That's really interesting, I hadn't come across Section 195 in my research. How would I "demonstrate" that I was still in startup phase? Would the fact that I only had one short-term guest who was a friend be evidence of that? And how does this interact with the depreciation requirements that seem to start once I had that first paying guest?

To demonstrate you were in startup phase, you would need to show that you were preparing to enter the rental business but not yet actively operating. Documentation is key here - keeping records of renovation work, marketing efforts in progress, business plan development, etc. The fact that you only had one friend stay for a fee that was likely below market rate could potentially support your position that this wasn't the start of regular operations. Regarding depreciation, there's an important distinction here. Section 195 applies to business startup costs (like market research, analysis, business formation costs, etc.), while depreciable assets like furniture and appliances follow different rules. Those depreciable assets would generally start being depreciated when placed in service, which would arguably be when your property was ready and available for rent - potentially when your friend stayed there. It's a complex area with some gray zones. The most conservative approach would be to start depreciation in 2024 for your assets while potentially treating certain qualifying expenses as Section 195 startup costs. This is definitely a situation where professional guidance specific to your circumstances would be valuable.

I went through an audit 3 years ago specifically about first-year rental losses. In my experience, the IRS was mainly looking at whether I had the "intent to profit" from the rental activity. They wanted documentation showing I was genuinely trying to rent it out at market rates and not just using it primarily as a personal residence with occasional rentals. They also scrutinized my depreciation start dates and whether I had properly segregated personal use vs. rental use time. As long as you have good documentation and weren't trying to claim personal expenses as rental expenses, you should be fine even with legitimate losses in the first year. Those startup costs and initial losses are normal in the rental business.

That's really helpful, thanks. I do have good documentation of all my expenses and definitely was trying to rent it out (have all my marketplace listings saved). I'm just nervous because the loss ratio is so high compared to income in that first year. Sounds like that might be normal and expected though if I can document everything properly.

Thanks for the insider perspective! Do you think I should say something to my friend? He seems so confident about all this, and when I expressed concerns he just laughed it off saying "everyone does it." I don't want to be preachy but also don't want him to get in serious trouble.

I would definitely say something, but approach it carefully. Instead of making it about him being wrong, maybe share an article about audit risk factors or a story about someone facing severe penalties. You could mention that you spoke with a tax professional who raised red flags about some of these deductions. If he's resistant, you could suggest he get a second opinion from another CPA - one who doesn't have a vested interest in keeping him as a client by promising aggressive deductions. Sometimes people need to hear the same message from multiple sources. Just remember that ultimately, it's his decision and his risk to take. You've done your part by raising the concern.

Did you have receipts for everything? I've heard if you keep perfect records they can't really say much even if the deductions are aggressive?

Thanks for the direct links! Have you personally used the SSA's BSO system for late W-2 filings? Was it easy to navigate for someone who isn't super tech-savvy?

Yes, I've used the SSA's BSO system for late W-2 filings twice now. It's definitely designed with the average business owner in mind, not just for tech experts. The interface walks you through each step and clearly labels what information needs to go where. For late filings, there's a specific section where you'll see the original deadline and the system acknowledges you're filing late. It doesn't prevent you from proceeding. Just make sure you have all your business information and employee details ready before you start. You can save your progress and come back if needed, but having everything prepared makes it a much smoother process.

This is super important! I completely forgot about state W-2 filing and got hit with a $200 penalty from my state last year even though I filed the federal one.

Does your brother get audited? This seems like exactly the kind of thing that would trigger IRS scrutiny. I'm interested but nervous about drawing attention.

He's been doing this for about 8 years and has been audited once - but not specifically for the vehicles. The audit covered his entire business operations and they did review his vehicle documentation. Since he keeps extremely detailed records (mileage logs, business purpose for trips, maintenance records, etc.), there were no issues with the vehicle deductions. His accountant told him vehicle deductions don't trigger audits on their own - it's usually when they're combined with other unusual deductions or when the business use percentage seems unrealistic compared to your type of business. The key is legitimacy and documentation - this isn't a strategy for getting personal vehicles, it's for actual business vehicles that happen to be nice.

Is that really worth the extra complexity though? Seems like you'd spend a lot on accounting and legal fees just to maintain two entities.

I need to jump in here as this is potentially dangerous advice. Creating an LLC solely to circumvent tax rules is exactly the kind of arrangement the IRS looks for during audits. This is what tax professionals call a "substance over form" issue - the IRS will look at the economic reality of the arrangement, not just the legal structure. If there's no legitimate business purpose for the separate entity other than tax avoidance, the IRS can collapse the arrangement and treat it as if you owned the vehicle directly. This could result in back taxes, penalties and interest.

That makes sense. I had just heard about it from someone but wasn't sure if it was legitimate. Thanks for clearing that up - definitely don't want to recommend something that could cause audit problems!

This is really interesting - I hadn't considered the marketing angle that deeply. My business is in media production, so the image we project to clients does matter. Did your accountant have you track this in a specific way? I'm curious how you documented the marketing aspect vs. regular transportation.

We created a specific "brand image" log where I documented each time a client commented on the vehicle or it influenced a sale. I took photos when the car was used at property showings and kept all marketing materials that featured the vehicle. My accountant had me use a separate expense category in my bookkeeping specifically for "brand representation expenses" where we allocated a portion of the vehicle costs. We still took regular depreciation for the transportation portion but were able to expense some costs differently. The key was very specific documentation showing how the luxury aspect directly contributed to revenue.