I'm currently dealing with a very similar situation and this thread has been a lifesaver! My partner in our graphic design LLC had to step away in March 2023 due to family obligations, and I've been running everything solo since then but haven't addressed the tax implications yet. What's really helpful is seeing how many people have successfully navigated this transition while keeping their EIN and business name intact. I was terrified I'd have to start over completely, but it sounds like the IRS has established procedures for exactly this scenario. One thing I'm still unclear on - when filing that final Form 1065 partnership return, do I need to show my former partner's capital account being zeroed out, or can I just indicate his withdrawal in the explanatory statement? We never had any formal buy-out agreement since he essentially just stopped participating rather than there being any money exchanged. Also, has anyone dealt with this situation where the departing partner is completely unresponsive? My former partner has been going through some personal struggles and hasn't been returning calls or emails. I'm hoping I can move forward with the entity transition even without getting formal documentation from him, as long as I can demonstrate that he stopped participating in the business on a specific date. Thanks to everyone who's shared their experiences - it's giving me the confidence to finally tackle this properly instead of continuing to procrastinate!

I've been following this thread closely because I'm in an almost identical situation with my landscaping LLC. My partner had to leave the business in September 2023 due to a work-related injury, and I've been running everything solo since then but haven't dealt with the tax transition yet. What's been really helpful is seeing the consistent advice about filing Form 8832 and the final Form 1065, plus knowing that I can keep my EIN and business name. I was also worried about having to rebuild everything from scratch. One practical tip I wanted to share - I started by creating a simple timeline document showing exactly when my partner stopped participating (last day they worked, last distribution they received, last business decision they were involved in, etc.). Having those specific dates written down has made the whole process feel much more manageable and will be essential for the tax filings. For anyone else in this situation who's been procrastinating like I was - start with just organizing your records around the transition date. Once you have a clear timeline, the rest of the steps become much less overwhelming. This thread has given me the confidence to finally move forward with getting everything properly documented with the IRS. The consensus seems to be that while we're all behind on the paperwork, this is a recognized business transition that the IRS knows how to handle, even with late filings and penalties.

Hmm, I think everyone's missing something important here. The mini-split heat pump might actually qualify as 5-year property under MACRS, not 39-year property. HVAC equipment is typically considered 5-year property when it's not a structural component of the building. Since mini-splits are somewhat standalone systems (unlike central HVAC that's built into the structure), you might be able to depreciate it much faster even without Section 179 or bonus depreciation.

This is a great discussion with some really valuable insights. Based on everything shared here, it sounds like you have a few solid options for your mini-split depreciation: 1. **Section 179**: Given your 3.5-day average rental period (well under 30 days), you should qualify for the short-term rental exception. This would let you deduct the full $3,835 in 2024. 2. **5-year MACRS**: As Cole mentioned, mini-splits often qualify as equipment rather than building components. This could be a middle ground - faster than 39 years but spread over 5 years instead of all at once. 3. **Bonus depreciation**: 60% immediate deduction for 2024, then depreciate the remainder. Given your $145k AGI, I'd lean toward either Section 179 or the 5-year MACRS approach. The immediate deduction from Section 179 could be valuable at your current tax bracket, but you'll want to consider the QBI implications Jasmine mentioned. One thing to keep in mind: whichever method you choose, make sure you're applying it consistently to similar improvements. The IRS likes consistency in depreciation methods across similar assets. Have you considered getting a second opinion from a tax professional who specializes in rental properties? With the complexity of short-term rental taxation, it might be worth the investment to ensure you're maximizing your deductions while staying compliant.

I've been through this exact situation with my S corp! The good news is you absolutely can handle medical expenses through your business, but you need to do it the right way to avoid IRS issues. First, DO NOT just start charging medical expenses to your business credit card directly. That creates a mess that's hard to unwind and could trigger audit red flags. Instead, set up either an HRA (Health Reimbursement Arrangement) or QSEHRA (Qualified Small Employer HRA). For a small S corp like yours with just you and your spouse, QSEHRA is usually the better choice. The 2025 limits are $5,850 for individual coverage or $11,800 for family coverage. Here's how it works: You pay medical expenses from your personal accounts first, then submit receipts to your S corp for reimbursement. The business gets a tax deduction, and you don't pay income tax on the reimbursements. It's legitimate tax savings, not a loophole. You'll need a written plan document (templates are available online), and you must keep detailed records of all expenses and reimbursements. Set up consistent procedures - I recommend monthly reimbursements to help with cash flow. One important note: Health insurance premiums for S corp shareholders owning >2% require special handling. They get added to your W-2 as income, but then you can deduct them as self-employed health insurance on your personal return. The documentation seems intimidating at first, but once you establish the system, it becomes routine and the tax savings are substantial. Just make sure everything is properly structured before you start!

Thanks everyone for the incredibly detailed responses! This has been so helpful in understanding the proper way to structure medical expense reimbursements through my S corp. Based on all your advice, I think I'm going to move forward with setting up a QSEHRA since it seems perfect for our small operation. The step-by-step process you've outlined makes it feel much more manageable: 1. Create a written QSEHRA plan document 2. Set up that dedicated bank account for medical reimbursements (love this idea!) 3. Pay expenses personally first, then submit for reimbursement 4. Keep detailed records with receipts and formal reimbursement requests I'm particularly relieved to hear that vision expenses like glasses are definitely covered - that's been one of our biggest out-of-pocket costs lately. One quick follow-up: For the written plan document, should I have this reviewed by our accountant before implementing, or are the online templates typically sufficient to get started? I want to make sure we're bulletproof from an audit perspective, but also don't want to delay getting this set up if the templates are adequate. The potential tax savings are exactly what we need to get some breathing room in our personal finances while keeping everything legitimate and properly documented. Really appreciate everyone taking the time to share their real-world experiences!

Great question about bonus withholding! I've been dealing with this same issue for years. The 40% you're seeing is definitely the combination of federal (22% flat rate for supplemental wages), state, and FICA taxes all hitting at once. I learned the hard way that claiming exempt is NOT the way to go - the IRS is very strict about this and you can only claim it if you had zero tax liability last year AND expect zero this year. With your salary plus bonuses, you definitely don't qualify. What I discovered works much better is adjusting your regular W4 to account for the over-withholding on bonuses. Since the IRS only cares about your total annual withholding (not the timing), you can reduce withholding on regular paychecks to balance out the heavy withholding on bonuses. The safest approach is to use the IRS Tax Withholding Estimator and input your expected annual salary AND bonus amounts. It will calculate the optimal withholding across all your paychecks. Just make sure you stay within the safe harbor rules (pay at least 90% of current year tax or 100% of last year's tax) to avoid underpayment penalties. This strategy has saved me hundreds per month in cash flow while still keeping me compliant with IRS requirements. Way better than trying to game the system with exempt status!

I just went through this exact situation last month! Like everyone else has mentioned, claiming "Exempt" specifically for bonuses isn't possible - it's an all-or-nothing status that applies to your entire paycheck. What I found really eye-opening was learning that the IRS doesn't care about the timing of your withholding throughout the year, just that you meet the annual requirements. So you can absolutely adjust your regular paycheck withholding to compensate for the heavy withholding on bonuses. Here's what worked for me: I gathered my last year's tax return and recent pay stubs (including bonus stubs), then used the IRS Tax Withholding Estimator to run scenarios. I input my expected annual salary plus a conservative estimate of my bonuses. The calculator showed me exactly how to adjust my W4 to get better cash flow while staying compliant. The key is hitting those safe harbor thresholds everyone mentioned - either 90% of this year's tax liability or 100% of last year's (110% if your AGI was over $150K). As long as you meet one of those, you won't face underpayment penalties even if your withholding is lumpy throughout the year. I ended up reducing my regular paycheck withholding by about $180 per month, which has made a huge difference for cash flow while the bonus withholding stays the same. Way less stressful than trying to claim exempt status and potentially getting in trouble with the IRS!

I completely understand your frustration! This is one of the most confusing aspects of payroll taxes. What you're seeing is actually pretty normal, unfortunately. The key thing to remember is that your bonus isn't actually being "taxed" at 40% - that's just the withholding rate. When you file your taxes, the bonus gets added to your regular income and taxed at your normal marginal rates (so likely closer to that 24% you mentioned). The reason you're seeing such high withholding is probably because your employer is using the "aggregate method" - they temporarily add your bonus to your regular paycheck and calculate withholding as if that huge amount was your normal salary. This pushes the withholding calculation into higher tax brackets temporarily. On top of the federal withholding, you've also got: - Social Security tax (6.2%) - Medicare tax (1.45%, plus potentially 0.9% additional if you're a high earner) - State income tax (varies by state) - Possibly local/city taxes - Any pre-tax deductions like 401k contributions All of this can easily add up to that 35-40% total withholding you're seeing. The good news is you'll likely get a nice chunk of that back as a refund when you file your taxes. You can also ask your payroll department if they'd consider using the flat 22% percentage method for future bonuses, or temporarily adjust your W-4 to reduce regular paycheck withholding to offset the over-withholding from your bonus.

This is such a frustrating experience, but you're definitely not alone! I went through the exact same shock when I saw my year-end bonus withholding. What's happening is likely that your employer is using the "aggregate method" for withholding - they temporarily combine your bonus with your regular salary and calculate taxes as if that inflated amount was your normal pay. This can easily push the withholding calculation into the 37% or even higher brackets, especially when you add in all the other deductions. Here's what's probably being taken out of your bonus: - Federal income tax (could be 22% flat rate OR much higher if using aggregate method) - Social Security (6.2%) - Medicare (1.45% + possible 0.9% additional Medicare tax for high earners) - State income tax (varies widely by state) - Any 401k, HSA, or other pre-tax deductions - Possibly local/city taxes All of this can definitely hit that 38-40% range you're seeing. The important thing to remember is that when you file your actual tax return next year, your bonus just gets added to your regular income and taxed at your normal progressive rates. So if your marginal rate is 24%, most of your bonus will be taxed at 24%, not 40%. You'll likely get a decent refund from all that over-withholding. You can ask HR if they'd switch to the 22% flat rate method for future bonuses, or consider temporarily adjusting your W-4 to reduce withholding on your regular paychecks for the rest of the year to offset this. Just make sure to change it back in January!