You might not be thinking about taxes until closer to the deadline, but planning your eCommerce tax deductions is a year-round process. If you run an online business, investing in tax-deductible business expenses can reduce your tax burden and increase your profits.
We’ll help you plan ahead for next year’s filing. Here are the 9 most common eCommerce tax deductions that you should include in your financial planning:
Home offices are among the most common tax deductions for eCommerce businesses to take. Before we show you how, it’s important to understand the requirements for deducting your home office expenses.
To qualify, your workspace must meet the following requirements:
- Your office must solely be devoted to business activities
- Your office must be your eCommerce business’s principal place of operation
- The majority of the time spent in your office must be work-related
In other words, if your home office doubles as a nursery or workout room, you’ll likely be unable to claim it as a deduction on your tax return.
Making this deduction depends on your deduction method:
If you use the simplified option for claiming tax deductions, the IRS permits you to deduct $5 per square foot of office space. However, you’ll be capped at a maximum of 300 square feet, which often prevents you from claiming garage space as a work area.
Using the regular method, you’ll need to determine the square footage of your home office and express this area as a percentage of your home’s total square footage. You can then apply this percentage to any and all home expenses.
For example, if your home office represents 10% of your home’s total square footage, you can deduct 10% of expenses like:
- Rent or mortgage interest
- Property taxes
- Homeowner’s insurance
- Homeowner’s association (HOA) fees
- Cleaning services
Can you deduct the cost of your home’s internet? Yes. Like your other utilities, you’ll simply deduct a percentage of the cost of the internet service for the year, including monthly fees, equipment, and installation.
Just be aware that the IRS keeps a fairly close eye on these types of deductions. It never hurts to snap a few photos to document your workspace to demonstrate its use for your business.
Tax deductions are also available on the cost of shipping. All of the materials and expenses associated with shipping products to your customers are deductible, including:
- Packaging materials
- Labeling supplies
- Printer ink
- Shipping meter subscriptions
- Delivery charges
- Other handling fees
Since shipping is such a regular part of your business, these eCommerce tax deductions can help you keep costs down and improve your financial efficiency.
All expenses associated with marketing and promoting your business are tax-deductible. This includes:
- Social media campaigns
- Local newspaper ads
- Radio or television spots
- Digital marketing products
- Costs associated with design or content creation
If you hire a designer or copywriter to produce content for your business, you can deduct their wages, just as you would any other 1099 worker.
Don’t forget that you can also deduct marketing tools used to run email campaigns or manage your social media calendar. If you use subscription-based services, the cost of your annual subscriptions also count toward your eCommerce tax deductions.
For many business owners, this is an encouragement to invest in marketing. You’ll gain more exposure for your business, all while finding yourself in a more favorable position during tax season.
Online merchants typically have a small variety of travel expenses, since you’ll be using a car to perform basic tasks that include:
- Transporting packages to the post office or shipping company
- Meeting with clients
- Carrying out essential business operations
Even if you rely on a personal vehicle, you can still deduct transportation costs, though you’ll need to determine what percentage of your time behind the wheel was used solely for business purposes.
You’ll also want to find a system to track your mileage, since this data will be used for calculating your deduction.
You can claim the entire cost of the vehicle for the year (fuel, repairs, etc.), though most business owners opt for the standard mileage rate deduction, which is $0.56 per mile as of 2021.
Keep in mind that we’ve been talking exclusively about cars, but there are other transportation costs that you can deduct, like:
- Train or subway tickets
- Cab fees
- Parking fees
Any travel performed in the operation of your business can be deducted from your annual taxes. In most cases, conference tickets can also be claimed as a business expense, provided that the conference is related to your eCommerce company.
Meals with clients can also be deducted from your taxes, though only when these meals also serve as business meetings. If you and a client decide to see a movie or sporting event, these entertainment costs will not count among your normal and necessary business expenses.
Earlier, we noted that your internet service can be deducted as part of your home office expenses along with your other utilities. But if you have a separate office, you can deduct the entire cost of internet service from your taxes, since it’s being used exclusively for business purposes.
Similarly, if you share a workspace where you contribute to the utilities, you can likely deduct your portion of the internet fees from your taxes. You may wish to contact your office or property administrator about how to handle shared fees, as they may be able to recommend best practices based on past tenants.
What kinds of tools do you use for your business? You can make eCommerce tax deductions for almost anything you use to further your business.
For a lot of online business owners, this means deducting the cost of online tools such as:
- Web domains
- Website fees
- Web development services
- Social media management platforms (e.g., Hootsuite, Buffer)
- Project management software
- Email marketing platforms
- VoIP or video conferencing services
- eCommerce business software
- Bank fees
If you use Shopify for your eCommerce store, the fees associated with this service can be deducted from your business income taxes.
Additionally, since you’ll be relying on a business bank account, bank fees can be counted among your business expenses, though only those that relate to normal business operations. Monthly fees, for example, can be deducted, but overdraft penalties cannot.
If you contract a designer, copywriter, or web developer for any of these services, you can deduct these costs just as you would for a 1099 employee.
Of course, these are just the common core tools used for running the customer integration side of your business. Your unique eCommerce business might require specialized tools and training to produce your products or services, and these expenses can often be deducted from your tax return.
For example, if you subscribe to a trade magazine or journal, this can be deducted, since these materials are used to further your business.
If you have a cell phone devoted to your business, you can deduct the cost of your plan as a business expense. This would include the monthly fee, the cost of the phone itself, and any other charges associated with setup and activation.
If you rely on your personal cell phone, you’ll have to deduct the cost of the portion of the bill devoted to business use. This can be tricky, since your cell phone is likely used for more than just phone calls, but you can likely make a reasonable estimate by examining data usage and time spent using the phone.
Any office supplies you use can be deducted from your yearly taxes. This includes packaging materials (see above), but it also extends to printer supplies, paper, pens, and even furniture if it’s used solely for your business.
What if you rent a coworking space where you contribute to the cost of office supplies? You can likely still deduct these expenses, though you may want to consult a CPA or an eCommerce bookkeeping firm to guide you through these eCommerce tax deductions.
Taking eCommerce tax deductions on your business insurance is a great way to reduce your overall expenses, especially since your insurance premiums can be a sizable overhead cost.
Many eCommerce business owners have invested in insurance policies that include:
- General liability insurance
- Professional liability insurance
- Commercial property insurance
- Workers’ compensation insurance
- Data breach insurance
Typically, these policy types are regarded as common and necessary for the operation of your business, which allows you to deduct the full amount of your monthly premiums, as well as any additional fees required for maintaining the policy.
You may have other insurance policies that are unique to your niche, though you may wish to contact an eCommerce accountant to verify your ability to deduct other, more unique insurance policies.
Tax Planning Takes Time and Xendoo Can Help
Are eCommerce bookkeeping services tax-deductible? Absolutely. Not only can Xendoo’s outsource accounting solutions be deducted from your taxes; we can also help you plan your eCommerce tax deductions to help you make the most from your business.
Don’t wait for tax season to start planning. Sign up today for a free trial, and we can get you started on tax preparation to make filing a breeze, maximizing the deductions you receive.