Don't forget about the AMT implications with ISOs! Even if you have a disqualifying disposition, you might still need to figure out if you paid any AMT in the year you exercised. If you did, you might be eligible for an AMT credit. The whole ISO system is ridiculously complicated. When I exercised some ISOs in 2022, I had to pay AMT that year. Then when I sold in 2023 (disqualifying disposition), I got ordinary income but was also eligible for an AMT credit. Make sure you're tracking all this stuff.

Something else to consider with ISOs - if your company is private or was private when you exercised, the calculation of the bargain element can get really messy. Companies use 409A valuations which might not match what you think the shares are worth. My company went public 8 months after I exercised some ISOs and the 409A value at exercise ($12/share) was WAY lower than the IPO price ($47/share). I made a disqualifying disposition but the bargain element was calculated based on the lower 409A value, not the public market value when I sold.

Has anyone tried just ignoring a small W-2 like this? I got one for $36 two years ago and just left it off my return. Nothing ever came of it. IRS probably has bigger fish to fry than chasing down tiny amounts.

I'm confused by some of these comments. If you know for sure you didn't earn the money, why would you report it and pay taxes on it? Shouldn't the company issue a corrected W-2 instead?

Don't forget to consider state tax implications of the switch! Depending on your state, there can be significant differences in how S Corps vs C Corps are taxed at the state level. For example, in California, S Corps pay a 1.5% tax on net income (minimum $800), which is different from the C Corp rate. Some states don't recognize S Corps at all for state tax purposes!

The timing of when you make the conversion matters a lot. If your business has significant assets that have appreciated in value (like real estate, equipment, intellectual property), converting can trigger a tax on that appreciation. If your business is mainly service-based with minimal assets, this is less of a concern. But if you do have valuable assets, consider getting them properly valued before making any decisions.

One thing nobody's mentioned yet - you should look into establishing a separate entity specifically for your real estate development activities. I have a plumbing business and rental properties, and my CPA recommended setting up: 1. My original S-Corp for the plumbing business 2. An LLC taxed as a partnership for the rental properties 3. A separate LLC for property development/flips This way, there's no confusion about which expenses belong where. My plumbing business can legitimately bill my development projects at market rates for any plumbing work. For materials, I keep separate accounts and credit cards for each business to avoid commingling funds. For your specific situation, materials for your rentals will still need to be depreciated over time, but with the right entity structure and cost segregation, you can optimize your tax situation significantly. Just don't make the mistake of running everything through your landscaping business like I initially did with my plumbing company.

I've been doing exactly what you're trying to do for about 7 years now. Started with a painting company, moved into flips, and now have 11 rental units. Here's what I've learned: 1. For flips: You CANNOT deduct materials as expenses through your landscaping business. These costs are part of your "basis" in the property and offset your profit when you sell. You might need to amend previous returns if you've been doing this wrong. 2. For rentals: New construction costs are capitalized and depreciated over 27.5 years (residential). BUT - you can do a cost segregation study that lets you depreciate many components much faster (5-15 years). This can front-load deductions in the early years. 3. Entity structure: Consider having your landscaping business be a legitimate contractor for your real estate projects. Charge fair market rates, keep proper documentation, and you can move some profit that way. 4. 1031 exchanges: Look into these for your flips if you want to defer taxes and build your rental portfolio faster. Don't get discouraged! The tax rules for real estate actually favor investors once you understand them properly. My tax bill is way lower now than when I was just running my painting business.

Quick tip from someone who went through this exact scenario two years ago: gather proof of where you WERE during the time the IRS claims you were working at this company. I was a student too, and I provided: 1. My class schedule from that semester 2. My student ID swipe records showing I was on campus 3. My part-time job timesheets from the campus library 4. Bank statements showing regular withdrawals near campus (not near the supposed employer) The IRS attorney took one look at this package and realized it would be impossible for me to have worked full-time at the company in question. We settled before ever going to court. Also, call the SSA and request a wage and income transcript for that tax year. It might show who actually received the income (could be someone with a similar SSN to yours).

Just adding that I went through something like this and learned identity theft might be involved. Request an Identity Protection PIN from the IRS at https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin Also, check your credit report immediately. Someone might have used your SSN for employment and that could appear there. The company not existing anymore is actually common in these scams. Sometimes "companies" are created just to file fake W-2s and then disappear. Make sure you mention this suspicion in your court documents.