Best Tax Deductions for Retail Business Owners
Everything small and mid-sized retailers need to know about the tax code, tax strategies, and cash flow management.
Retail is a thin-margin, inventory-turning, cash-flow-watching kind of business. It can mean a lot for retail owners to understand the tax deductions that are available. This guide outlines the most important retail-related tax deductions, tips for documenting them and strategies to save as much on your taxes while still staying out of trouble with Uncle Sam.
Cost of Sales and Inventory Deductions
Among the most significant deductions for retailers is the cost of goods sold (COGS). This is the actual cost of buying or producing (i.e., manufacturing) the products you sell. Accurately tracking COGS lowers taxable income and shows you the real margin of your business. The valuation method you choose to use for inventory – there are a few among which specific identification, first-in-first-out, and average cost are options – will impact COGS as well as tax liabilities, so it’s important to select and use the same method from one year to another. Don’t forget to take into consideration shrink, damaged goods and obsolete inventory; the corresponding write-downs are often deductible so long as they are adequately substantiated.
Rent, Utilities, and Facility Expenses
Store space, warehouse, or kiosk rental and lease payments are deductible business expenses. Retail space electricity Figure out which utilities you use for your retail location and deduct them, including pipes that contain the heat. Take the amount you pay for utilities that are strictly business-related if you operate some of the business out of your home. As you negotiate leasehold improvements (shelving, signage, or lighting), find out if you can deduct those costs right away or if they are to be depreciated over time.
Wages, Benefits and Payroll Taxes of Employees
It is typically a retailer’s largest monthly, recurring expense, but it is also deductible. Wages, salaries and bonuses (plus employer-subsidized benefits like contributions to health insurance or retirement plans) and the employer’s share of payroll tax liabilities are directly deductible from taxable income. Keep records of payroll, timecard and all benefits plan documentation to validate these deductions.
Independent Contractors and Professional Fees
Multiple businesses utilize independent contractors for services like merchandising, installations, bookkeeping and marketing. Payments made to contractors are deductible -- be sure to get that documentation and keep it, and file any information returns required by tax regulations. Fees for professional services from accounting, legal, and tax preparation are also deductible if they pertain to the retail business.
Advertising, Marketing, and Customer Acquisition
Deductible costs include advertising and marketing expenses that promote your store or product. These include print and on-line advertising, promotions and events, signage, loyalty program expense and point of sale materials. Some branding or website costs may need to be capitalized, but the vast majority of your day-to-day promotional outlays can usually be expensed in the year you make them.
Equipment, Fixtures, and Depreciation
Big ticket items such as point of sale systems, display fixtures, refrigeration equipment and forklifts may need to be depreciated over time instead of capitalized and written off in a single year. Look at available expensing options that provide for the immediate deduction of the purchase of certain assets; if immediate expensing is not available, then depression can spread the deduction over a number of years. Retain purchase receipts, serial numbers and documentation of business usage to substantiate these deductions.
Supplies and Small Tools
Certain types of everyday supplies — shopping bags, tags and labels, cleaning supplies, office supplies, for example — usually are deductible when they’re used in the retail business. In general, small tools and low dollar-value items that are replaced frequently can be expensed when they’re purchased, but proving you bought and used them for business will help support their deductibility.
Shipping, Freight, and Delivery Costs
Costs of shipping merchandise to customers or between locations, freight-in costs for inventory and cost of returns and exchanges are deductible on Schedule A. If you run free shipping promos, factor those costs into your business expense. If you have delivery vehicles, keep careful track of all fuel, maintenance, insurance and other vehicle expenses and decide whether to use actual expenses or a standard mileage method where allowed.
Insurance, Licenses, and Professional Subscriptions
Business insurance premiums — such as general liability, property and product liability insurance — are deductible. You can also deduct the cost of necessary business licenses, permits and professional subscriptions that benefit your retail operations. Keep a file of policy papers and fee receipts to back up these expenses.
Bad Debts and Customer Returns
Retailers may be able to write off as bad debt or merchandise-returns if they're unable to receive payment, due on goods returned that can't be re-sold. Appropriate supporting documentation is required to substantiate such losses, including a record of the sale, collection actions taken and that goods or merchandise were received in defective or unsalable condition.
Home Office and Administrative Space
If you run some of your retail operation from a home office — maybe you manage online orders or conduct bookkeeping or do design work there — you might be eligible to deduct a percentage of your home expenses. The space must be used regularly and exclusively for business. You have to manually figure out how much of a deduction you’ll take, and backups for your home utilities, insurance, and mortgage or rent.
Record-Keeping and Documentation Tips
Deductions are a big deal, and good record-keeping is the key to being able to claim them with any confidence. Set up a uniform system for which you monitor receipts, invoices and payroll records against bank statements and inventory logs. Regularly scan and back up documents. Reconcile your bank and credit card statements monthly, and hold separate business accounts in order not to mix personal and business expenses. Thorough documentation reduces the chances of disputes and facilitates tax preparation.
Year-End Planning and Timing Strategies
Tax results can be affected by year-end planning. Plan for Purchases, Repairs or Inventory Write-Downs Timing the purchases, repairs, or inventory write-downs that affect your taxable income can be predictable. Work with your tax advisor to determine if accelerating or delaying certain expenses will be more advantageous for you in the eyes of the IRS.
Collaborate with Experts and Implement Best Practices
"While a large number of these deductions are just plain common sense, some things -- such as depreciation schedules; inventory valuation methods; and distinguishing capital expenses from other items that can be deducted currently -- may require guidance," reads Publication 535. A tax specialist can assist with finding benefits particular to your business, and help you meet filing requirements and prepare for an audit. Prophylactic measures, such as keeping clean charts of accounts, recording inventory procedures in writing, and putting employees on the books also mitigate against risk.
Conclusion: Be Aggressive in Deductions -- but not Reckless
Retail store owners enjoy a wide selection of deductions representing the average costs of keeping an outlet open. From inventory and payroll to advertising, insurance and equipment expenses, documenting transactions carefully — and making well-timed decisions about costs that can be deducted immediately or depreciated over time — can help reduce tax liability while keeping your business on the right side of the I.R.S. Concentrate on maintaining good books, making the same accounting decisions and seeking professional advice as necessary to help ensure you claim all of your rightful retail tax deductions.