First-Year LLC Tax Filing: Lessons from Doing It Myself

As a first-time partnership/LLC founder, navigating the complex world of business taxes can be a daunting task. While I had previously founded a business as a sole proprietor, filing taxes for an LLC with multiple partners was a new challenge. When it came time to file taxes for my LLC in its first year, I decided to take on the task myself. While I learned a great deal in the process, I also encountered some surprises and made a few mistakes along the way.

In this post, I want to share some of the important lessons I learned from doing my own accounting and taxes as a new founder. My goal is to help other entrepreneurs be better prepared and avoid some of the pitfalls I stumbled upon.

Please note that these are my personal findings and experiences, and I am not an accounting or tax professional. Always seek expert advice for your specific tax situation and questions.

Here are the key lessons I learned from filing my LLC taxes for the first time:

1) March 15th Deadline for Pass-Through Entities

Most people in the U.S. have April 15th cemented in their minds as the tax deadline, but that's not the case for businesses organized as partnerships, LLCs, and S-Corps. The deadline to submit tax returns for these pass-through entities is March 15th.

If your business is a C-corp, you can still focus on the April 15th deadline.

In the eyes of the IRS, my co-founder and I organized our company, CareKate LLC, as a partnership. I started working on our taxes a few weeks ago because I didn't want to wait until the last minute. I was surprised to discover the March 15th deadline for filing, which kicked me into high gear.

I believe this earlier deadline is because the IRS and each partner need the Schedule K-1 forms. These forms report each partner's share of the partnership's income, deductions, credits, and other items, which the partners need to file their individual tax returns.

2) Don't Forget 1099-NEC Forms for Attorney Fees

As a new business owner, I was aware of the need to issue W-2 forms for employees and 1099 forms for contractors. However, I didn't realize that 1099-NEC forms were also required for attorney fees paid during the year.

In our first year, CareKate LLC did not have any employees other than the partners, so I wasn't concerned about W-2s. We also didn't work with any contractors, so I assumed I didn't need to worry about 1099 forms.

I was wrong.

It turns out that you need to issue a 1099-NEC form for any attorney fees paid during the year, which we did have. This was news to me, and I learned about it on a Saturday night in late February.

I spent the rest of that night scrambling to get the 1099-NEC form filed and a copy sent to our legal firm. Unfortunately, I was late and will have to accept any associated financial penalties.

Now, I have a reminder set for January 15th to ensure I submit all necessary W-2 and 1099 forms on time in future years.

3) Partnerships Must File Separate Federal and State Tax Forms

As a pass-through entity, I assumed that all of our LLC's tax filings would be handled on the partners' personal tax returns. I thought there would be a specific form or schedule for this purpose.

However, when I started shopping for tax software, I discovered that we needed a separate business version. Thinking that this version was simply a feature-rich option designed to handle both corporate and personal taxes, I purchased it with my personal credit card.

Before realizing that this software didn't cover personal taxes, I went ahead and bought the state tax package, also with my personal credit card.

Just a few clicks later, it dawned on me that this software was intended solely for the partnership's tax filings. Since it was a business expense, I should have used the company card.

After filing two personal expense reports, I formally recorded the expense to set things right. I also learned that I'd need to purchase two separate tax software packages – one for the partnership and another for my personal taxes.

I learned to always double-check the purpose and scope of any tax-related software.

4) Track Start-up and Organizational Costs Separately

Before officially launching your start-up, you may incur various expenses such as purchasing domain names, paying for legal fees to set up the business entity, and conducting research. It's essential to keep track of these costs separately, as they fall into two distinct categories with different tax implications.

According to IRS Section 195, start-up costs are expenses incurred before the business begins operations. These can include market research, advertising, employee acquisition, and training. On the other hand, IRS Section 709 defines organizational costs for partnerships as expenses related to creating the partnership, such as legal fees and filing fees.

Distinguishing between start-up and organizational costs is crucial because they may lead to separate tax deductions. Consult the tax code or a professional to understand the specific deduction limits for each category in the first year of business. The key takeaway is to avoid combining these costs when tracking and reporting them.

When you officially open your business, start-up and organizational costs need to be capitalized as assets. This means you'll record them on your balance sheet and then gradually expense them over time, following the appropriate amortization rules.

5) Be Aware of State-Specific Taxes

In addition to federal taxes, it's crucial to understand the tax requirements specific to the state where your business is located. In Illinois, where CareKate LLC is based, I discovered that there is a replacement tax and an option to elect into a pass-through entity (PTE) tax. I was unaware of these state-specific taxes until I started working on our state tax filings.

Several states have recently introduced PTE taxes, which are paid by the business entity rather than the individual partners. These PTE taxes are relatively new, and the federal rules surrounding them are not yet fully defined. However, electing to pay PTE taxes can potentially lead to additional federal tax savings if properly conducted and documented.

Moving forward, I need to ensure that I pay estimated taxes throughout the year to account for both the Illinois replacement tax and the PTE tax.

It is worth noting that CareKate, LLC is a service-based business and is not subject to sales tax in Illinois, but please make sure you understand any applicable state or local sales tax requirements.

The Bottom Line

As a first-time partnership/LLC founder, navigating the world of business taxes has been a challenging but enlightening experience. By sharing my journey and the lessons I've learned along the way, I hope to help other founders be better prepared and avoid some of the pitfalls I encountered.

Throughout this process, I made mistakes, spent countless hours researching, and had to backtrack and fix errors. While it was time-consuming and sometimes frustrating, I gained valuable knowledge and a deeper understanding of the tax requirements for my business.

If you're a new founder feeling overwhelmed or unsure about handling your business taxes, remember that you're not alone. It's okay to make mistakes, as long as you learn from them and take steps to improve your processes for the future.

However, if you feel uncomfortable or ill-equipped to handle your taxes on your own, don't hesitate to seek expert guidance from a qualified tax professional. They can help ensure that you stay compliant, maximize your deductions, and avoid costly errors.

I'd love to hear about your own experiences with business taxes as a founder. What lessons have you learned, and what advice would you share with others just starting out? Let's continue this conversation in the comments below.

Disclaimer: The information provided in this blog post is based on my personal experience and should not be considered professional tax or legal advice. Every business's tax situation is unique, and tax laws and regulations are subject to change. Always consult with a qualified tax professional or attorney for specific guidance tailored to your business's needs. The author of this blog post is not responsible for any actions taken based on the information provided herein.