Ecommerce Tax Deductions: A Complete List For Online Sellers Bench Accounting

20 Aug Ecommerce Tax Deductions: A Complete List For Online Sellers Bench Accounting

For many eCommerce businesses grossing over $1 million, this will be the single largest source of tax savings for owners. As eCommerce businesses grow, it is strongly recommended that they switch to accrual accounting. When you purchase $50,000 of inventory under accrual accounting, you actually don’t have an expense because that transaction converted cash into inventory, simply moving values around on your balance sheet. The inventory costs are only deductible when the inventory is sold.

Another regular cost is the cost of making or receiving calls through Skype, Google Voice or other software used for these purposes. Keep receipts for the credits you purchase to make these calls as long as they are business-related calls. Running an e-commerce business can be challenging from an operational perspective. A survey conducted by BigCommerce, shows that more than half of online retailers agree that running a ecommerce operations requires significant effort. Deborah Sweeney is the CEO of, which provides online legal filing services for entrepreneurs and businesses.

Professional Fees

Many states that collect sales tax exclude certain items—typically groceries, books, and prescription drugs—from state-level tax. If you do not have a physical presence, you are not required to collect sales tax on internet sales. That’s not necessarily a bad approach, but having a website gives you much more control — not to mention, more legitimacy to prospective 20 Tax Deductions Ecommerce Businesses Need To Take Advantage Of Now customers. When you sign up for hosting and register a domain name, you should keep those receipts and mark the costs as business-related deductions. Ordinarily, depreciation regulations force people to take off part of the cost for an asset each year for several years. However, there are ways to get the full 100% deduction on such assets within the same tax year.

20 Tax Deductions Ecommerce Businesses Need To Take Advantage Of Now

You can deduct the cost of your business insurance on your tax return. If you have a home office, or use a portion of your home to run your business, you can deduct your renter’s insurance costs as part of your home office write-offs. Any costs you incur from shipping goods to customers can be deducted on your taxes.

Take advantage of tracking your mileage

Heavy vehicles, or any auto weighing over 6000 pounds on its own, are even classified as transportation vehicles and may be eligible for further tax breaks. So a C corporation dividend could put you ahead at higher income levels, at least when it comes to federal taxes. Many states tax capital gains at the same rates as income, but some tax it at lower rates and a few don’t tax capital gains at all. A C corporation structure is like an S corporation in that you’re required to pay yourself a W2 wage, and the remaining profit would be a dividend. However, a C corporation can elect to retain earnings, and not pass along the dividend to the owners of the company.

20 Tax Deductions Ecommerce Businesses Need To Take Advantage Of Now

The U.S. sales tax system is unlike that of many foreign nations that impose a VAT. As mentioned earlier, VAT systems generally impose tax at each stage of the supply chain. The U.S. sales tax system imposes sales tax when products or services rest with an end user (i.e., the person consuming the product or service). Rather than imposing sales tax at each phase of the supply chain, states rely on statutorily enacted sales tax exemptions. You pay taxes on your profit — the amount remaining after you subtract the cost of goods sold, depreciation expenses, operating expenses, and interest expenses.

Final Thoughts: eCommerce Tax Strategies

Recessions can be challenging times for businesses, as economic uncertainties and market downturns create obstacles to maintaining profitability. However, with strategic accounting practices, it is possible to navigate these difficult periods and even maximize… Because of the sensitive, ever-changing nature of eCommerce taxes, you should seriously consider consulting a tax professional to determine the best course of action for your business. Tax professionals’ insight can help you make the best decision for your eCommerce business, as well as ensure your business stays compliant and remits its sales tax correctly. Late or incorrect payments can drastically hinder your business’s ability to operate and remain in a positive state of cash flow.

  • Shipping is a necessary and significant expense for any online business.
  • Regarding nations, the difficulties surrounding tax loss and tax evasion are critical.
  • The latter is the money your business generated that the government can tax.
  • That’s also the minimum that a business can pay someone to fill out a 1099-NEC for the IRS.
  • If your ecommerce website and hosting expenses are solely for your business, they are likely deductible.

With cash-based accounting, expenses are booked when they hit your bank account, and so is income. It’s easy to understand, which is why many companies start accounting in this fashion. If you run your eCommerce business from your home, you’re probably fairly familiar with home office deductions.

Small-Business Tax Deductions You Need to Know

If you purchased $50,000 worth of inventory three years ago, and you still have $30,000 left, you’ve only captured $20,000 worth of expenses. But you can choose to write off the remaining inventory, resulting in a $30,000 deduction against your income. Note that when you write off inventory you actually do have to destroy it or donate it, and you should keep records to prove you actually did this. You can also write down the inventory, recognizing that it still has some value, but taking an immediate expense on the value it has lost. As you’re approaching the end of your tax year under accrual accounting, it’s always a good idea to look around your facility to see if any dead-stock inventory can be harvested for write-offs.

  • These costs include travel, advertising, accountant fees, market research, setting up a corporation or LLC, and more.
  • Using your own vehicle for work-related reasons may qualify as a business expense.
  • Unfortunately, many business owners make mistakes when calculating how big their home office deduction should be.
  • Types of deductible home business expenses include mortgage interest, insurance, utilities, repairs and depreciation.

Once you have a space that qualifies for a deduction, you can begin your calculations using either the simplified option or the regular method. Mixing your business and personal expenses is a surefire way to get into trouble. Avoid this by setting up an account that is purely used for business. Once you’ve done this, link this account to your cloud accounting software to easily record and track expenses.

Ecommerce Made Easy with ChatGPT: 5 Prompts You Can’t Afford to Miss

At your revenue level, the difference between hiring a professional to perform your Shopify tax filing and doing it yourself would not yield significant enough savings. The current post-pandemic environment has been very encouraging for small business owners. The government has provided a great deal of help and support for small business owners to grow their businesses in the US. If you have incurred any of the above expenses during your first year of business, make sure to take advantage of this little-known “secret” deduction for ecom businesses you are running.

20 Tax Deductions Ecommerce Businesses Need To Take Advantage Of Now

With that said, you’re almost guaranteed to need one just to run any type of business. It’s not unusual for a prospective business owner to finance their dream by taking out a loan. The great hope is to build a stable operation off that money, pay off the loan quickly, and watch the profits roll in. Banks and similar institutions may be persuaded to lend some cash, but they’ll want something in return. Presentation can make a big difference, and you’ll want your office lobby to look spiffy and cozy.

Necessary and Ordinary Costs

Starting January 1, 2018, the standard mileage rate for vehicles including cars, vans, pickups, and panel trucks is 54.5 cents. A similar analysis applies to doing business in the United States. Foreign companies, like EU-established companies, may not have considered indirect taxes (e.g., sales tax and other non-income taxes) when contemplating doing business in the United States. Treaty protections between the United States and sovereign foreign nations allow foreign companies without permanent establishments to avoid taxation.

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