Tax time for internet sellers means keeping track of two very different pieces of financial information. These pieces of information are key for deductions for ecommerce. First, the sales that you’ve made from your ecommerce business and second, the expenses that you can potentially deduct.
Tax deductions for ecommerce will help reduce your total income, which in turn helps decrease your taxes owed. Taking advantage of the most common tax deductions for ecommerce that are available to you is an essential part of good business financial-management.
Unfortunately, many online sellers don’t know where to start. If you sell online, here is a list of typical deductions for ecommerce that internet sellers should consider claiming on their tax returns.
Direct Expenses to Deduct For Ecommerce
If you sell online using Amazon FBA, Shopify, eBay, or other ecommerce platforms, you can benefit from deducting some of your direct expenses. These are the top direct expense deductions for ecommerce business:
There are several ways to deduct the cost of the computers that you need to run your business. You have the option to deduct the entire depreciable cost in a single tax year or depreciate it over 4 years. However, you only have the option to expense the cost of your computers in a single year if the full cost is under $2,500. You can’t use this option if the cost of the computers exceeds $2,500, in which case you’ll need to spread the cost over a multiple-year period using depreciation.
You can also use a provision of the tax law called Section 179. This section allows you to deduct the cost of computers and other business equipment. However, you can’t use Section 179 to deduct in one year an amount that is more than your net taxable business income. Nonetheless, you do have the option to save the deduction for future years if you have yet to turn a profit from your business.
Commissions and Fees
Some ecommerce platforms charge you fees for using their services. For example, eBay charges listing fees for the items that you list for sale on their platform. Additionally, the platform may charge a commission on every sale that you make. It may also charge monthly fees for hosting a store on their platform.
You may be charged fees that include PayPal and bank fees for processing payment transactions from your customers. All of these charges are deductible. Keep track of the amount charged on every sale so that you can deduct these expenses at tax time.
While you’ll be able to get sales from some platforms like Amazon FBA without making much of an effort to promote your business, your earnings will ultimately come down to how much effort you put into advertising your storefront. Expenses from promotional services such as Facebook Advertising and Google Adwords are tax-deductible.
Don’t forget that these costs are not all the costs that can be written off. Other costs that can be deducted include business cards, website, and other print promotional materials.
Cost of goods sold is the most common deduction for ecommerce. Cost of goods sold refers to the amount of money that you spend in order to acquire your inventory. It could refer to the amount that you paid to wholesale vendors when you sourced your products. It could also refer to cost of the materials for the goods that your company manufactures. The cost of goods sold deduction also includes the cost of freight, packaging, and any taxes paid on these items. Foreign transaction fees, customs, import, or tariff taxes are also deductible when sourcing inventory.
The new tax law has severely limited the deductibility of business meals and entertainment expenses. After December 31, 2017, there is no deduction for entertainment expenses which involve entertaining clients. However, business meals are still 50% deductible, which means that you can deduct the cost of meeting with a vendor. You can also deduct your lodging and tips and transportation costs.
The ecommerce world evolves fast and business owners need to keep up with the latest advancements. As a result, many online sellers invest in coaching, books, conferences, and seminars to stay up-to-date. Providing continuing education for yourself is deductible as long as you can directly tie those expenses to your business operations.
Indirect Expenses to Deduct
If you run your ecommerce business from your home, you could qualify for the home-office deduction. In addition to a percentage of your rent or mortgage interest, you can also deduct the cost of maintaining your home workspace. However, keep in mind that the home office deduction is a big red flag for the IRS. This means that you should make sure that you only take this deduction if you’re legitimately entitled to the deduction. If you take a home office deduction, you are also able to deduct a portion of your utility bills. Namely your monthly electricity and heating/cooling bill.
To make sure that your personal life is in order, you may also consider setting up an IRA or a medical plan for yourself. Here are some of the expenses related to these activities that you can deduct as a business owner:
- Your personal income contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s) if you are a sole proprietor, partner in a partnership, or LLC member.
- If you have incorporated your business, you can deduct the contributions that your business makes on your behalf to a retirement account as business expense contributions.
- The self-employed health insurance deduction allows you to deduct the cost of health insurance premiums for you and your dependents. This includes dental and long-term care coverage.
You may be tempted to get creative with tax deductions. However, restrictions on business expense deductions are tightening. This makes it easy to overstep the boundaries that have been set by the IRS. Always consult your tax professional before claiming any deductions on your tax return.