The Guide to Ecommerce Tax Deductions: 19 Business Expenses You Can Write...

The Guide to Ecommerce Tax Deductions: 19 Business Expenses You Can Write Off

42
0
SHARE

Not long after launching Loop Loft, Shopify seller Ryan Gruss saw his profits increase. But there was a catch.

“We’d have a pretty profitable year, but then get nailed with taxes,” he says. “Looking back, we should have reinvested that money into the company.”

Even though those tax hits hurt, they inspired Gruss to put some of profits towards expenses he could write off—in this case, marketing—and help turn Loop Loft into the steadily growing company it is today.

Every ecommerce entrepreneur can learn from Gruss’s experience.

If you run an online store, putting some of your profits towards tax-deductible business expenses can help your business grow and give you a break come tax season.

Even day-to-day expenses—car trips to the post office, or the electricity bill for your home office—could be saving you money, so long as they’re recorded and reported.

Read on to learn about the write-offs you may be missing, and some ideas on how to use them as a means to reinvest in your ecommerce business.

Shipping

Unless you’re running a dropshipping business, it’s your job to deliver the goods. Luckily, the IRS considers the cost of doing so “ordinary and necessary.”

Postage, shipping meter subscriptions, delivery charges—they’re all tax deductible come tax time. Still, you’re better off paying less for shipping in the first place. Learn how to reduce shipping costs, and make sure you’re getting the best deals on bubble wrap and postage fees.

1. Packaging

The cost of everything you use to get your product delivered on time and in one piece can be deducted on your tax return. This includes envelopes, boxes, paper, packing material, tape, labels, markers, and printer ink.

Shipping… is not just Cost of Goods Sold. You need packing material, and there are postage costs as well. When I look at my credit card bill at the end of the month, it’s a huge expense.  

Trisha Okubo, Maison Miru

Workspace

2. Home Office

If you run your store from home, you qualify for an ecommerce deduction. The size of this deduction will depend on how much of your home is devoted to doing business.

These are the requirements you need to meet:

  • Your work area is only used for business activities. (If you occasionally do paperwork at the kitchen table, your kitchen does not qualify as a home office.)
  • Your work area must be the principal place of business for your ecommerce company. You should be ready to prove this with a consistent, printed schedule.
  • The majority of the time you spend in your home work area must be devoted to doing business. 

Also, you should have no alternative workspace. That means no external office or coworking space from which you run your business.

You have two options for calculating the home office deduction: the simplified method, and the regular method. Unsurprisingly, one is easier than the other.

Using the simplified method, you deduct $5 per square foot of your home used for business, up to a maximum of 300 feet.

To use the regular method, you calculate the percentage of your home’s square footage that you use for business, then apply that percentage to your home expenses—rent or mortgage interest, property taxes, electricity, heat, water, and anything else that makes it possible to occupy your home.

For example, if you use 10% of your house’s square footage for business, you can deduct 10% of your mortgage interest on your tax return.

To use the regular method, report expenses on Form 8829. To use the simplified method, fill out the appropriate worksheet on Schedule C of Form 1040.

One of these methods may give you a better deduction than the other. It really depends on the nature of your business and your home office. Check with your CPA before you file, and read our guide to making the most of the home office deduction.

Heads Up

The IRS has a reputation for carefully scrutinizing home office expenses. Make sure you have the info you need to back up your claim. Take pictures of you work area and maintain a copy of your schedule for working there. Each financial year, keep them filed with your tax records and receipts.

3. Utilities

If your home qualifies as a workplace, household utilities—heat, water, and electricity—can be deducted on your tax return.

You get this number as part of the regular method of calculating home office expenses. So, if 10% of your home’s square footage is used for doing business, you can deduct 10% of your heat, water, and electricity payments.

4. Improvements and Repairs

A necessary repair to your home office—for instance, fixing a broken window—can be reported as an expense on your tax return.

An improvement to your home office can also be reported, but it must be depreciated over a period up to 27.5 years. Work done on your home office is classified as an improvement if it involves “betterment, adaptation, or restoration”—for instance, installing a larger window.

Before paying for an improvement or repair, talk to your CPA to make sure you’re classifying it correctly.

5. Coworking Space

If you rent coworking space where you contribute to the cost of utilities and supplies, there’s a good chance those costs may be tax deductible. Check with your CPA.

Banking and Insurance

6. Business Interest and Bank Fees

If you have a business credit card or a small business loan, anything you pay in interest during the course of the financial year is tax deductible. The same applies to fees charged by your bank for maintaining or using your business checking account.

7. Business Insurance

Business, rental, liability, and workers’ compensation insurance are all tax deductible.

Professional Services

8. Bookkeeper, Accountant, and Tax Consultant Fees

Interesting fact: You can actually deduct the cost of meeting with a tax consultant who advises you on which expenses you can deduct.

It’s known as a “professional services” deduction, and this deductible expense actually applies to a range of professionals who help you manage your business. When you hire a business lawyer, CPA, bookkeeper, online bookkeeping service, or tax consultant, their fees qualify as deductible business expenses.

I’ve had an accountant for my entire adult life, but just recently switched over to a local one who specializes in small business. He’s saved me more money this year than my other accountant ever did.

Caroline Weaver, CW Pencils

9. Legal Fees

If you hire or retain an attorney to prepare contracts, file trademarks and copyrights, negotiate leases, defend your business in court, or perform other services for your business, you can write off their fees.

Workers

10. Independent Contractors

If you hire an independent contractor for any purpose related to your business—for instance, taking photos of products for your online store—the cost of their services is a tax deduction.

Always be sure to collect 1099 forms from independent contractors before they start working for you, and file it properly (you’ll need to submit a copy to the contractor, and another copy to the IRS, before deadline).

Heads Up

The IRS is often on the lookout for employers who try to avoid paying employment taxes by classifying employees as contractors. Read our guide, Employee vs. Independent Contractor: How to Classify Your Employees, to make sure you’re playing by the rules.

Because ecommerce businesses are representing themselves online, the visuals tend to be so important. You want to invest in the right people to help you create and realize those.

Trisha Okubo, Maison Miru

11. Employees

If your ecommerce business hires employees, their wages and benefits are tax deductible. To learn more, check out our article How to Deduct Employee Perks, Benefits, Compensation. 

Marketing

12. Advertising

Help your business grow, and pay fewer taxes while you’re at it. Whether you advertise your business on Instagram or in your local newspaper, the cost of advertising is tax deductible.

This includes both the price of placing the ad, and any fees you pay to have it written and designed. If you hire a designer, copywriter, or other marketing professional to produce ads for you, you deduct their wages as you would any 1099 worker.

13. Marketing Tools and Services

If you use tools like Klaviyo or AdEspresso to manage your email and Facebook campaigns, they count as “ordinary and necessary” marketing expenses. The cost of your subscriptions can be deducted.

Our best deductible expense goes into paid marketing—towards lead generation, and filling the top of our funnel.

Ryan Gruss, Loop Loft

Website Fees

14. Shopify

Shopify gives you all the tools you need to run an online store. As such, for any ecommerce business, Shopify fees definitely qualify as an “ordinary and necessary” business expense.

15. Domain and Web Hosting

You can’t run an ecommerce business without an online presence. Domain and web hosting are tax deductible. If you purchase web design templates or stock images to use on your site, you can also deduct their cost. The same applies if you pay to upgrade your store’s theme in Shopify.

16. Services

Beyond operating an online store, the services you use to engage with current or potential customers can be deducted.

So, if you publish a newsletter, you can deduct the cost of MailChimp. If you schedule social media posts, you can deduct the cost of Hootsuite. Or, if you’re optimizing your site for search engines, you can deduct the cost of SEO tools such as SEMRush.

Education

17. Classes

If you take classes to upgrade your skills in a way that is relevant to your business, you can deduct their cost.

The class qualifies for a deduction if you take it in order to obtain a certification—such as becoming a Certified Ecommerce Consultant.

But even less specific forms of education—for instance, a photography class that helps you take better pictures of the products you sell—can be deducted. So long as the class directly improves your day-to-day business operations, it’s tax deductible. 

Also, the cost of transportation to any business-related classes qualifies as a travel expense. Read our guide on How to Deduct Education, Classes, and Workshops to learn more about reporting this expense.

I use the education expense quite a bit. One thing that’s important to me is the Japanese idea of kaizen, of continuous education—and of having an experimental mindset.

Trisha Okubo, Maison Miru

18. Magazines

Subscriptions to trade magazines related to your industry are tax deductible, too. Make sure they’re specifically connected to your industry, though. General interest business magazines do not qualify.

Travel

19. Business Vehicle and Travel Expenses

As an ecommerce entrepreneur, you’re probably mobile.

If you use your vehicle to transport packages (for instance, to the post office), meet with clients, or carry out any other business operations, you have a range of business expenses you can choose to claim.

When your vehicle is used exclusively for business purposes, you can deduct the full expense of its operation. But if you use it for both business and personal purposes, you’ll need to calculate the percentage of the cost of operation that applies to business. 

You have two options for claiming a business mileage deduction:

  • The standard deduction, as of 2017, is $0.535 per mile. Track this throughout the year with an app like MileIQ, and check the relevant IRS page every financial year in case the rate has changed.
  • The actual cost of what you paid in vehicle costs over the course of the year—including fuel, maintenance, and repairs.

Other travel expenses you incur in the course of doing business—parking fees, cab fares, or conferences tickets, for example—can be claimed.

For more information on this deduction, check out our guide on how to deduct the cost of business travel.

What About Other Business Expenses?

Depending on the nature of your business, there may be other expenses you can claim on your tax return.

The IRS deems a business expense to be tax deductible if it is “ordinary and necessary.” Meaning, it is an expense you would incur ordinarily in the course of conducting business, and it is necessary for your business to operate.

When in doubt, remember this guideline, and hang onto the receipts attached to any business related expenditure. That way you can (and should) double check with your CPA to confirm what is, and what isn’t, tax deductible before you file your return. 

We’ve included a list of essential business expenses ecommerce business owners should consider claiming on their tax returns. For a wider-ranging look at business expenses for your small business, check out our article on small business tax deductions and how to claim them.

You may be tempted to get creative with tax deductions. But the world of business expenses is full of grey areas, and it can be easy to overstep the boundaries set by the IRS. As always, talk to your CPA or tax advisor before claiming any expenses on your return.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.


Ready to build your own business? 

Start your free 14-day trial of Shopify today!


shopify-author bryce warnes

About The Author

Bryce Warnes writes for Bench, the online bookkeeping service that gives you a team of bookkeepers to do your books, and simple, elegant software to track your finances.

Source link

LEAVE A REPLY