➖Tax Deductions

Learn about how one of the most American concepts ever effects your eCommerce business.

Heads up! This guide is intended for U.S. based sellers.

What do you think of when you hear the word “taxes?” Most likely, the word isn’t kind or positive. Taxes are complex and when it comes time to file them, it can be scary. Though it isn’t possible to wave around a magic wand to make them go away, you can maximize the amount of tax deductions you take in order to reduce your tax liability. Deductions are a wonderful way to pay a whole lot less money in taxes, so you can invest more into making your ecommerce business the best it can possibly be. Simply sit back, relax, and get ready to show your taxes who’s boss!

Advertising & Promotions

Write-offs in this category include all the outlets used to promote your online business. Think about marketing expenses like:

• Facebook Ads

• Google Adwords

• Ad placements in digital and print publications

• Ad placements on a website

• Ad placements on marketplaces (Etsy, Amazon, eBay)

• Email marketing

• Fees for sponsored content by influencers

You can also write off expenses used to build and grow your website such as:

• Domain names

• Hosting

• Subscription website services (Wix, Squarespace)

• Themes

• Plugins

• Stock photos

• Many other items bought for your website

Auto Expenses

As an online business owner, driving is an important aspect of your business. Though you may not commute to clients or an out-of-home office, you're most likely driving to meetings, networking events, the post office, or supply stores. When doing your taxes, you are able to write these expenses off in two ways:

Mileage Deduction

This process is the easiest way of writing off auto expenses, and it includes tracking your business mileage throughout the year. Every year, the IRS sets a standard mileage rate and at the end of the year, you simply multiply your annual business mileage by the standard rate given by the IRS.

FOR EXAMPLE: Let’s say you drive 1,000 miles to run business errands. The IRS mileage rate for 2022 is 62.5 cents per mile. The formula to calculate your deduction is: 1,000 x 62.5 cents = $625, so your deduction is $625.

Actual Cost

The second way of writing off your car is by writing off a percentage of total vehicle expenses. These expenses include insurance, gas, repairs, oil changes, and car washes. The percentage that you write off depends on how much you use your car for business travel and personal travel

FOR EXAMPLE: If you drive a total of 10,000 miles and 4,000 of those miles are considered business travel, you are able to deduct 40% of your expenses. Let’s say that you spend $8,000 on car expenses throughout the year, you would use this formula to calculate the deduction: $8,000 x .40 = $3,200, so your deduction would be $3,200.

Bank Fees

Fees that are associated with your business’ bank and credit card accounts are deductible. In terms of your bank fees, you can deduct monthly service fees, ATM fees, overdraft fees, deposit fees, and wire transfer fees. As for your credit card fees, this would include annual fees and late payment fees.

Business Insurance

This would include your liability and professional insurance, including shipping insurance, so make sure that you take advantage and claim that deduction!

Business Licenses and Permits

This encompasses any fees that are associated with a license, permit, or certification that is needed to run your business. Again, go claim that deduction!

Charitable Contributions

This includes both cash and in-kind donations made to a charity, which does not include donating your valuable time to a charity. Moreover, for a charitable donation to be deductible, the organization must fall under the 501(c)(3) non-profit. You should also remember to request a donation receipt for your taxes because you will have to include that when you claim the deduction. Be sure to contact a tax professional regarding Charitable Contributions, because this deduction can work differently than other typical business deductions.

Commissions

This category pertains to what you pay to affiliates and partners in order to promote your business’ products or services. Luckily for you, these payments are completely deductible. Just a little tip, affiliates are considered 1099 contractors, so if you pay them more than $600 in a tax year, you must file a 1099 form with the IRS.

Cost of Goods Sold

This is a special expense that deals with the cost you absorb as a seller when one of your items is manufactured or sold. This is also anything that’s directly or indirectly related to the cost of creating your product.

Materials

This category refers to the raw materials that are needed to create and sell your product. For example, let’s say you sell hand-painted tote bags on Etsy. The tote bags, paints, and brushes would be part of your cost of goods sold.

Labor

This refers to the labor needed to manufacture a product. To further clarify, this means the people involved in the production process, not the people you hire to sell your product. For example, you hire someone to help you paint designs on tote bags, so what you pay them would be part of your cost of goods sold.

Inventory

This is the merchandise you purchase to resell. For this category, you are only able to write off the cost of the inventory that is sold. Unsold inventory is considered an asset. For example, if you sell five boxes of your hand-painted tote bags, you are able to write that cost off. On the other hand, if you have 10 boxes just sitting in your warehouse, you can’t write off that cost.

Education

When you are new to running a business, you can’t expect to know everything about the business and e-commerce world. Luckily, there are amazing resources to help you, and the cost of those educational resources can be written off. You are able to write off:

• Printed books and ebooks

• Magazine subscriptions

• Newspaper subscriptions

• Audio books

• Online courses and online summits

• Mastermind groups

• Membership site subscriptions

• In-person workshops

• Conferences

• Lecture series

When you sign up for learning courses or purchase educational books, you need to make sure they correlate with your business. So if you sell jewelry online and purchase a scrapbooking workbook at your local bookstore, you are unable to write that purchase off because it has nothing to do with your business.

Gifts

The gifts that you give to clients or business associates can be deducted, but only up to $25 per recipient per year. This means that if you buy one of your clients a gift that costs $50, you can only deduct $25.

Home Internet

Running a business out of your home means you probably use a lot of internet. Luckily, a portion of this bill can be written off. The portion you are able to write off depends on how much you use the internet for your business and how much you use for other things.

FOR EXAMPLE: Let’s say you use 60% of your home internet for work, and your monthly internet bill is $100/month. The formula you would use is $100 x 0.60 = $60. Since that is the cost for a month, you would need to multiply that cost by twelve to get the deduction for the year. In this case, that total would be $720.

Home Office Expenses

Having a home office can reduce your tax liability, but your office space must meet the IRS’ two requirements for a home office. Firstly, it must be a space in your home used solely for business purposes. This means your “man cave” cannot double as a home office space. Secondly, the space must be used regularly for business purposes. This means you can’t take a call once in your garage and call it your home office.

If you have a space that meets these requirements, then you are ready to calculate your deduction. For this, you must figure out the total square footage of your home plus the square footage of your home office space. Once you have those numbers, simply divide your home office square footage by your home’s square footage. This is going to be the deductible percentage of your home expenses.

FOR EXAMPLE: If your home is 1,000 square feet and your home office space is 250 square feet, then your formula is: 250 sq ft / 1000 sq ft = 0.25 or 25%. With this percentage, you are able to deduct a percentage of your home’s expenses for your business. If your rent is $2,000 a month and your home office is 25% of your home. The formula is: $2,000 x 0.25 = $500. Since that price is only for a month, you would multiply by twelve to receive the price over a year. In this case: $500 x 12 = $6,000

You are able to write off a percentage of these expenses:

• Rent or mortgage

• Renters or homeowners insurance

• Utilities (like gas, electric, or water)

• Repairs to your home office space. In fact, any repairs that are made to your home office are completely deductible

Alternatively, you can opt for the simplified method, which allows you to deduct $5 per square foot used exclusively for business use. Many business owners opt for this option to keep things simple.

It is always necessary to keep a record of your home office expenses in case you are audited by the IRS.

Interest Expenses

This category includes credit card interest, finance charges, and loan interest for any business liabilities. It’s pretty simple.

Meals

This category has been a point of contention among tax professionals since the 2018 tax law, but walking through what we know will clear things up so you can deduct business meals with ease. Here are the basics:

• Meals while traveling (as an owner or for an employee): 50% deductible

• Meals with employees for meetings: 50% deductible

• Meals for employees during work shifts for the convenience of the employer: 50% deductible

• Meals with business clients and associates: maybe 50% deductible. The new tax law is unclear about the deductibility of these meals, so you should always check with a tax professional to get their take before claiming a deduction.

The IRS has also noted that businesses can generally deduct the full cost of business-related food and beverages purchased from a restaurant. If not, the limit is usually 50% of the cost of the meal. This applies for 2021 and 2022 only.

Merchant Processing Fees

As an online business, you more than likely accept credit cards. Fees associated with processing credit cards are deductible, including fees from: Stripe, PayPal, Authorize.net, Square, Braintree, Intuit’s payment processor, and many other payment processors.

Payroll Expenses

These expenses are related to running payroll for your employees. This category includes:

• Local, state, and federal payroll taxes

• Payroll service fees (fees that you pay your payroll provider)

• Workers’ compensation insurance

Photography and Videography Equipment

Engaging photos and videos on a website attract potential buyers and help to increase sales. Luckily for you, photography and videography equipment are deductible. Anything under $2,500 is considered an expense and can be deducted, while anything purchased for more than $2,500 may be considered a non-deductible capital expenditure and an asset that depreciates over time. Expenses that can be deducted if they’re under $2,500 includes:

• Equipment like cameras, lenses, and flash

• Supplementary equipment like lighting, tripods, filters, camera bags, backdrop stands, and paper

• Repairs and maintenance for your equipment

Professional Fees

Legal and professional consultations used for your business are deductible. This includes:

• Legal fees for an attorney or online legal service

• The cost of purchasing templates for contracts, terms and conditions, and privacy policies

• Accountants and bookkeepers

Office Expenses

Online businesses still need office supplies in order to be functional. These expenses can be simple day-to-day costs like software and file folders that help your business stay up and running.

Equipment

Large equipment like computers, tablets, printers, and copiers are able to be deducted. You just have to keep in mind that equipment over $2,500 in value may be an asset and can depreciate over time rather than be deductible at the time of purchase.

Depreciation is a method of allocating the cost of an asset over that asset’s lifespan. For example, if you buy a $4,000 dollar computer and plan to use it for four years, the computer would depreciate $1,000 each year. You are unable to deduct the initial $4,000 purchase, you are able to claim the $1,000 annual depreciation expense on your taxes.

Software and Online Services

These include one-time and ongoing software subscriptions for accounting software (like CommerceNavigator!), scheduling software, task management software, cloud storage, social media schedulers, cart software, apps, and other tools you use to run your business.

Supplies

This would include consumable goods or products that get used up. This includes office supplies like pens, pencils, paper, file folders, and printer ink.

Rent

Though your business is online, you may have non-office rental spaces like co-working spaces or storage units. The expenses for these spaces are deductible.

Salaries and Benefits

Wages and benefits that you provide for your employees are deductible. That would include:

• Wages, salaries, and employee commissions

• Employee benefits such as health insurance, 410K matches, HSA and flexible spending accounts, life and disability insurance

• Bonuses

Seller Fees

You are able to deduct the fees you pay to sell your items on ecommerce platforms or to host an online storefront. These fees are to use the platform to sell your products and not to process credit cards (that would be a merchant processing fee). Fees from Amazon, eBay, Etsy, and Shopify are examples.

Shipping and Packaging

Shipping and packaging expenses are deductible such as:

• Postage and subscription postage services

• Delivery charges

• Dropshipping fees

• Packaging materials like boxes, envelopes, packing peanuts, bubble wrap, packing tape, and labels

Subcontractors

A subcontractor is a person you hire to perform a service for your business that is not an employee. If you pay that person more than $600 in a tax year, you will need to file a 1099 return. You may hire a contractor that works as a:

• Virtual assistant

• Graphic or web designer

• Photographer

• Software developer

Telephone and Communications

Cell Phone

Like the home internet deduction, you are able to write off a percentage of your personal cell phone bill. That percentage is based on how much you use your phone for business compared to personal use.

FOR EXAMPLE: if you use your cell phone for your business 50% of the time and your monthly bill is $60/month. The formula is: $60 x 0.50 = $30. Multiply that number by twelve to get your deduction for the year. In this case, the deduction would be $360.

If you own a cell phone that is used exclusively for business use, you can write off the entire bill.

Skype and VoIP Fees

If you use an internet phone service of a 1-800 number for your business, you can deduct the entire cost of those fees.

It is smart to document how you calculate this deduction, so that in the unlikely case that you are audited, you will have the evidence for how you determined your percentage and that it has been applied consistently every year.

Travel

If you need to travel for a business conference, a trade show, or to meet a potential distributor? Well, you are able to write off the costs if your trip has a business purpose and you are spending the night in an area away from where you typically work. You can write off:

• Airfare

• Ground transportation

  • Lyft

  • Uber

  • Taxis

  • Public transportation

  • Rental cars

• Lodging

  • Hotel

  • Airbnb

  • VRBO

  • Other short-term rental

You are still able to write off the cost of traveling in your local area if it is for business purposes. Just like ground transportation, you can write off taxis, public transportation, Lyfts, and Ubers.

How can CommerceNavigator help?

The Schedule C Worksheet on CommerceNavigator is the perfect way for you to keep track of everything related to your taxes. The worksheet keeps track of all of your business expenses, so when it comes time to start doing your taxes, you have all of your information in one place. You can also find CommerceNavigator on Discord, so if you have any burning questions, you can ask them there year round.

Our lawyers want you to know: while we're pretty proud of our team here at CommerceNavigator, we aren't acting in an official capacity as your CPA or attorney. We provide general information for educational purposes, not specific or professional advice. Since every situation is unique, you may want to consult with the appropriate experts for accounting, legal, and business issues.