eCommerce companies have a substantial amount of tax deductions that can be a boon in a rapidly changing tax environment that can hinder their progress. Since the Supreme Court case South Dakota Vs. Wayfair, 43 states now tax eCommerce companies for selling goods in their state. Since eCommerce is still an evolving industry, eCommerce companies should be prepared for more modifications in the tax nexus in the coming years.
Having an experienced team of financial professionals on your side can help determine the best approach to eCommerce tax obligations to ensure you get the most out of your deductions and don’t wind up paying Uncle Sam more than you have to.
At Fully Accountable, we believe having a team of fractional accounting professionals gives you access to the most experienced tax team in your industry. Whether you need simple eCommerce bookkeeping or you’re looking for a more integrated, strategic approach to your tax obligations, we have the capabilities to get the most out of your deductions. It’s simple: Fully Accountable can provide the financial stability your burgeoning business needs.
Home Office Deductions
The IRS offers home office deductions to any business run out of a home office. This is highly applicable to eCommerce business owners who spend the majority of their time operating out of their homes. To apply for the home office deduction, your working environment must meet the following criteria:
- Regular use of part of the home for conducting business
- Your work area can only be used for business activities. Personal use of your work area is not allowed.
- The home office must be used as the principal place of business for your eCommerce business.
The deduction permits you to occasionally work outside of your home office in places such as a coworking space or a different office as long as you still regularly use your home office to complete work.
You can also use the simplified option for claiming the deduction, meaning you can deduct $5 per square foot of your home that’s used for business purposes with a maximum of 300 square feet for the deduction.
Additionally, the IRS is known for carefully monitoring home office deductions. To apply for the deduction, you should take pictures of your home office workspace and file the pictures with your other tax records and receipts. In case the IRS questions your home office, having photo evidence is valuable to prove that your home office is exclusively for business purposes.
You can deduct expenses if you use your home for inventory space. This deduction does not come under the same scrutiny as the home office deduction. However, you must still meet the following criteria:
- You must have wholesale or retail at your business.
- You keep the inventory or product samples in your place of residence.
- Your home is the only location for your business.
- You use the storage space for inventory regularly.
- The space you use is an identifiably suitable storage area.
Additionally, if you rent space outside of your home to use for inventory, you can deduct the rent and other expenses for that space.
Without an internet connection, an eCommerce business is virtually impossible. That means your business’s internet expenses are tax-deductible. If your business shares the internet connection with your household, you will have to deduct the percentage of the cost you use to run your eCommerce business.
Using your cell phone to conduct interviews, talk to vendors, and use it for other business purposes lets you deduct the cost for the portion of your bill related to your eCommerce operations.
Plugins, Apps, Themes, and Software
You can deduct all of the plugins, apps, themes, and software you use to run your eCommerce business. The WordPress plugin you use, the Shopify theme used to upgrade your website, the iPhone app used to conduct inventory management; you can deduct all of them so long as they pertain to your business.
VoIP or Video Conferencing Services
You can deduct all communication technologies and applications. Whether you make purchases using Zoom or Skype and you purchase credit for the service, you should keep track of your receipts. If you use the services for business purposes, they can qualify as a tax deduction.
Website Domain and Hosting
To achieve success in the eCommerce world, you need extensive website hosting options for your online store. Registering a domain and paying for IT also accrue costs to ensure your website continues to run smoothly. All of these expenses are tax-deductible.
Business and Entertainment
Fifty percent of all your business meals and entertainment costs can be claimed as a tax deduction. However, business entertainment costs are heavily scrutinized. To prove their legitimacy, you need to record the following information:
- The amount and date of the expense.
- Where the expense was made.
- The purpose of the expense.
- The details of the people involved.
These details can fit accordingly on the back of your receipts or you can choose to keep track of it in your journal and online calendar. The IRS doesn’t allow for lavish or extravagant deductions at fancy restaurants. There isn’t a specific amount for these expenses that qualify a meal as lavish or extravagant and these meals are determined on a case by case basis.
You can deduct all of your premiums for non-health-related insurance coverage, such as business insurance or renters insurance. Liability insurance and workers’ compensation insurance costs are also included in this list of deductibles.
Auto and Travel Expenses
If you use your vehicle to mail packages, meet clients, or conduct other business activities, you can deduct these expenses. The auto and travel expenses are somewhat extensive and can require some thorough delineation to determine which expenses your business can deduct.
If you use your car exclusively for business operations, you can claim the entire cost of operation. If you use it for both business and personal reasons, you must calculate and deduct the percentage of the cost incurred for business purposes.
You can either deduct your business mileage expenses using a standard deduction or using the actual costs for gas, oil changes, and other vehicle-related expenses while using your car for business. The standard deduction is $0.56 per mile in 2021. Using the standard deduction requires you to track your mileage throughout the year using a mileage calculator or journal.
You might also incur travel expenses while traveling such as parking fees, conference tickets, cabs, or other miscellaneous expenses. These can all be classified as travel expenses and they are eligible for deduction off your tax return.
Working With Independent Contractors
If you hire independent contractors, whether to write web copy, take images of products, or design your website, their service costs are deductible. When using an independent contractor, you should collect a Form W-9 form contractors before starting your partnership. You can also use a W-9 to log the contractor’s name, address, and taxpayer information for your records.
Once you have this information, you can issue a 1099-NEC to independent contractors to who you paid more than $600 during the tax year. The IRS looks for business owners who try to evade paying additional taxes by misclassifying independent contractors, so you need to be diligent when recording this information.
You should consult a licensed CPA or use digital accounting services to determine whether the costs associated with your coworking space are deductible. In addition to the costs associated with traditional office spaces, you might be able to deduct rent, utilities, supplies, and certain equipment used to run your business.
Conclusion- End of the Year Tax Deductions
As the end of the year approaches, your eCommerce business should understand its tax obligations in preparation for filing. Having an eCommerce business gives you access to some unique tax deductions that can aid your cash flow and ensure proper financial preparation and performance for 2022.
Because the tax nexus can be quite complex for eCommerce businesses, it’s important to understand what resources are available to your business to simplify the process. Using digital accounting software and having a full-service accounting team on your side can significantly reduce the amount of time you spend determining compliance.
At Fully Accountable, our fractional team of financial professionals helps prepare businesses in every industry for the tax season. As an eCommerce business, you already have a lot on your plate regarding inventory management, marketing, and competitor analysis. You don’t need to add tax complications to the docket.
Contact Fully Accountable today to learn more about how we can simplify the tax burden from your eCommerce business.