Were there any differences between your return and your brother's? Like did you claim any credits or deductions that he didn't? Sometimes certain things trigger additional review.

Thanks for the suggestion, but unfortunately that's not feasible in our case. There are specific reasons (including some health insurance and retirement benefits) why this person needs to remain employed by the S-Corp rather than directly by the partnership. We looked into changing the employment structure earlier and determined it would create more problems than it would solve.

I understand the constraints with benefits. In that case, I think your best option is to follow the special allocation approach mentioned earlier. You'll need to amend your partnership agreement to specifically state that the $25k is first allocated to S1 as a special allocation to compensate for the employment expense, with the remaining profits split 50/50. This maintains economic substance while ensuring your allocations match the reality of your situation. Just make sure the special allocation language complies with the "substantial economic effect" requirements in Treas. Reg. 1.704-1(b)(2).

Accountable plans are typically for employee expense reimbursements, not for reimbursing one partner for paying another partner's compensation. I don't think it applies here since the partnership isn't reimbursing an employee for business expenses - it's a structural compensation arrangement between partners.

1 That's a really good point about the withholding! I'll definitely ask her if she received the full $25,500 or if taxes were already taken out. The tax paperwork they gave her was kind of confusing - it had both USD and CAD amounts on it, but I'm not sure if it showed whether any Canadian taxes were withheld. Do you know if the US-Canada tax treaty affects the withholding rate at all? Someone mentioned treaty rates in another comment.

17 Yes, the US-Canada tax treaty can definitely affect the withholding rate! The standard non-resident withholding for prizes in Canada is 25%, but the treaty might reduce that depending on the specific type of income. For certain prizes and winnings, it could be reduced to 15%. The paperwork with both USD and CAD is typical. They would have used the exchange rate on the day of the win to calculate the Canadian tax withholding. If you look carefully, there should be a line item showing "non-resident withholding tax" or something similar. It's crucial to know this amount for filling out Form 1116 correctly to claim the foreign tax credit.

8 That's actually not correct. US citizens and residents are taxed on their worldwide income regardless of where it's earned. Both your $500 poker winnings from Mexico and the OP's cousin's $25,500 game show winnings from Canada are reportable on US tax returns. The US is one of the few countries that taxes based on citizenship rather than just residency or the source of income. You were technically required to report that $500 poker winning as "Other Income" on your tax return. For small amounts like that, it's unlikely to trigger any issues, but for larger amounts like $25,500, failing to report could potentially lead to penalties if discovered.

5 Oh crap really? Nobody ever told me that before. I thought income earned outside the US stayed outside the US tax system. So I should have reported my Mexico poker winnings? Will I get in trouble for this?

Can you explain the 1031 exchange a bit more? Does it completely eliminate the depreciation recapture or just postpone it? And are there time limits for finding the next property?

A 1031 exchange doesn't eliminate depreciation recapture - it postpones it. The depreciation you've taken gets factored into your new "basis" in the replacement property. There are definitely time limits - you have 45 days from the sale of your property to identify potential replacement properties (in writing), and you must close on the new property within 180 days of selling the old one. You also need to use a qualified intermediary to hold the funds between sales - you can't touch the money yourself. And the replacement property must be of equal or greater value to defer all tax. These exchanges can be complex, but when done correctly, they're one of the most powerful wealth-building tools for real estate investors.

That's painful! Did you try talking to a tax professional about filing amended returns for the years you could still amend (usually last 3 years) to at least get some benefit from the depreciation you were taxed on?

Thanks! I hadn't even thought about deducting expenses. I definitely buy my own cleaning supplies and drive about 15 miles round trip to her house each time. How do I calculate the phone deduction though? I do text with her about scheduling.

For mileage, keep a log of each trip with the date and miles driven. The deduction for 2023 was 65.5 cents per mile, which adds up quickly. So your 15-mile round trip would be worth about $9.83 in deductions each time. For the phone, you need to figure out what percentage you use it for business. If about 20% of your phone use is for coordinating cleaning jobs, you can deduct 20% of your phone bill. Just be reasonable with the estimate and keep your bills as documentation.

This is exactly what I was thinking! The aunt is definitely trying to write off personal home cleaning as a business expense. I had a client try to do this with me for babysitting her kids at her home office.