18 Free File Fillable Forms don't support business returns unfortunately. They're only for individual Form 1040 filing. I looked into this last year for my low-revenue LLC and had to go another route. Partnership returns require either paid software, paper filing, or hiring a professional.

9 Thanks for clearing that up. That's disappointing - you'd think the IRS would want to make it easier for small businesses to file properly. Guess I'll look into paper filing or the other options mentioned in this thread.

19 You had me excited for a second there! I was already googling "1065-EZ" before I finished reading your comment. It's crazy that they don't have a simplified version for tiny partnerships.

How much did you end up having to pay in back taxes and penalties when they disallowed your arrangement? I'm worried about setting this up wrong and facing a similar situation.

We had to pay back about $5,400 in taxes that we thought we had saved, plus another $1,100 in penalties and interest. The worst part was having to amend two years of returns and losing all those medical deductions we thought we had legitimately claimed. The IRS agent specifically told us our arrangement failed because: 1) I had no regular wages separate from medical reimbursements, 2) We couldn't provide documentation of actual work performed, and 3) We didn't have formal plan documents in place before starting reimbursements. They viewed the whole thing as just a tax avoidance scheme rather than a legitimate employment arrangement. If you set it up correctly from the beginning with proper documentation and treat it like a real employment relationship (regular wages, taxes withheld, formal plan documents), you should be fine. But definitely don't try to cut corners!

Definitely not! The plan has to be formally established BEFORE any expenses can be reimbursed. If you try to backdate documents, that's a huge red flag for the IRS. You could set it up now for future expenses, but anything before the plan's official establishment date wouldn't qualify.

9 Do the special allocations have to be documented somewhere specific? We have a 60/40 split because I put in more startup money, but it's just in our partnership agreement, not any tax forms yet.

5 Yes, the special allocations should be documented in your formal partnership agreement first, but they also need to be reflected on your tax return. On Form 1065, you'll indicate the profit/loss percentage for each partner, and this should match your agreement. The K-1s generated with your 1065 will show each partner's specific allocation percentages. This establishes your baseline with the IRS, so if you ever get questioned about why one partner is receiving 60% while another gets 40%, you can point to the consistent history starting from year one.

7 I used TaxAct last year for our no-income partnership and it was WAY cheaper than TurboTax, like 1/3 the price. Same e-filing capability and it worked fine for a simple return.

Thanks for bringing this up! I checked my lease and surprisingly, subletting is allowed with landlord approval. My city also allows short-term rentals with proper registration. This is super helpful though - I wouldn't have thought about checking local regulations beyond just my lease.

Wait, aren't you technically running a business though? Could you have classified it as self-employment instead of rental activity? Then maybe the losses would apply differently?

I asked my accountant about that too! She said it depends on the level of services provided. If you're just providing basic rental amenities (bed, bathroom, etc.), it's still rental activity. If you're providing substantial services like daily cleaning, meals, concierge services, etc. - more like a B&B - then it might qualify as a business rather than rental activity. In my case, I wasn't providing those "substantial services" so it still counted as rental activity with all the passive loss limitations.

Our company actually does offer those pre-tax transit benefits, but most employees don't take advantage of them. Do you know if there's any way to make driving expenses pre-tax too? Most of our staff drives rather than using public transportation.

For driving expenses, the pre-tax benefits primarily cover parking costs at or near your workplace, up to $300/month. The actual driving expenses (gas, maintenance, etc.) can't be made pre-tax unless it's part of a qualified vanpool arrangement. If your employees are mostly drivers, highlight the parking benefit since it can save them 20-37% on those costs depending on their tax bracket. Some companies also offer incentives for carpooling or subsidize vanpools to help with commuting costs. These can be provided as tax-free fringe benefits under certain conditions. Worth exploring if you're trying to encourage more in-office work.

That's incredibly privileged thinking. Many people can't afford to live near their workplace, especially in high cost cities. And "just find a job closer to home" isn't realistic for specialized careers or in areas with limited job options.

You're right, I didn't consider the housing affordability crisis in many areas. I was thinking purely from an environmental perspective, but there are social equity issues too. Maybe a better approach would be targeted deductions for lower-income workers who are forced to commute long distances due to housing costs, rather than blanket deductions that would mostly benefit higher-income taxpayers. Or better yet, improve public transportation and make that more widely available as a pre-tax benefit.