You're absolutely right to be concerned about the negative equity situation. Based on your numbers, you've exceeded your basis by approximately $8,825, which will indeed be treated as capital gains on your personal return. Here's something important to consider: since you're still early in 2024 and haven't filed your 2023 return yet, you have a few options: 1. **Loan Reclassification**: You mentioned potentially reclassifying $4K as a loan. This could help reduce the excess distribution amount, but you'd need proper documentation (promissory note with reasonable interest rate, repayment terms, etc.) dated before filing. 2. **Shareholder Loan Documentation**: If you go the loan route, make sure it's a legitimate business transaction with proper documentation. The IRS scrutinizes these closely, especially when they're created retroactively. 3. **Consider the timing**: The loan reclassification needs to be done before you file your 2023 return, and it should be reflected in your 2023 books. One thing to keep in mind is that your current negative equity position will also affect any future distributions until you rebuild your basis through future profits or additional capital contributions. I'd strongly recommend consulting with a CPA who specializes in S Corps to ensure you're handling this correctly and have all the proper documentation in place. The tax implications of getting this wrong can be significant.

I've been through this exact scenario with my S Corp, and it's definitely stressful when you realize you're in negative equity territory. The advice about reclassifying part of your distributions as a loan is solid, but I want to emphasize how important the documentation is. When I did this, I created a formal promissory note that included: - The principal amount ($4K in your case) - Interest rate at the AFR for the month the original distribution occurred - Monthly payment schedule over 3 years - Personal guarantee (even though you're the owner) - Corporate resolution authorizing the loan The key thing is making sure this looks like a legitimate business transaction. I actually started making the monthly payments immediately after setting up the loan documentation, which helped demonstrate to my CPA (and potentially the IRS) that this was a real obligation, not just a paper transaction to avoid taxes. Also, don't forget that once you reclassify part of the distribution as a loan, you'll need to report the interest income on your personal return and the company can deduct the interest expense. It's a small additional complexity but worth mentioning. The good news is that this approach should reduce your excess distribution from about $8,825 down to around $4,825, which will save you some money on the capital gains treatment.

I'm dealing with the exact same issue! Been trying to get into FreeTaxUSA since this morning and the login page is completely frozen. Really frustrating since I'm trying to wrap up my return before the weekend ends. Based on what others are saying here, it sounds like this is a widespread server problem rather than something on our end. I might try that taxr.ai suggestion if FreeTaxUSA doesn't get their act together soon - the document scanning feature sounds like it could save a lot of time anyway. Thanks everyone for sharing your experiences and workarounds!

Same issue here! I've been locked out since around noon and it's driving me crazy. I actually ended up trying both suggestions from this thread - first I used Claimyr to get through to FreeTaxUSA support (took about 45 minutes but way better than waiting on hold forever), and they confirmed it's a system-wide outage affecting login services specifically. The agent said they're working on it but couldn't give me a timeline. So I also signed up for taxr.ai as a backup plan and honestly, I'm kind of blown away by how much easier the document scanning is compared to manual entry. Even if FreeTaxUSA gets fixed, I might just finish with taxr.ai since I'm already halfway done and don't have to worry about more outages. Sometimes these technical disasters end up being blessings in disguise!

I've been wrestling with this exact same issue for months! After reading through all these responses, I'm leaning toward either the S-Corp election or adding a family member as a small percentage owner. Quick question for those who've gone the partnership route - how do you handle the K-1 distributions to your spouse/family member? Do they actually need to be involved in the business operations, or can it be purely a paper arrangement? I'm worried about creating unnecessary complications with someone who doesn't really understand the business side of things. Also, has anyone had experience with state-level complications when making these changes? My state has pretty strict LLC regulations and I want to make sure I'm not creating problems at the state level while trying to solve federal tax issues.

I've been following this thread with great interest since I'm in a very similar situation. One thing I haven't seen mentioned yet is the potential impact on business insurance and liability protection when making these structural changes. When I was researching the S-Corp election option, my business insurance agent warned me that changing tax classifications could affect my professional liability coverage and potentially require policy updates. Has anyone dealt with insurance complications after making these changes? Also, for those who added family members as LLC partners - did you need to update your business insurance to include them as additional insured parties? I'm trying to weigh all the costs and complications before deciding which route to take, and insurance considerations seem like they could be a significant factor that's often overlooked in these discussions.

Has anyone used TurboTax for this kind of situation? Their multi-state option seems expensive but wondering if it's worth it or if it even handles this kind of situation properly.

I went through almost the exact same situation last year! My wife and I were in different states (she was in Oregon, I was in Texas) for about 10 months due to work. Here's what we learned: You're absolutely right that you can file jointly for federal and separately for each state. Since California is a community property state, you'll likely need to report half of your combined income ($85k) on your CA return, even though your husband doesn't work there. Colorado isn't a community property state, so your husband will mainly report his Colorado income. For the mortgage situation - since the house is in Colorado and you're both on it, the mortgage interest deduction will generally go on the Colorado return. However, if you're itemizing on your federal joint return, make sure you're coordinating this properly between states. One thing that caught us off guard was California's disability insurance (SDI) tax - make sure you understand how that applies to your portion of the community income. Also, don't forget to look into any credits for taxes paid to other states to avoid double taxation. Given the complexity with community property rules and your rental situation, it might be worth consulting a tax professional who specializes in multi-state returns, at least for this first year. The peace of mind was worth it for us!

The tax software wont let you claim the child tax credit for her if you indicate your spouse is claiming her, but you can still get other benefits as the custodial parent. Its confusing but actually works out better financially for most couples this way.

This whole thread has been super helpful! I'm dealing with a similar situation where my ex-wife and I share custody but she claims our son as a dependent. Reading through all these responses, I'm realizing I might be missing out on Head of Household status and other credits I'm entitled to as the custodial parent. Quick question for those who've been through this - does the IRS ever question why two parents from the same household are filing with different statuses? Like if I file as Head of Household and my wife files separately claiming our daughter as a dependent? I'm worried it might trigger some kind of red flag in their system even though it sounds like this is totally legitimate. Also seeing a lot of mentions of Form 8332 - is this something that needs to be filed every year or just once when you first make the agreement?