Are there special tax deductions or credits unique to online sellers and people who own and run e-commerce businesses? Not exactly – but these types of businesses frequently have certain types of business expenses that do make them eligible to receive many potentially significant deductions.
As a rule of thumb, the IRS relies on the “necessary and ordinary” rule for judging whether a business expense is deductible. Any expense your ecommerce business has that is required for operations and would be considered ordinary for similar businesses can likely be deducted in some way, shape or form.
Documentation is an absolute must if you want to claim legitimate deductions. If you or your ecommerce business is ever audited, you will need to justify all your deductions to the IRS.
The home office tax deduction is one of the most common tax deductions for people who are self-employed or SMB owners. Unfortunately, many business owners make mistakes when calculating how big their home office deduction should be. If you claim too much, the IRS may audit you. If you are too conservative with your calculation you may end up paying more taxes than you should.
Technically, your home office deduction is proportional to the space and the cost of your home and utilities – but only as it pertains to your business hours.
If your home is 2,000 sq. ft. and your home office is 200 sq. ft., then 10 percent of your home is a work expense. If your mortgage is $2,000 a month, then that space would cost $200 a month. You could do the same type of calculation for your power use, internet costs, phone bill, etc. Just make sure you’re using a justifiable percentage.
There are other requirements as well, like:
Nearly all the shipping costs for small ecommerce businesses are deductible – from packing peanuts to postage. Some businesses can even deduct the cost of P.O. Box rental. For any online store that ships sold products to customers, shipping costs are a necessary expense.
In either case, you likely qualify for storage deductions. The home storage deduction is similar to the home office deduction, but to use it your home must be your exclusive business location (can’t have other fixed business locations). The space you claim for an inventory storage deduction also needs to be designed specifically for storage (like a garage).
Ecommerce businesses that use offsite storage, like rented warehouse space or a storage unit, can alternatively deduct the rent they pay for that space.
If you run an online store out of your home, you will undoubtedly be using your home’s internet connection for doing business. You’ll also likely be using other paid services, like your cell phone or various video conferencing apps. Any expenses you incur at home that are business related likely qualify for a tax deduction. As with the home office, the deduction is not for your entire cell phone bill – only the percentage of it dedicated to your business. If you’re exclusively on business calls for eight hours each day, then your personal cell phone is a business expense about a third of the time.
Not every Ecommerce business is run out of the owner’s home. Many require office space or even rent desk space in various coworking environments. Your rental expenses and even your utilities or office supply costs may be deductible.
Not every office expense will be deductible for every business, which is why you should speak with the business tax preparers at H&H Accounting Services before you file your taxes to ensure compliance with all IRS rules.
If you’re running an ecommerce business, you likely have a lot of ancillary website costs. Everything from specific software you use and WordPress themes to hosting costs and SEO tools are potentially deductible.
These expenses are a necessary part of running your business, and they are clearly separate from your own personal expenses (in most cases). If your ecommerce website and hosting expenses are solely for your business, they are likely deductible. Even marketing tool subscriptions may potentially be written off.
Make sure to have every contractor you use fill out a W-9. Adhering to IRS reporting rules for freelancers is hugely important if you want to avoid running afoul of federal tax laws. If you follow the right procedures, you can deduct any wages you pay to independent contractors who build out and work on your ecommerce website.
Tax laws can be hugely advantageous to ecommerce business owners who make full use of their deductions. However, the IRS is always on the lookout for people who claim more deductions than they should, especially if those businesses don’t have the receipts or bookkeeping to back up their deductions.
The business tax preparers at H&H Accounting Services understand business tax law inside and out. We’re always happy to help Phoenix ecommerce business owners maximize their tax savings while maintaining compliance with federal law.
Call us at (480) 561-5805 for a free one-hour consultation.
