This thread has been incredibly helpful! I went through the same confusion when I first started dealing with S-Corp taxation. One additional tip that saved me a lot of headache: make sure you understand the difference between distributions and salary from your S-Corp, as they're handled completely differently on your personal return. Salary from your S-Corp gets reported on your W-2 and goes on your 1040 as regular wages. Distributions, on the other hand, aren't taxable income at all - they're just a return of your investment in the company (as long as they don't exceed your basis). The K-1 income that flows to Schedule E represents your share of the S-Corp's profits, which is completely separate from both your salary and any distributions you received. This was the piece that finally made everything click for me - the K-1 income is what you owe taxes on regardless of whether the company actually distributed that money to you or not. Keep good records of your distributions versus your K-1 income, because mixing these up is a common audit trigger.

As someone who's been through this exact confusion, I can confirm that the process does get clearer with experience! One thing that really helped me understand the flow was to think of it this way: your S-Corp is like a separate "person" that earns income and pays expenses, but since it's a pass-through entity, YOU ultimately owe the taxes on its profits. The K-1 is essentially your S-Corp saying "Hey, here's your share of what I earned this year - you need to pay taxes on this." Schedule E is where you acknowledge that income on your personal return. The IRS needs to see both documents to verify that the income reported by the business matches what you're claiming on your individual return. A helpful analogy: think of it like getting a 1099 from a client. The client reports they paid you (their version of the K-1), and you report that same income on your tax return (your version of Schedule E). It's the same principle, just with more complex forms. One last tip: keep a simple spreadsheet tracking your S-Corp basis year over year. This will be invaluable if you ever have losses or take distributions, and it'll save you hours of reconstruction if you ever get audited.

Warning from personal experience: I tried deducting a design certificate program a few years back and got audited! The IRS determined my courses qualified me for a "new profession" even though I was already working in a related field. Ended up owing back taxes plus penalties. Make sure your courses are truly enhancing EXISTING skills, not qualifying you for something new. The distinction can be really subjective and depends on how you present it. Document everything!

This is really helpful information, everyone! I'm in a similar situation as a marketing professional who recently took some advanced analytics courses. Based on what I'm reading here, it sounds like the key is proving these courses enhance existing skills rather than qualify you for something completely new. @Chloe Anderson - for your UI/UX courses, since you're already in graphic design and have started earning income using these enhanced skills, you seem to have a solid case. The fact that you're already generating $4,200 in freelance income using these new capabilities strengthens your position significantly. One thing I'd add - make sure you can clearly articulate how UI/UX design relates to your existing graphic design work. Maybe document some specific projects where you used both skill sets together? That connection will be important if you ever need to justify the deduction. Also keeping an eye on that "hobby loss rule" mentioned by @CosmicCruiser. Since you're already profitable in your first year with these skills, that's a great sign for the IRS that this is a legitimate business activity rather than a hobby.

I understand how difficult this situation must be for you. The fact that you're asking these questions shows you want to do the right thing, which is commendable. One thing I'd add to the excellent advice already given: consider the timing of any actions you take. If your father is planning to retire in 2 years, that gives you some runway to address this thoughtfully rather than reactively. However, if he's actively committing fraud right now, waiting too long could make things worse. From a practical standpoint, I'd suggest documenting what you know (dates, general descriptions of conversations) in case you need this information later. Don't participate in any of the questionable activities, and be very careful about any financial gifts or transfers he might offer in the meantime. The estate planning attorney approach mentioned earlier is really smart - it gives your dad a face-saving way to transition to legitimate strategies while potentially stopping ongoing fraud. Many successful business owners genuinely don't realize there are perfectly legal ways to significantly reduce estate taxes through proper planning. You're in a tough spot, but addressing this now is much better than dealing with IRS enforcement actions later. Stay strong and prioritize protecting yourself and your family's long-term interests.

I really appreciate seeing so many thoughtful responses here. As someone who works in tax compliance, I want to emphasize a few key points that might help clarify your situation. First, the distinction between tax avoidance (legal) and tax evasion (illegal) often comes down to transparency and intent. Legitimate estate planning involves strategies that are fully disclosed to the IRS - things like properly structured trusts, annual gifting within legal limits, and business succession planning. The red flags in what your father described (offshore arrangements to hide assets, unreported cash transfers, shell companies to conceal income) are textbook evasion tactics. Second, regarding your potential liability as an heir: while you generally aren't responsible for tax fraud you didn't participate in, the IRS can pursue assets that were illegally shielded from taxation. This means you could inherit assets that come with significant tax liens or be required to pay back taxes on previously unreported income. I'd strongly recommend the estate planning attorney approach suggested earlier, but with one addition: make sure any attorney you work with has experience dealing with IRS compliance issues, not just estate planning. They need to understand both sides - how to structure legitimate tax-efficient transfers AND how to address potential past compliance problems. The fact that you're concerned enough to ask these questions puts you in a much better position than families who ignore these issues until the IRS comes knocking. Take action sooner rather than later.

This is an excellent discussion thread! I'm dealing with a very similar situation and want to add a few practical considerations that might help others navigating this. After reading through all the responses, I'm convinced that the income-based allocation method (option 3) is the most defensible approach, especially when you can document where your business activity actually occurred. However, I'd recommend a few additional steps: 1. **Create a detailed timeline** showing not just income but also major business activities, client meetings, project completions, etc. at each location. This strengthens your case that the allocation reflects genuine business reality. 2. **Consider state tax implications** - Some states have different rules for home office deductions, so make sure your allocation method works for both federal and state returns. 3. **Keep copies of utility bills, internet bills, etc.** from both properties showing the business use periods. This supporting documentation can be valuable if questions arise. The point about quarterly estimated taxes is spot-on too. When your income increases significantly after a move, it's easy to get caught off guard by underpayment penalties. I learned this the hard way last year! One last thought - if you're using tax software, some programs struggle with multiple Form 8829s in the same year. You might need to prepare them separately or use professional software to handle this correctly.

This thread has been incredibly helpful! I'm in a similar situation where I moved my home office mid-year and have been stressed about handling the carryover expenses correctly. What I'm taking away from all these responses is that the income-based allocation method (option 3) seems to be the most logical and defensible approach, especially when you can clearly document where your business income was actually generated. The key seems to be maintaining detailed records and being able to justify your methodology. I'm particularly grateful for the practical tips about creating timelines, checking state tax rules, and the warning about tax software limitations. I had no idea that some programs struggle with multiple Form 8829s in the same year - that could have been a nasty surprise! One question I still have: if you're using the income-based allocation method, how granular do you need to get with the documentation? Is it sufficient to show total income earned at each location, or should you break it down by client/project? I want to make sure I'm prepared if the IRS ever asks for supporting documentation. Thanks to everyone who shared their experiences - it's amazing how much clearer this complex situation has become through everyone's collective knowledge!

Make sure you're considering the Form 8832 "check-the-box" implications here. A single-member LLC is automatically disregarded for US tax purposes unless you elect to have it treated as a corporation by filing Form 8832. Sometimes it's actually beneficial to elect corporate treatment for a foreign-owned LLC to simplify reporting and avoid certain direct ownership issues, even though it creates a separate taxable entity. The French investor should also check with a French tax advisor since the French tax treatment of the LLC might not match the US treatment.

This is exactly the kind of complex international tax situation where you really need specialized expertise. I've dealt with similar French investment structures and there are several additional considerations beyond just the treaty withholding rates. One thing that hasn't been mentioned is the potential French wealth tax (IFI) implications. If the mother is a French tax resident, her ownership in US real estate through the LLC structure could trigger French wealth tax obligations, even if she doesn't directly own the real estate LLC partnership you mentioned. Also, consider the timing of distributions. The US-France treaty has specific tie-breaker rules for determining tax residence that could affect the treaty benefits if there's any question about her French residency status. Make sure she maintains clear documentation of her French tax residency. Given the substantial investment amount you mentioned, I'd strongly recommend getting a formal opinion from someone who specializes in US-France tax matters before finalizing the structure. The cost of proper planning upfront will be much less than trying to unwind a problematic structure later, especially with the recent changes to international reporting requirements. The suggestions about getting direct IRS guidance are also solid - having official confirmation of how they'll view the structure can provide valuable certainty for everyone involved.