal poverty level. If your income is just slightly above one of these thresholds, you might be able to reduce your income enough to qualify for a lower repayment limit. For 2024 returns (filed in 2025), I believe the limits are: - Under 200% FPL: $350 single/$700 family - 200-300% FPL: $950 single/$1,900 family - 300-400% FPL: $1,500 single/$3,000 family - Over 400% FPL: No limitation, full repayment

I've been dealing with Form 8962 repayment limitations for a while now, and one thing that really helped me was understanding the timing of when to report income changes to the marketplace. If you know your income is going to be higher than expected (like getting a bonus or new contract), you can actually report this change during the year and reduce your advance premium tax credit payments. This prevents you from having to pay back as much at tax time, even with the repayment limitation protection. The key is to report changes within 30 days if possible. I learned this the hard way after two years of hitting the repayment cap. Now I check my projected annual income every quarter and update the marketplace if there's a significant change. It's made my tax filing much smoother and reduced the amount I have to repay each year.

Has anyone else successfully charged between their own business entities like OP is considering? I'm in a somewhat similar situation with a consulting business and a rental property, and I sometimes do consulting work that benefits the rental. Never thought about actually charging between them.

This is a really nuanced situation that requires careful handling. Based on what you've described, you're actually in a decent position to maintain business classification despite the recent losses. For your first question about the vacation rental paying your advertising business - this is absolutely legitimate as long as you treat it like any other business transaction. Create proper invoices, document the services provided, and charge fair market rates. This can actually help your Schedule C business show some income while providing a legitimate deduction for your rental property. Regarding the hobby classification concern - don't artificially inflate profits by not reporting expenses. Instead, focus on documenting your profit motive. Since you've had profits for most of the 20 years, that's strong evidence in your favor. Make sure you're documenting: - Your business plans and efforts to return to profitability - Marketing activities to drum up new clients - Any changes you've made to improve operations - Your expertise and time invested in the businesses The IRS looks at the totality of circumstances, not just recent losses. Your long history of profitability combined with documented efforts to improve the struggling business should support your business classification. The fact that you're actively trying to get new clients for the low-revenue business is particularly important to document. Consider keeping detailed records of your business development activities, client outreach efforts, and any strategic changes you're implementing. This demonstrates the businesslike manner and profit motive the IRS looks for.

This is definitely a stressful situation, but you're handling it the right way by addressing it proactively! I went through something similar a few years ago where I had filing status inconsistencies. One thing that really helped me was creating a spreadsheet with all the key information for each tax year - income amounts, deductions claimed, taxes paid, etc. This made it much easier when I met with my new tax professional to quickly assess the situation. Also, don't beat yourself up too much about not catching this earlier. Tax forms are confusing, and it sounds like your accountant really dropped the ball here. The fact that your husband's returns showed "married filing separately" while yours showed "single" should have been a huge red flag that any competent tax preparer would catch. Since you mentioned you're getting a new accountant anyway, I'd recommend interviewing a few different tax professionals (CPAs or enrolled agents) and specifically asking about their experience with amended returns and filing status corrections. Some are much more experienced with these complex situations than others. The good news is that this is fixable, and as others mentioned, there's a decent chance you may have actually overpaid taxes by filing as single rather than married filing separately. Keep all your documentation organized and take it one step at a time!

I'm a tax professional and want to add some perspective that might help ease your anxiety. Filing status errors like this are more common than you'd think, especially when spouses use the same preparer but handle their taxes separately. The key thing to understand is that the IRS generally treats honest mistakes differently than intentional fraud. Your situation clearly falls into the "honest mistake" category, particularly since your husband's returns correctly showed "married filing separately" - this actually works in your favor as it demonstrates there was no intent to deceive. Here's what I'd recommend for your immediate next steps: 1. Gather all tax returns for both you and your husband from 2018-2023 2. Calculate your actual tax liability using "married filing separately" status for each year 3. Determine if you owe additional taxes or if you overpaid (single filers often pay more than MFS) 4. For the Roth IRA issue, calculate your modified adjusted gross income for each contribution year to see if you were actually eligible The statute of limitations works in your favor here - you can only be assessed additional taxes going back 3 years (2021-2023) unless there's substantial underreporting. And if you overpaid in any of those years, you can claim refunds. Don't panic about penalties either. First-time penalty abatement is available if you've been compliant otherwise, and reasonable cause provisions often apply to situations like yours where there was professional preparer error. The most important thing is getting a qualified tax professional (CPA or enrolled agent) who specializes in tax controversy and amended returns. This is definitely fixable!

I went through this exact same confusion last year! The key thing to understand is that "effectively connected with U.S. trade or business" has a very specific meaning - it's not just about having a bank account in the US while you're here temporarily. For your situation, Exception 1(a) is almost certainly the right choice. Since your bank gave you a letter stating the account is subject to IRS information reporting, and you're just keeping savings there (not running a business), this falls under passive income reporting. Exception 1(b) would only apply if you were actually operating a business in the US and the bank account was directly related to that business activity. Just being temporarily in the US with a savings account doesn't qualify. I'd recommend going with Exception 1(a) and including your bank's letter as supporting documentation. The IRS is pretty clear that any interest-bearing account subject to their reporting requirements qualifies under this exception, regardless of how much interest you're actually earning.

I just wanted to add my experience since I went through this exact same situation about 6 months ago. Like you, I was completely confused about which exception to choose, and I ended up making it more complicated than it needed to be. After reading through all the IRS instructions multiple times and calling my bank for clarification, I learned that the key question is really simple: Are you using this bank account for business purposes or personal savings? Since you mentioned you're just keeping savings there while temporarily in the US, Exception 1(a) is definitely the right choice. The "effectively connected with U.S. trade or business" language in Exception 1(b) is very specific - it means you're actually running a business or engaged in commercial activity in the US, not just maintaining a personal account. My bank's letter was similar to yours - it just stated that the account was subject to IRS information reporting. That's all you need for Exception 1(a). The IRS approved my application in about 8 weeks with no issues. One tip: Make sure to include a copy of your bank's letter with your W-7 application as supporting documentation. It directly supports your choice of Exception 1(a) and shows the IRS exactly why you need the ITIN. Good luck with your application! You're overthinking it - Exception 1(a) is the way to go for your situation.