Does anyone have experience with how this affects state returns? I'm in California and dealing with a similar situation. Would reclassifying from ordinary income to rental income on the federal flow through correctly to CA Form 565?

This is a great discussion on rental income classification. I want to add a practical tip that might help with documentation when you amend these returns. When I've dealt with similar partnership rental misclassifications, I always prepare a detailed memo explaining the correction that gets attached to the amended return. I include citations to IRC Section 1402(a)(1) which specifically excludes rental income from self-employment tax, and Reg. 1.1402(a)-4 which clarifies that real estate rentals are not considered carrying on a trade or business for SE tax purposes. For the self-rental aspect, I also cite Reg. 1.469-2(f)(6) to show that while the income may be recharacterized as non-passive under the self-rental rules, it's still rental real estate income exempt from SE tax. This documentation has been helpful when dealing with IRS inquiries on amended returns. One more thing to consider - if your clients have been overpaying SE tax for multiple years, make sure you calculate the interest the IRS will owe them on the refunds. For substantial amounts, that interest can add up to a meaningful sum that clients appreciate knowing about upfront.

As a CPA who works with a lot of S-Corps, I can confirm that Malik's explanation is spot on. The key thing to remember is that your tax year follows your fiscal year end date - so June 30, 2024 fiscal year end means you file a 2024 return. One additional point that might help: when you receive your K-1 from the S-Corp, it will be labeled as a 2024 K-1 even though it covers income from July 2023 through June 2024. This K-1 gets reported on your personal 2024 tax return (filed in 2025). The timing can be confusing at first, but once you understand the pattern it becomes much clearer. Also, make sure you're not missing any quarterly estimated tax payments. With a June 30 fiscal year end, your quarterly due dates are September 15, December 15, March 15, and June 15 - different from calendar year filers.

Thanks everyone for all the detailed responses! This thread has been incredibly helpful. I ended up following Malik's advice about filing for the tax year in which my fiscal year ends, so I filed a 2024 return for my June 30, 2024 fiscal year end. I also took several of your suggestions and called the IRS directly to confirm everything (thanks Omar for the Claimyr tip - saved me hours of hold time!). The agent confirmed I was on the right track and also reminded me about the September 15th deadline, which I almost missed focusing on the tax year confusion. One thing I learned that might help others: the IRS agent mentioned that if you're unsure about your fiscal year filing requirements, Publication 538 has all the details about tax years and accounting periods. It's pretty dry reading, but it cleared up several questions I had about the timing. For anyone else dealing with this - definitely don't overthink it like I did. The basic rule really is straightforward: file for the year your fiscal year ends. Everything else follows from that principle. Thanks again for all the help!

One thing that hasn't been mentioned yet - if your short term disability was paid by a third-party insurer (even if it's through your employer's plan), you should have received a Form 1099-G, not just have it included on your W-2. My company uses Sedgwick for disability claims and it's always reported separately from my regular wages. You might want to double check with your HR department about how your specific plan works. Some companies self-fund their STD plans (then it's on your W-2) while others use insurance (which results in a separate 1099).

Just adding my experience - I took short term disability last year after surgery and realized months later that my company had taken taxes out of the payments but I had been paying the STD insurance premiums with after-tax dollars for years! I ended up having to file an amended return to get back about $900 in taxes. If you paid for the STD with after-tax money, double check your W-2 and paystubs. You might be paying taxes you don't actually owe.

Don't forget to look into college financial aid too! When my daughter started college, we discovered that how we claimed her on taxes affected her FAFSA application. Sometimes the tax benefits vs. financial aid benefits can be a tradeoff.

I'm going through this exact transition right now with my oldest! One thing that really helped me plan was creating a simple spreadsheet to compare the financial impact year by year. For 2024 taxes (filed in 2025): You'll still get the full Child Tax Credit since she's 17 at year-end. For 2025 taxes (filed in 2026): No more Child Tax Credit, but if she's in college full-time, you can still claim her as a dependent AND potentially get the American Opportunity Tax Credit (up to $2,500 for the first 4 years of college). The key thing is that "providing more than half her support" - keep track of what you spend on her (tuition, room/board, food, medical, etc.) vs. any income she earns. As long as your support exceeds 50% of her total support for the year, you can claim her. Also, don't forget that claiming her as a dependent might affect her eligibility for certain financial aid, so definitely talk to the college financial aid office before making decisions. Sometimes it's better for the student to file independently depending on the aid packages available. The transition definitely stings financially, but the education credits can help bridge some of that gap if she goes to college!

One trick I learned is that the IRS doesn't require equal payments for estimated taxes if your income is seasonal or irregular. Use Form 2210 Schedule AI (Annualized Income) to calculate different payment amounts for each quarter based on when you actually earn the income. Huge help for my lawn care business where I make 80% of my money in summer months!

Just wanted to add something that really helped me when I first started dealing with estimated taxes - you can actually make your payments online through EFTPS (Electronic Federal Tax Payment System) instead of mailing those paper vouchers. It's free to set up and you can schedule payments in advance, which is super helpful for budgeting. Also, if you're really unsure about your amounts, consider the "safe harbor" rule: if you pay 100% of last year's tax liability (110% if your AGI was over $150,000), you won't owe any underpayment penalties even if you end up owing more at tax time. It might mean a bigger refund, but it gives you peace of mind while you're learning the ropes of self-employment taxes. One last tip - keep detailed records of your business income and expenses throughout the year. This makes it so much easier to adjust your quarterly payments if your income changes significantly from what you initially projected.