I'd actually been handling this wrong on my returns for years until my return was audited in 2023. The IRS was very clear: each tier maintains its own character. My CPA had to prepare a detailed analysis for each entity where I claimed material participation. For partnerships where I was just a limited investor (even though they were held by my materially-participating HoldCo), the income remained passive. The IRS agent specifically referenced Reg 1.469-2(f) and said HoldCo's active management doesn't "cleanse" the passive character of the income from lower tiers.

This is exactly the type of complex flow-through situation that trips up many taxpayers. The consensus here is correct - your material participation in HoldCo doesn't convert the passive income from the underlying entities where you're a limited partner. I'd recommend keeping detailed records of your participation hours for each entity separately, since the IRS will look at material participation on an activity-by-activity basis. Also consider whether you might benefit from grouping elections under Reg 1.469-4 if you have multiple similar activities, but this requires careful planning and proper elections. One thing to watch out for: make sure your K-1s from HoldCo properly reflect the passive/nonpassive character of the income as it flows through. Sometimes holding entities don't correctly maintain the character codes, which can create issues if you're ever audited.

Man, the IRS needs to get with the times. In this day and age, we should be able to access all this info online easily. SMH 🤦‍♂️

Pro tip from someone who's been through this nightmare - if you applied online, try logging back into the IRS website with the same credentials you used. Sometimes the EIN is still visible in your application history. Also, check your bank statements from around that time - if you paid any fees, it might help you narrow down the exact date you applied, which could help when you call the IRS. They can search by application date if you have it!

I'm confused about something else - if these reimbursements are considered self-employment income on a 1099-NEC, can I deduct the health insurance premiums as a self-employed health insurance deduction? Seems like if they're going to tax me on the money they gave me for insurance, I should at least get to deduct the insurance costs?

This is a frustrating situation that unfortunately happens more often than it should with small employers. The key issue here is that your employer likely doesn't have a formal Health Reimbursement Arrangement (HRA) in place, which is required for these reimbursements to be tax-free. Since you received a 1099-NEC, you'll need to report this as income on your tax return. However, there are a few things to consider: 1. You may be able to deduct the actual health insurance premiums you paid as a self-employed health insurance deduction (since this is being treated as self-employment income) 2. You might qualify for the premium tax credit if you purchased marketplace insurance 3. You'll unfortunately owe self-employment taxes (15.3%) on this amount in addition to regular income tax For your 2024 taxes, you can file an amended return (Form 1040-X) to include this income. Going forward, I'd strongly recommend talking to your employer about setting up a proper HRA or QSEHRA for future reimbursements to avoid this tax mess. The late timing of receiving the 1099-NEC in June is also concerning - they should have issued it by January 31st. Consider consulting with a tax professional to make sure you're handling this correctly and maximizing any available deductions or credits.

This is a great discussion! I'm dealing with a similar situation but with a twist - I converted my rental property to mixed-use about 3 years ago and just realized I may have been handling the depreciation incorrectly this whole time. I've been continuing to depreciate the personal-use portion on Schedule E at a reduced percentage rather than removing it entirely. After reading this thread, I'm realizing I should have stopped depreciating that portion completely when I moved in. Should I file amended returns for the past 3 years to correct this? Or is there a way to adjust going forward without having to amend? I'm worried about triggering an audit by filing multiple amended returns, but I also don't want to compound the error by continuing with the wrong method. Has anyone else had to correct depreciation mistakes like this after the fact?

I've been following this thread closely as I'm dealing with a similar mixed-use conversion situation. One thing I want to emphasize that hasn't been mentioned enough is the importance of getting a professional appraisal at the time of conversion. When I converted part of my rental property to personal use, my CPA strongly recommended getting an official appraisal to establish the fair market value of each portion at the conversion date. This documentation became crucial for calculating the proper basis adjustments and will be essential when I eventually sell. The appraisal cost me about $500, but it's already saved me potential headaches. The appraiser was able to break down the value by floor/section, which made the allocation between business and personal use much cleaner for tax purposes. Without this documentation, I would have been making educated guesses that could easily be challenged in an audit. For anyone dealing with these conversions, I'd highly recommend budgeting for a professional appraisal. It's a small cost compared to the potential tax implications of getting the basis calculations wrong.

Just to add on to what others have said - the 2025 W4 doesn't even have allowances anymore like the old form did. It's structured completely differently now. You need to fill out the multiple jobs worksheet if you have more than one job, or the deductions worksheet if you have a lot of deductions. The form is actually easier to use now but claiming exempt still has the same requirements - you need to have had NO tax liability last year and expect NONE this year. At $68k, you definitely don't qualify.

Hey Miguel! I was in almost the exact same situation as you - making around $70k, getting huge refunds, and wanting more money in my paychecks. Definitely don't claim exempt though - that's only for people who literally owe zero taxes, which definitely isn't the case at your income level. What worked for me was using the IRS Tax Withholding Estimator (it's free on irs.gov) to figure out exactly how to fill out my W4. Since you're single with no kids and just have student loans, it should be pretty straightforward. You'll probably want to claim the standard deduction and maybe add your student loan interest deduction if you pay interest on those loans. The key is using Step 4 on the W4 - you can reduce your withholding there without going all the way to exempt. I ended up putting about $2,000 in the deductions section (Step 4b) which increased my take-home by about $150 per paycheck. Still got a small refund of around $400 instead of the $3,000+ I was getting before. Just be conservative with your first attempt - you can always adjust it again if needed!