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Just a heads up - when you get your new LLC EIN, don't forget to update it with ALL your payment processors (PayPal, Stripe, Square, etc) and any platforms where you sell your services. I forgot to update mine with one platform and it caused a huge mismatch when they issued my 1099-K. Took months to sort out with the IRS!
Omg thank you for this reminder! I use both PayPal and Square for client payments, and definitely would have forgotten to update them. Do you know if there's a specific time I should make these updates? Like should I wait until the start of a new tax year or do it immediately after getting the new EIN?
I'd recommend updating them as soon as your LLC is fully operational and you're ready to switch your business activity over to the new entity. The cleanest approach is to make a clear cutoff - for example, as of July 1, all new business runs through the LLC with its new EIN. If possible, doing this transition at the beginning of a calendar quarter makes your accounting cleaner. But the most important thing is to communicate clearly with your payment processors about the change and keep meticulous records of when the switch happened, so you can properly allocate income between your sole prop and LLC for tax purposes.
Just went through this exact same situation last month! One thing I learned that wasn't immediately obvious - when you apply for your new LLC EIN, make sure you have your LLC's Articles of Organization handy. The IRS online application will ask for specific details like your LLC's formation date and the state where it was formed. Also, don't stress too much about the timing. You can continue operating under your sole prop EIN while you're waiting for the new LLC EIN to come through, as long as you make the switch before filing your next tax return. Just keep good records of which income/expenses belong to which entity during any overlap period. The whole process is actually pretty straightforward once you get started - much less scary than it seems when you're reading about it online!
This is really reassuring to hear from someone who just went through it! I was worried about the timing aspect - like what happens if there's a gap between when I stop using my sole prop EIN and when I get the new LLC one. Good to know I can keep operating during that transition period. Quick question - when you say "make the switch before filing your next tax return," do you mean I need to have everything switched over by December 31st for this tax year? Or can I make the change partway through the year and just split the income appropriately on my returns?
why do you even need a W2 from that long ago? just curious
Long story, but it's for a legal thing. Wish I didn't have to deal with this tbh
Oof, legal stuff. Say no more. Hope you get it sorted out!
Pro tip: If you filed your taxes electronically that year, your tax preparer might still have a copy of your W2. Worth a shot!
Since you're filing jointly, I've found it easiest to just enter everything once and let the software handle it. No need to split anything manually between you and your spouse. The tricky part is tracking everything correctly for future years. Keep separate folders for receipts that are 100% rental (like repairs only in the tenant's area) vs. shared expenses that need to be prorated. It'll save you hours next tax season!
Is there a good system for tracking this stuff throughout the year? I always end up scrambling at tax time trying to figure out which expenses were for what.
I use a simple spreadsheet with columns for Date, Description, Amount, Category (100% Rental vs Shared), and Notes. Throughout the year, I just snap photos of receipts with my phone and enter them weekly. For shared expenses like utilities, I set up automatic reminders to record them monthly with the 40% allocation noted. At tax time, I just filter by category and everything's already organized. Takes maybe 15 minutes a week but saves hours of headache later!
Just wanted to add something that helped me when I was in a similar situation - make sure you're aware of the "home office" vs "rental property" distinction. Since you're renting out 40% of your home, that portion is treated as rental property (Schedule E), not a home office deduction (Form 8829). This means you can deduct things like advertising costs to find tenants, rental management fees, and even mileage for trips related to the rental property. Also, if you have any startup costs for getting the rental ready (like painting or minor repairs before the first tenant moved in), those might be deductible too. One more tip - if you're planning to do this long-term, consider opening a separate bank account just for rental income and expenses. It makes tracking so much easier and looks more professional if you ever face an audit.
This is really helpful, especially the distinction between home office vs rental property! I hadn't thought about being able to deduct advertising costs and mileage. Quick question - for the startup costs you mentioned, is there a limit on how much you can deduct in the first year? I spent about $2,800 getting the rental area ready (new flooring, paint, fixtures) before my first tenant moved in. Can I write all of that off this year or does it need to be spread out somehow? Also, the separate bank account tip is gold - I've been mixing everything together and it's been a nightmare trying to separate personal vs rental transactions. Definitely setting that up before next year!
Something nobody mentioned yet - for college students, there's the special rule that scholarship money doesn't count toward support calculations at all! So if your daughter gets any scholarships or grants, those amounts are completely excluded when figuring out total support and percentages. This often makes it easier for parents to meet the 50% threshold.
This is true but there's one exception - if the scholarship requires the student to use it for living expenses rather than tuition, then it DOES count as support provided by the student. This sometimes happens with graduate fellowships or certain types of grants.
The key distinction you're asking about is absolutely correct - direct payments to the landlord are unambiguously considered YOUR support contribution, not a gift to your daughter. This is one of the clearest scenarios for the support test. Based on your numbers, you're in great shape to claim her as a dependent. You mentioned $1,350/month rent ($16,200 annually), plus tuition from the 529 plan, plus groceries and living expenses for the first 4 months. That's likely well over $30,000 in support you're providing. For your daughter to provide more than half of her own support, she'd need to spend more than the total amount you're contributing. With her campus job income of $800-900/month early in the year, and even if she gets a decent job after graduation, it would be very difficult for her to exceed your contribution level. Keep detailed records of all direct payments (rent, tuition, groceries) and any transfers you make that are designated for specific support purposes. The IRS Publication 501 has the complete rules, but your situation with direct landlord payments is exactly the type that clearly counts as parental support. One tip: calculate the total support for the entire year (including what she spends on herself) and make sure your portion exceeds 50% of that total amount.
This is exactly the clarity I was looking for! Thank you for confirming that direct landlord payments are unambiguously my support contribution. I was getting worried about the gift vs support distinction, but it sounds like when I pay the landlord directly, there's no ambiguity at all. Your point about calculating total support for the entire year is really helpful. So I need to add up everything - what I pay AND what she spends on herself - then make sure my portion is more than 50% of that combined total. That makes much more sense than just comparing my contributions to her income. I'll definitely get a copy of IRS Publication 501 to make sure I understand all the rules. Thanks for the reassurance about my situation - it sounds like I should be in good shape as long as I keep good records of all the direct payments.
Layla Sanders
Have you considered requesting her personal tax return (Form 1040) along with the Schedule C? The Schedule C only shows the business profit/loss, but doesn't include any other income she might have. Maybe she has multiple income sources?
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Morgan Washington
ā¢This is good advice. I've had applicants with multiple Schedule Cs for different businesses, plus investment income, etc. The full 1040 gives you the complete picture.
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Ellie Perry
You're dealing with a classic discrepancy that happens all the time with small business owners. The Schedule C ($43,325 net profit) is what she actually reported to the IRS, while the HR Block P&L ($111,500 net profit) might be her internal bookkeeping before tax planning adjustments. Here's what I'd recommend: Focus on the Schedule C since that's her official tax filing, but also request her complete Form 1040 to see her total income from all sources. The $43,325 from Schedule C gets added to any other income she has (W-2 wages, investment income, etc.) to give you her total adjusted gross income. However, don't stop there. Many LLC owners legitimately maximize deductions to reduce taxes, which can make their "paper income" look much lower than their actual cash flow. Ask for 3-6 months of personal bank statements to see what she's actually taking out of the business for living expenses through owner draws or transfers. Also check if there's significant depreciation on the Schedule C - this is a non-cash expense that reduces taxable income but doesn't affect her ability to pay rent. Some landlords add back depreciation when evaluating cash flow capacity.
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