Thanks for that specific case reference! I'll definitely look up Ruckriegel v. Commissioner. If I wanted to fix this going forward, could I restructure the existing loans into back-to-back loans now, or would I need to pay off the current loans and start fresh with new properly structured loans?

For existing loans, you generally need to unwind them first before creating a proper back-to-back loan structure. Having your S Corp repay the affiliated company, then having the affiliated company loan to you, and you loan to the S Corp. Document each step with proper loan agreements. If unwinding isn't feasible due to cash flow constraints, consider a debt restructuring where the S Corp's debt to the affiliated company is replaced with debt to you personally. This requires proper documentation showing the affiliated company releasing the S Corp from its obligation and you becoming the creditor. You'll also need to show actual consideration for taking over the loans. Be aware that restructuring rather than unwinding and creating new loans faces higher scrutiny from the IRS.

Yes, basis impacts distribution ordering rules. S Corp distributions are tax-free to the extent of your stock basis, while distributions in excess of basis are generally treated as capital gains. When you properly structure loans to create debt basis, it doesn't directly affect the taxability of distributions (which are measured against stock basis, not debt basis). However, having sufficient basis (both stock and debt) allows you to claim losses, which preserves more of your stock basis for distributions. The ordering matters: First, stock basis is reduced by non-dividend distributions and losses. Only after stock basis is exhausted would debt basis be reduced by remaining losses. So properly structuring loans helps ensure you can take losses without creating taxable distributions.

Does requesting a hold on collections affect your credit score or create any other problems? I'm dealing with something similar but worried about making things worse.

Requesting a hold doesn't affect your credit score at all. The IRS doesn't report to credit agencies unless they've actually filed a tax lien, which wouldn't happen at this early stage in the process. The Taxpayer Advocate Service is actually designed specifically to help in situations like this where there's a clear error or hardship. Many people don't realize it exists, but they can be incredibly helpful when dealing with issues that aren't getting resolved through normal channels.

This happened to me too! I sent in all the documentation and they claimed they never received it, then hit me with additional penalties. What did you end up doing to resolve it?

How exactly do you bring this up without causing family drama? My father-in-law gets defensive whenever I mention anything about the business structure or distributions.

The key is framing it as a business sustainability issue rather than a personal complaint. I approached it by saying: "For the business to thrive long-term, all owners need to be able to maintain their ownership without financial hardship." I also found it helpful to bring some documentation from our accountant explaining how other family businesses handle this common issue. When presented as a standard business practice rather than a criticism, it was received much better. Sometimes having a neutral third party (like an accountant) suggest these changes can remove the emotional element from the discussion.

This is good advice. When I was in a similar situation, I was able to deduct a portion of my home office, travel to business meetings, and some professional development costs. It didn't solve the whole problem, but it reduced the tax hit by about 30%.

I hadn't even thought about deductions! I work from home occasionally on stuff related to the orchard (mostly bookkeeping and some marketing). Would that count toward a home office deduction? And we drive about 80 miles round trip to visit the orchard like 6-7 times a year.

Whoa I had no idea about the 183 days thing! Is that calendar days or business days? And what counts as a "permanent place of abode"? Like if I'm renting a room would that count?

It's 184 calendar days (not just business days) - and partial days usually count as full days in NY. So if you cross into NY for lunch, that potentially counts as a full NY day. A "permanent place of abode" is usually any place you have regular access to that's suitable for year-round use - so yes, a rented room would typically count. It doesn't need to be owned by you or even paid for by you. If you have a key and regular access, it could qualify. NY is particularly aggressive about auditing people who claim to live elsewhere but work in NY. They've even been known to check your E-ZPass records, cell phone records, and credit card statements to verify your whereabouts! If you're close to that 183-day threshold, document everything.

Good point! This is why state-specific advice is so important. I'm in Illinois but work in Wisconsin, and they have a reciprocal agreement so I only pay IL taxes despite earning income in WI. Saves me from filing two state returns.

That's interesting about the S-Corp option. How difficult is it to change from partnership to S-Corp? Are there minimum salary requirements we would need to be aware of? Our LLC is still pretty small but we're planning for growth.

Converting from a partnership to an S-Corp isn't particularly difficult. You file Form 8832 to elect to be taxed as a corporation, then file Form 2553 to elect S-Corp status. It can be done any time, but if you want it effective for the current tax year, there are deadlines to be aware of. For salary requirements, the IRS expects S-Corp owners to take a "reasonable salary" based on market rates for the work you do. There's no specific minimum, but it needs to be defensible if questioned. Too low a salary raises red flags because it looks like you're trying to avoid payroll taxes. For a small business, even a modest salary that's in line with what you'd pay someone else for the same work should satisfy the requirement.

Good point about tax distributions! My partnership agreement actually requires minimum distributions equal to the highest tax bracket percentage of allocated income specifically for this reason. Helps prevent cash flow issues for partners at tax time.