Best Tax Write-Offs for Those Owning E-commerce Business

6 key write-offs and the best way to keep records so you can save where it counts

More to running an online store than just product sourcing and sales. In order to pocket more of your hard-earned profits, capturing and claiming the correct e-commerce tax deductions is crucial. This post includes a step-by-step guide to basing the best possible deductions for e-commerce entrepreneurs, along with tips on documentation and practice pointers to ensure online sellers take advantage of as many qualified write-offs as possible while avoiding the ire of the tax man.

Cost of Goods Sold (COGS)

The cost of goods sold tends to be one of the biggest deductions for any online sellers. COGS is comprised of the direct costs or inventory purchase costs: wholesale purchase price, shipping-in, manufacturing expenses, and cost of packing materials directly tied to the product. Keeping close records of inventory purchases and using the same method of accounting for inventory (like FIFO or specific identification) keeps COGS from being challenged and lowers the taxable profit.

Inventory write-downs and shrink can also be deducted with the proper documentation. If product becomes obsolete, damaged or otherwise unsaleable enter the reason and adjust the value of inventory accordingly. These corrections reduce net income in the year that they are claimed.

Home Office Deduction

Many e-commerce entrepreneurs work from home. If you use a part of your home regularly and exclusively for business, then you may be able to claim the home office deduction. That Deduct personal mortgage deduction for part of the rent, utilities, homeowner’s insurance and repairs. The deduction is calculated in two ways that are generally more generous to the homeowner: a flat rate based on the cost of maintaining the home or a percentage of actual homeowner expenses according to the portion of your home you use for business.

Take exact dimensions, photo the work space and keep a record of per day usage to help justify this deduction if asked any questions.

Shipping, Packaging, and Fulfillment Costs

Transportation charges to carriers and postage and packaging materials expenses are legitimate business costs. If you pay a third-party service for fulfillment, either in full or in part, those fees are deductible also. Track cost per order and save invoices from carriers and suppliers. If you bill shipping costs separately to your customers, report only the net amount that affects your profit and loss.

Advertising and Marketing

Advertising costs that are essential to attracting customers — online ads, sponsored listings, content creation and influencer partnerships — are deductible when ordinary and necessary to your business. Other creative production costs that are directly related to marketing campaigns also qualify. Keep receipts, campaign records and anecdotes that identify the business purpose of each activity.

Software, Subscriptions, and Tools

Monthly or annual subscriptions for the services you use to run your store — accounting, inventory management, design and analytics— are deductible. Differentiate subscriptions for personal versus business use, and retain invoices that show the service rendered. One time purchase software is generally deductible in the year it is purchased or its cost spread over the life of your business.

Payment Processing, Bank Fees and Charges to merchants

Payment processor, merchant services and bank fees are typical business costs. Keep track of these costs as individual expenses in your accounts to show the actual cost per sale. Even relatively low per-transaction fees multiply and can chip away at taxable income, when reported properly.

Office Supplies and Equipment

Day-to-day supplies — labels, ink, tape, notebooks — are deductible as ordinary business expenses. For bigger purchases and investments, like a computer, a printer, scanner or camera that you use for business purposes, decide whether to expense the full cost under current favorable immediate-expensing rules or capitalize and depreciate over more than one year. Save receipts and note the percentage of business use if an item serves double duty for personal and business purposes.

Professional Services and Education

The amount you pay to hire accountants, attorneys, consultants, or tax preparers for your business is deductible. Similarly, if you are working on your business education courses, seminars or trade publications to improve your skills while working directly on your e-commerce business operations those may be deducted. Keep your invoices and course overviews as proof why the education is business related.

Business Travel and Vehicle Use

Charges for business trips—flights, accommodations and meals (though there are limits) and local transportation—are usually eligible to be deducted if the trip is primarily for business. For the car, you have your choice of actual costs — such as gasoline, maintenance and depreciation based on the proportion of business use — or a standard per-mile rate. Maintain concurrent logs indicating dates, mileage, and business purpose.

Utilities and Internet/Phone Expenses

Some of your business-related internet and phone costs could be deductible. If you have a separate business phone line or internet connection, those full costs are deductible. If paid jointly, allocate a reasonable business proportion and retain invoices indicating the amounts charged.

Insurance, Licenses, and Taxes

Business insurance premiums, license costs and some of the taxes you pay during the course of operating your e-commerce business are all deductible. Keep a tally of every payment, and write down the business purpose — including if you need any local permits or professional licenses to legally be able set up shop.

Startup and Organizational Costs

New businesses can currently write off a limited amount of start-up and organizational costs in the same year they incur them, with the remainder amortized. Other common costs to start a record label are those for market research, initial advertising and the legal fees to establish the business. Keep precise records of these initial expenditures so you’ll have a clear idea of the amount that can be written off once you open for business.

Recordkeeping Best Practices

We need good documentation to back up these deduction claims. Keep tidy books, and be accurate in accounting for costs — keep all paperwork. Keep digital copies and think about using time-stamped logs for records of travel and home office. Balance bank and merchant statements monthly so nothing falls through the cracks.

Simple Mistakes to Avoid

• Commingling personal and business costs: Keep separate bank accounts and credit cards for the film to make it easier to track expenses — and avoid having deductions disallowed.
• Exaggerating used of home office: When you calculate business-use percentages, be both conservative and consistent.
• Throwing away receipts: Many deductions need back-up. If you don’t have a receipt, contemporaneous notes and back up from others can make the difference, but paper trail is best.

Final Tips to Maximize Deductions

Strategically plan purchases: Buy equipment and subscriptions at certain times to maximize deductions in a tax year. Check ongoing expenses annually to ensure they are still required. For more complex issues like inventory valuation methods, depreciation choices, and how international sales and VAT-like charges are to be treated, you should consult a tax professional.

Knowing how and when to utilize these e-commerce write offs will reduce your taxable income and build up the financial well-being of your business. When you keep good records and have the proper documentation, there are deductions which online store owners can claim that mirror what it truly costs to operate an online business.