Oh man, I hadn't even thought about the state implications. I'm in Illinois - do you know if they automatically recognize the federal S-corp election or do I need to file something separate with them too?

Illinois does generally conform to federal S-corp elections, but they still require their own notification. You need to file Form IL-1120-ST with the Illinois Department of Revenue, and they technically want you to submit this within 60 days of your federal election. Since your federal election is going to be retroactive, you should contact the Illinois Department of Revenue specifically about your situation. They may require you to file a separate late election acceptance for state purposes. Unlike some states that automatically accept the federal election, Illinois wants to be formally notified, even though they typically follow the federal tax treatment.

Any recommendations for finding a CPA who specializes in fixing these kinds of messes? I've been looking but everyone I talk to seems to have a different opinion on how to handle it.

Which app do you use for the receipts? I've tried a couple and they were garbage at organizing things properly.

I use Expensify for most things - it automatically extracts the vendor, date, and amount which saves tons of time. It also syncs with my accounting software. Before that I used QuickBooks' receipt capture feature, which was decent but not as good at recognizing text on receipts.

Amazon order history plus your credit card or bank statement showing the payment amount does work. I had an audit last year and this combo was accepted. Just make sure the amounts match and you can show the items were for business use. If it's a mixed order with personal items, highlight the business items specifically.

Thanks for the info! That's a huge relief since about half my office supplies are from Amazon and I've just been keeping the email receipts and order details page screenshots. Good to know that plus my credit card statements should cover me.

You make a really good point about the regulatory compliance stuff. I hadn't even thought about the FDA labeling requirements. I'm going to ask him specifically about packaging, shipping supplies, and the labels since those definitely couldn't have been "gifted years ago" - they would be ongoing expenses. I've been trying to give him the benefit of the doubt, but the more I think about it, the more impossible it seems to run any business with zero expenses. I'm going to have a more direct conversation with him and explain that I'm trying to help him avoid unnecessary IRS scrutiny.

Glad I could help! The FDA requires supplements to have specific labeling including ingredients, nutrition facts, serving sizes, and various disclaimers. He's definitely paying something for compliant labels unless he's operating completely under the table (which would be a whole different problem). Also consider asking about things like shipping costs, payment processing fees (Venmo might charge business accounts), any social media or advertising costs, and home office expenses if he's producing these at home. Sometimes clients don't realize these all count as legitimate business expenses that would actually reduce his tax liability.

Do business Venmo fees show up separately somewhere? I've been paying them but haven't been tracking them for my small business.

How do you determine the exact point when you're "in business" versus still in startup phase? I set up my LLC in January 2023 but didn't start making sales until March 2023. Would expenses in that January-February period count as startup costs?

Yes, those January-February expenses would likely qualify as startup costs under Section 195. The IRS generally considers you "in business" when you begin your actual business operations - which usually means when you start offering goods or services for sale. Since you formed your LLC in January but didn't begin making sales until March, the expenses incurred in that January-February window would typically be considered startup expenses subject to the Section 195 rules, including the $5,000 first-year deduction limit with the remainder amortized over 180 months.

I had the opposite problem - TurboTax didn't recognize my legitimate startup costs at all until I manually selected the form. Make sure you're entering your business start date correctly in the software. That's usually what triggers these categorization issues.

This is super helpful, thank you! Do you know if I would need to file any US tax returns if I'm classified as a non-resident alien? And if I do submit a W-8BEN to PayPal, how long does it typically take for them to process it and stop the 30% withholding?

Yes, you would likely need to file Form 1040NR (U.S. Nonresident Alien Income Tax Return) if you have U.S. source income above certain thresholds, even as a non-resident alien. For income received through PayPal that's considered U.S. sourced, you'd generally need to report it. For the W-8BEN processing, PayPal usually takes about 1-2 weeks in my experience, though sometimes it can be faster. The tricky part is determining if your income through PayPal is actually U.S. sourced or not - it depends on where the services were performed or where the payer is located, not just where your PayPal account is based. If you're performing services while physically outside the U.S. for non-U.S. clients, that income might actually be foreign-sourced and not subject to U.S. taxation at all.

This is such a good point! I had a similar situation and ended up double paying taxes because I didn't understand the source rules. Does anyone know if there's a way to explain to PayPal that the income isn't US-sourced even though it's going into a US account?