Does receiving the K-1 automatically make you a "material participant" in the business? I'm in a similar situation with a family business and don't know if I can claim the losses.

No, receiving a K-1 does not automatically make you a material participant. Material participation is determined by how much time and effort you put into the activity. There are seven tests for material participation in IRS Publication 925, but generally you need to work 500+ hours in the activity during the year to be considered a material participant. For rental activities specifically, they're automatically considered passive regardless of your participation hours, unless you qualify as a real estate professional (which requires 750+ hours in real estate activities and more time in real estate than any other occupation).

Yes, rental losses can affect your QBI (Qualified Business Income) deduction. Under Section 199A, QBI is calculated for each business activity and can be reduced by losses. If your rental activity is considered a qualified trade or business (which depends on several factors), the net loss would result in no QBI deduction for that activity. Additionally, net losses from qualified businesses can offset QBI from other profitable qualified businesses, potentially reducing your overall QBI deduction. It gets complicated quickly, which is why tracking these losses properly is so important.

THANK YOU! That's exactly how I feel. It's like they're deliberately making it hard for self-employed people. I'm trying to run a business and now I have to be an amateur tax accountant too?

I mean, the penalty is only like 3-4% interest on the amount you underpaid. It's not the end of the world. Just think of it as a very low-interest loan from the government if you're short on cash.

This is genius! I have a part-time W2 job along with my consulting business. So I could potentially just have them withhold extra from my W2 in Q4 and it would count as if I'd been paying it evenly all year? Would save me so much headache with quarterly calculations.

Exactly! The IRS treats withholding from paychecks as if it occurred evenly throughout the year, even if you adjust your W4 in December to withhold a larger amount from your final paychecks. This is a completely legal strategy that many tax professionals recommend. Just be careful not to withhold so much that you create financial hardship for yourself. You'll want to calculate approximately how much you'll owe for the year, subtract what you've already paid through estimated payments, and then divide the remainder by your remaining paychecks to determine how much extra to withhold per paycheck.

Which state are you in? I'm in California and haven't even looked into the state requirements yet. Do you file W2s with the state tax agency separately?

I'm in New York, but most states have their own requirements. In California, you'd need to submit your W-2s to the Employment Development Department (EDD), not just the federal SSA. California actually has some of the stricter penalties for late filing - they can charge $50 per W-2 plus potentially 10% of the tax that was withheld if you're very late. Their deadline is the same as the federal one (January 31st), but the submission process is completely separate. Check the California EDD website for their specific filing instructions.

Are those services expensive? I only have 2 part-time employees and do everything manually because I thought payroll services were overkill.

Thanks for mentioning this! I would have totally messed that up. Do you know if I need to include all the original attachments again or just the ones I'm changing?

You only need to include the forms and schedules that you're changing with your Form 1040X. So definitely the Schedule C for your business expenses, but if you're not changing other aspects of your return, you don't need to include those other forms again. Also, you'll need to file a separate 1040X for each tax year you're amending. Don't try to combine multiple years on one form - the IRS will reject it.

Good advice. Also worth noting that the IRS generally has 10 years from the date of assessment to collect taxes owed. So depending on exactly when these returns were filed/assessed, the collection statute of limitations might be approaching.

Wouldn't using an LLC mean losing the mortgage interest deduction? I thought you could only deduct mortgage interest on your primary residence if you personally own it, not if it's owned by an LLC?

You're right to question this - an LLC typically would cause you to lose the mortgage interest deduction for a personal residence. What we actually did was create a partnership agreement rather than a full LLC (I simplified in my original comment). The partnership agreement gives us similar protections in terms of clearly defining ownership and responsibilities, but allows the property to remain in our personal names for tax purposes. This way we each get to deduct our portion of the mortgage interest while having clear documentation of our arrangement. Tax rules around entity structures can get complicated, so definitely consult with a tax professional before going this route.

I don't think that's correct. The annual gift tax exclusion is $17,000 per person for 2023 (probably higher for 2025), and it's only an issue if you exceed that amount. Plus, you'd have to file a gift tax return but probably wouldn't owe any actual tax unless you've used up your lifetime exemption, which is over $12 million.