It’s almost tax time, and for business owners, that means it’s time to track two very important pieces of financial information: the sales you’ve made throughout the year and the expenses that you can potentially deduct. Tax deductions for online businesses help reduce your total income, which in turn can decrease or even eliminate your taxes owed at the end of the year. Taking advantage of all of your common tax deductions is an essential part of good business financial management, yet many owners don’t know where to start. If you operate an online business, here are some broad categories of what items are tax deductible that is worth considering.
(Remember to check with your accountant or other finance pro if you have any questions or doubts about any of these deductions.)
Cost of Goods Sold
Easily the most common deduction for an online (or offline) seller is the cost of goods sold. Cost of goods sold refers to the money you spent to acquire your inventory. It could mean wholesale prices paid when you sourced your products from a distributor or the cost of materials for goods you manufacture. Costs of goods sold includes the items themselves, shipping, the cost of packaging and any taxes that you paid on those items. Depending on how you file your return, each of these may fall into a different line item; however, each of these are categories to consider when putting together your expenses for deductions.
As an online seller, you undoubtedly pay fees to run your business. It can seem like operating an online business hits you with fees at every level: platform operating fees, listing fees, PayPal fees and bank fees. Each of these represents a potential tax deduction. Make sure to include all the fees you can – go through your records and find all that apply. Because the fees are often small, many online marketplaces and banks will provide you with an end of year statement (automatically or upon request) summing up the fees you paid for tax purposes.
Costs Associated with Loans or Financing
Did your business receive a loan or funding from an alternative lender this year? It’s important to evaluate whether aspects of this funding may be tax deductible. Potential items to discuss with your accountant include interest, bank fees or fees that were paid to professionals such as lawyers and accountants that helped with the transaction.
Do you advertise your business, perhaps on Facebook, LinkedIn or Google? Those fees can be deducted on your taxes as well, as… you guessed it… advertising! But that’s not all; your business cards, website and other promotional materials can also be written off. Any advertising or marketing that you do in connection with your business is likely deductible. Consider the full range of activities on your list, from local sponsorships to printed ads.
When you think of online commerce, you generally think of two things: a computer and the post office. That’s because if you’re not at the computer listing items, you’re at the post office (or UPS or at your own meter… you get our drift) shipping them out! Take care to deduct all the expenses for this, including boxes, tape and even mileage driving back and forth to the post office. Shipping and postage can be a hefty deduction for certain types of online sellers.
Training and Conferences
The online commerce world evolves quickly and business owners need to be constantly learning. As a result, many business owners invest in conferences, seminars, coaching, books and other strategies for staying up-to-date. From industry level knowledge to general advice on internet selling, educating yourself is often deductible as long as it’s tied directly to your business operations.
Employees and Services
Whether you’re a one-person shop or you employ a team, it’s important to look at your workforce for deductions. The salary and benefits that you pay to employees is typically deductible. The fees paid to contractors or seasonal help qualifies as well. Finally, did you get assistance this year from service professionals such as accountants, lawyers or web designers? Their fees should also be in your potential deductions pile to review at tax time.
This one isn’t quite as common, but only because there are specific rules for a home office to qualify for a tax deduction. Basically, you have to exclusively use a space in your home for the business, most commonly an actual room (but not always). You also must use this space to do the majority of your work, at least on the administrative side. Ecommerce sellers who use a dedicated portion of their home for storage might also qualify for the home office deduction.
Speaking of the home office, if yours qualifies, you have a whole new list of deductions to take advantage of. If you had (or have) a separate physical office you would have office expenses like electricity, supplies, etc. to worry about. That’s no different when running an online business out of your home office. The IRS has specific rules which are worth evaluating before you decide what to deduct.
Think about everything it takes to run your home business. Utilities, mortgage and supplies all count – just make sure to keep them proportional. Equipment such as a new computer, printer and even smartphone can apply if you use them for your business. For example, if you deduct 10 percent for mortgage, don’t deduct 50 percent for utilities unless you can convince the IRS otherwise (you probably can’t)! Be warned, the IRS takes a long look at the home office deduction so this is one you might want to double and triple check with your accountant before taking this deduction.
Software and Apps
Do you use software or apps to run your business? The cost you paid for the software or the monthly subscription fees may be deductible. Common examples can include financial management software, ecommerce platforms, payment processers and more.
Make a list of all your potential deductions. Whether you’re preparing your own taxes or working with a professional, it’s helpful to get organized first. From there, it’s possible to figure out what applies to your specific situation. When in doubt, contact a professional such as an accounting firm, CPA or even a tax attorney.
Now you tell us. What did we miss? What common tax deductions do you take every year? Let us know your best recommendations for tax deductions for online businesses!