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.
This can take up a lot of time for business owners in this space, but the work does not end there. E-commerce business are also expected to remain compliant and file their taxes accurately. Fortunately there are a number of ways in which to minimize your tax liability as you maximize deductions.
Understanding the tax deductions you can optimize when running an e-commerce business can help you save money and grow your business. Not sure where to get started? We take a look at some of the tax deductions specifically tailored to e-commerce industry and give you an idea of how to make the most of them.
Tax deductions for e-commerce businesses
Making use of the tax deductions available to you, can significantly increase your bottom line. These are some of the deductions your e-commerce business may be eligible for:
- Home office deductions: Many e-commerce businesses can be operated from a home office. If you have a dedicated work space within your home, you may be able to deduct a portion of utility fees fees from your tax liability. The permitted deductions, allow you to include a portion of your home expenses, such as rent, utilities, and maintenance, as a business expense. Be sure to meet the criteria set by the Internal Revenue Service (IRS) to qualify for this deduction.
- Inventory expenses: Inventory costs can be a significant expense for your e-commerce business. Your business typically cannot operate without a certain amount of access to stock. The good news is that you may be able to deduct the cost of goods sold (COGS) from your taxable income. Ensure you keep detailed records of your inventory purchases or inventory management tools that come with accounting software like QuickBooks and NetSuite, to justify your tax deduction for this.
- Shipping and packaging expenses: As an e-commerce business, shipping and packaging is an essential part of the sale of goods. It is imperative to the smooth fulfilment of a sale transaction and ultimately impacts the reputation of your business. The expenses related to shipping and packaging for e-commerce businesses are generally tax deductible. To qualify for the deduction however, it is necessary to ensure accurate record keeping of this expense.
- Marketing expenses: With the e-commerce industry being rather competitive, it is essential to have a strong marketing strategy in place. This not only ensures consistent revenue, but keeps your brand visible in the market. Fortunately, advertising costs are seen as a necessary part of your sales. Thus they are tax deductible. It is important to keep track of all your marketing expenses including social media campaigns, to take full advantage of this deduction. You can ensure accurate record-keeping of this with your expense-management software.
- Professional services: Outsourcing certain tasks such as bookkeeping, tax preparation, and legal services is beneficial for your e-commerce business. The fees you pay for professional outsourced services are considered tax deductible business expenses. Working with a qualified CPA or tax professional can help you maximize deductions and ensure compliance with tax regulations.
- Software and technology: As an ecommerce business, you rely heavily on various software and technology tools to manage your operations effectively. Expenses related to the hosting of your e-commerce platform – such as WOO commerce or costs associated with Shopify, as well as your accounting software and inventory management systems are generally tax deductible.
The importance of accurate record keeping
Accurate record keeping is crucial when it comes to tax deductions for e-commerce businesses. Maintaining detailed records ensures that you have the necessary documentation to support your claimed deductions. It also minimizes the risk of errors or omissions during tax preparation and reduces the chance of being audited by the IRS. Accurate records not only provide a clear picture of your business’s financial transactions but also allow you to identify and substantiate eligible deductions while also staying compliant with tax regulations.
At Fusion CPA, we can help you manage the tax and accounting aspect of your e-commerce business. We can help you remain compliant and work on a tax strategy to save you money. Our CPAs are trained to set up e-commerce accounting software to best serve the needs of industry. Contact us to discuss the best accounting approach for your e-commerce business.
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The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your own discretion. For full guidance, consult with qualified professionals in the relevant fields.
