This discussion has been incredibly helpful! I'm dealing with a similar situation with my freelance business and wanted to share what I learned from my CPA about this exact issue. The key insight that finally made it click for me is that the IRS views prepayment as immediately creating an asset - the "right" to receive services or use property. This right has value from the moment you pay for it, which is why the benefit period starts then rather than when you actually use the service. I had prepaid some web hosting and business software licenses totaling about $4,500 in November 2023 for services running through various dates in 2024. My CPA confirmed that since all the service periods end within 12 months of payment (and within 2024), I can deduct the full amount in 2023. What really helped me organize this was creating a simple tracking sheet with columns for: Payment Date, Service Period Start, Service Period End, 12-Month Rule Date, and "Following Tax Year" End Date. Then I can easily see which prepaid expenses qualify for immediate deduction versus those that need to be capitalized. For anyone still confused about this rule, I'd recommend talking through a few specific examples with a tax professional. Once you see how it applies to your actual business expenses, the concept becomes much clearer than trying to understand it in the abstract.

This entire discussion has been incredibly valuable! As someone who's been struggling with prepaid expense timing for my small business, I finally feel like I understand the 12-month rule properly. The key breakthrough for me was realizing that the "benefit" isn't the actual use of the service, but rather securing the RIGHT to that service at the agreed terms. It's like the difference between having a reservation at a restaurant versus actually eating the meal - the value of the reservation exists from the moment you make it. I've been overly conservative with my prepaid expenses, spreading them across multiple years when I could have been deducting them immediately under the 12-month rule. This could have saved me significant cash flow issues during my startup phase. One practical tip I'd add: I now negotiate payment terms with vendors to maximize the 12-month rule benefits. For example, instead of paying in January for services starting immediately, I sometimes pay in December for the same January start date. This lets me deduct in the earlier tax year while still getting the same services. The tracking spreadsheet idea mentioned earlier is something I'm definitely implementing. Having a clear visual of payment dates, benefit periods, and the 12-month windows will make tax prep so much smoother and help ensure I'm taking advantage of this rule properly going forward. Thanks everyone for sharing your experiences and explanations - this community really helps demystify these complex tax concepts!

One additional resource that might be helpful is IRS Revenue Ruling 87-9, which specifically addresses the treatment of suspended passive losses when a rental property is sold. This ruling clarifies that the suspended losses become fully deductible against all income (not just passive income) in the year you dispose of your entire interest. Also, don't overlook the potential impact of the Net Investment Income Tax (NIIT) if your modified adjusted gross income exceeds certain thresholds ($200K single, $250K married filing jointly). The 3.8% NIIT could apply to your net gain after the passive losses are applied, so factor that into your tax planning. Make sure you keep detailed records of the calculation for your files. The IRS likes to see clear documentation of how suspended passive losses were computed and applied, especially on larger transactions like yours. Consider creating a simple spreadsheet showing the year-by-year accumulation of your $130K in suspended losses - it'll be invaluable if you ever get audited.

Drew, you're absolutely correct in your calculation. The $130K in suspended passive losses will indeed offset the $145K depreciation recapture, leaving you with about $15K in taxable gain. This is a straightforward application of IRC Section 469(g)(1). For the official IRS documentation you're seeking, here are the key resources: 1. **IRC Section 469(g)(1)(A)** - This is the primary code section governing disposition of passive activities 2. **IRS Publication 925** - "Passive Activity and At-Risk Rules" (pages 18-20 specifically cover disposition rules) 3. **IRS Publication 527** - "Residential Rental Property" 4. **Revenue Ruling 87-9** - Addresses suspended passive losses upon property sale The process works exactly as you described: when you dispose of your entire interest in the rental property, all suspended passive losses become fully deductible against any income in that tax year, including depreciation recapture income. You'll need to file Form 4797 (Sale of Business Property), Form 8582 (to release the suspended losses), and possibly Schedule D. The $15K remaining gain will likely be subject to the 25% depreciation recapture rate. One important note: verify that your $130K figure matches the suspended losses shown on line 16 of your most recent Form 8582. This ensures everything aligns properly when you file.

Lot of good advice here but nobody has mentioned the importance of the LLC Operating Agreement! That document should specify your actual status in the company and might clarify if you're supposed to be treated as a member, manager, employee or some combination. Request a copy ASAP if you don't already have one. Also, if they're paying you from a different entity than the one you work for, that could indicate they're using a Professional Employer Organization (PEO) or some kind of employee leasing arrangement, which is actually pretty common and not necessarily shady. But if that's the case, they DEFINITELY should be withholding taxes!

This situation has several red flags that suggest potential tax fraud or worker misclassification. The fact that they're claiming you as an employee for COVID relief purposes while simultaneously refusing to withhold taxes is particularly concerning - that's essentially having it both ways for their financial benefit. Here's what I'd recommend doing immediately: 1. **Document everything** - Save all contracts, pay stubs, emails about your status, and any communications regarding the COVID relief claims. Screenshot or print anything that might disappear. 2. **Request your LLC documentation** - Get copies of the Operating Agreement, any amendments, and confirmation of the LLC's tax election (partnership vs. corporation). You have a right to this information as a purported member. 3. **Calculate your potential tax liability** - Since no taxes have been withheld, you're likely on the hook for both income taxes AND self-employment taxes (15.3%) if you're truly classified as a self-employed LLC member. This could be a substantial amount. 4. **Consider professional help** - This situation is complex enough that you might want to consult with both a tax professional and an employment attorney. Many offer free consultations and can help you understand your rights and obligations. The discrepancy between your "employment contract" language and their current claims about your status, combined with the different payment entity and COVID relief issues, suggests this company may not be handling worker classification properly across the board.

Has anyone actually had their return examined by the IRS after claiming rehab expenses? I'm worried about triggering an audit. My daughter needed treatment and it cost us over $35,000 last year.

I went through this exact situation with my son last year. The rehab costs absolutely qualify as medical expenses under IRS Publication 502, but there are a few important things to keep in mind beyond what others have mentioned. First, make sure the facility provides a detailed breakdown of costs. Some rehab centers include non-medical services like premium room upgrades or recreational activities that aren't deductible. You want documentation showing the medical treatment portion specifically. Second, if your brother is receiving any grants, scholarships, or other financial assistance from the rehab center or outside organizations, those amounts need to be subtracted from what he can claim as a deduction. You can only deduct what you actually pay out of pocket after insurance and any other assistance. Also, timing matters - he can only deduct expenses in the year they're actually paid, not when the services were received. So if he pays in December 2024 but treatment continues into January 2025, only the December payment would be deductible on his 2024 return. The documentation is crucial if the IRS ever questions it. Keep receipts, insurance statements showing what they covered, and especially any letter from a doctor stating the treatment was medically necessary. Most reputable treatment centers are familiar with these requirements and can provide the right paperwork.

Something else to consider: if your state offers income tax benefits for 529 contributions, make sure you understand how those work! My wife and I messed this up last year. We live in New York which gives a state tax deduction for up to $5,000 per year ($10,000 for married couples) for contributions to NY's 529 plan. We had my in-laws contribute directly to our son's 529, but then found out WE couldn't claim the state tax deduction because we weren't the ones who made the contribution! Would have been smarter to have them give us the money and then WE contribute it to get the tax benefit.

Congratulations on becoming a dad! The 529 planning can definitely feel overwhelming at first, but you're smart to start early. One thing that might help simplify the decision-making process is to think about it in stages rather than trying to figure everything out at once. For the immediate term, you and your wife can each contribute up to $18,000 annually without any paperwork hassles. That's $36,000 per year just from you two. Then each set of grandparents can also contribute their own amounts using the same limits. If someone wants to contribute more than $18,000 in a single year, that's when the 5-year election comes into play, but honestly, unless your family is planning to contribute huge amounts right away, you might not even need to worry about that complexity initially. My suggestion would be to start with a basic contribution plan that stays within the annual limits, get the account set up and running, and then tackle the more complex gifting strategies later as your daughter gets older and your family's financial situation evolves. The most important thing is getting started - you can always adjust the strategy as you learn more!