Understanding what you can deduct on your tax return and how to do it can significantly impact your business’s financial health and save you a ton of money. .
In this guide, read about all of the potential business tax deductions available to ecommerce businesses. We’ll also share tips to help you maximize potential tax savings.
Disclaimer: Before we dive into this big list of tax deductions, this is for educational purposes only. We encourage you to talk with your accountant or tax professional who can provide specialized for your specific circumstances. In fact, you can reach out to our team via email here and we can share with you a few of our favorites.
The ultimate list of ecommerce tax deductions
Here is a list of all the ways that you may be able to save on your taxes as an ecommerce business owner.
- Home office deduction: To deduct home office expenses, the space must be used regularly and exclusively for business, and it should be your primary place of business or a space where you regularly meet clients or customers. Eligible deductions include a portion of rent or mortgage, interest, property taxes, utilities, homeowners insurance, and repairs directly related to the business space. The IRS offers two separate methods for calculation.
- Rental properties: This allows homeowners to exclude up to 14 days of rental income from their taxable income annually. This exemption applies to any homeowner in the U.S. and is beneficial for small business owners. This rule is particularly advantageous for small business owners, as it allows you to rent your home, deduct the expense at the business level, and exclude the income at the personal level. To qualify, the rental period must not exceed 14 days in a tax year, and the rental rate should be comparable to market rates, with the added benefit that related expenses are not deductible.
- Internet and phone services: You can deduct the business portion of your internet and phone bills, determining the percentage of use that is for business
- Office supplies and equipment: Deductible items include stationery, printing costs, and small office equipment, while larger purchases like computers and printers can be deducted in full or depreciated over time.
- Shipping: Deduct the actual costs incurred for shipping goods to customers and maintain detailed records of all shipping receipts and invoices, including postage, package materials, and delivery fees. Note: You’ll want to keep these records in addition and separate to inventory.
- Advertising: Deduct the actual amount spent on activities like online advertising and social media marketing.
- Traveling: Expenses must be ordinary, necessary, and directly related to your ecommerce business. Deductible expenses include airfare, hotel accommodations, car rentals, and a portion of meal expenses.
- Vehicle and mileage: If you use your car for work, deductible expenses include gas, maintenance, insurance, and depreciation. Choose between using the standard mileage rate set by the IRS or calculating actual vehicle expenses.
- Professional services: From your lawyer to accountant and bookkeeper, these services are all tax-deductible.
- Subcontractors: If you work with freelancers, these services are all tax-deductible.
- Education and training expenses: Deductible expenses include costs for seminars, workshops, conferences, and any courses.
- Insurance premiums: Deductible premiums can include business insurance, property insurance, health insurance, life insurance, business interruption insurance, etc.
- Retirement plan contributions: Deduct contributions up to the allowable limits set by the IRS and maintain records of all contributions.
- Bank and credit card processing fees: Any processing or bank fees related to business transactions are deductible if tied to a business bank account or business credit card.
- Interest on loans: Deductible interest includes interest on business loans, credit lines, and business credit cards. Keep loan statements and records of interest payments.
- Inventory costs: Deductible costs include the purchase price of inventory, shipping, and handling fees. You’ll want to work with your specialized ecommerce accountant to handle inventory accounting.
- Depreciation: This allows recovery of the cost of certain business assets over time. It’s applicable for assets like computers, office furniture, equipment, and inventory. You’re accountant can advise you on how to deduct depreciation on assets used in your business.
- Energy-efficient commercial buildings deduction: This deduction applies to ecommerce owners who have a warehouse or other commercial office space and have taken steps to actively make it more energy efficient and meet certain IRS standards. This can include updating lighting, heating, cooling, ventilation, and hot water systems.
- The Work Opportunity Tax Credit (WOTC): This incentivizes businesses to hire individuals from groups facing significant employment barriers, such as veterans and ex-felons. The credit is based on wages paid to eligible workers during their first year of employment.
- Bonus depreciation: This allows for an immediate deduction of a portion of the cost of qualifying assets, such as machinery, equipment, computers, appliances, and furniture. The percentage for bonus depreciation can vary each year, with recent tax laws allowing up to 100% for qualifying assets.
- Environmental tax credits and green initiatives: These include Renewable Energy Credits and credits for Energy Efficiency Improvements. To qualify, businesses need to meet criteria like certification and standards compliance and provide proof of investment. The deductions can be direct tax credits or accelerated depreciation.
- Charitable donations: These include cash donations, donation of goods, and sponsorships. The charity must be IRS-recognized, and proper documentation is required. Deductions can be either direct or for event sponsorship.
How to maximize your business deductions
When it comes to saving money on your taxes, it pays to plan ahead and get organized. Here are key strategies to effectively maximize your deductions:
- Maintain accurate and detailed records. Working with a specialized ecommerce bookkeeper or bookkeeping firm, like Bean Ninjas, makes it easy to keep thorough and organized records in your cloud accounting software. This includes documenting all expenses, logging receipts, and reconciling bank statements. So, at tax time, you don’t have to scramble to get everything in order.
- Log car mileage and travel. For vehicle and travel expenses, maintain detailed logs of business trips, including dates, mileage, and the purpose of each trip.
- Separate your personal and business finances. Use separate bank accounts and credit cards for business transactions to simplify record-keeping and ensure personal expenses are not mistakenly claimed as business deductions.
- Work with an ecommerce accountant. Tax laws change frequently. Working with an accountant or accounting firm, who stays on top of the latest news, can provide valuable insights into new deductions, credits, etc.
- Use cloud accounting software. We recommend using Xero or Quickbooks to track your revenue and expenses.
- Use sales tax software. Figuring out where you have nexus and making sure you register and file in these states is important if you want to stay compliant. At the bare minimum, software, like Zamp or a tax advisor like TaxValet, can save you a lot of time.
- Plan ahead for big expenses and investments. Strategic planning for significant expenditures can lead to more substantial deductions. For instance, if you have critical business software, you may want to switch to an annual plan to not only get a discount from the provider but it can also provide immediate deductions. The same method can also apply if you need to buy an expensive piece of equipment.
- Understand the rules of depreciation. For big assets, consider strategies like Section 179 or bonus depreciation for immediate write-offs.
- Be proactive. Instead of treating taxes as an annual task, integrate tax planning into your regular business strategy. The simplest way to start is to conduct quarterly reviews of your finances with a focus on tax planning. However, if you intend to sell your business some day, being proactive becomes much more important.
By staying informed, planning strategically, and seeking professional advice from an ecommerce accounting firm, you can not only stay compliant but also save money on your taxes.
The first step is to keep accurate and timely books. Looking for help with your ecommerce bookkeeping? We can help. Schedule a free consultation here.