The Guide to Ecommerce Tax Deductions: 18 Business Expenses You Can Write Off
If you run an online store, putting some of your profits towards tax-deductible business expenses can help your business grow and give you a break come tax season.
Even day-to-day expenses—car trips to the post office, or the electricity bill for your home office—could be saving you money, so long as they’re recorded and reported.
Read on to learn about the write-offs you may be missing and some ideas on how to use them as a means to reinvest in your e-commerce business.
1. Home Office
If you run your store from home, you qualify for an e-commerce deduction. The size of this deduction will depend on how much of your home is devoted to doing business.
These are the requirements you need to meet:
Your work area is only used for business activities. (If you occasionally do paperwork at the kitchen table, your kitchen does not qualify as a home office.)Your work area must be the principal place of business for your e-commerce company. You should be ready to prove this with a consistent, printed schedule. The majority of the time you spend in your homework area must be devoted to doing business.
Also, you should have no alternative workspace. That means no external office or coworking space from which you run your business.
You have two options for calculating the home office deduction: the simplified method, and the regular method. Unsurprisingly, one is easier than the other.
Using the simplified method, you deduct $5 per square foot of your home used for business, up to a maximum of 300 feet.
To use the regular method, you calculate the percentage of your home’s square footage that you use for business, then apply that percentage to your home expenses—rent or mortgage interest, property taxes, electricity, heat, water, and anything else that makes it possible to occupy your home.
For example, if you use 10% of your house’s square footage for business, you can deduct 10% of your mortgage interest on your tax return.
The IRS has a reputation for carefully scrutinizing home office expenses. Make sure you have the info you need to back up your claim. Take pictures of your work area and maintain a copy of your schedule for working there. Each financial year, keep them filed with your tax records and receipts.
If your home qualifies as a workplace, household utilities—heat, water, and electricity—can be deducted on your tax return.
You get this number as part of the regular method of calculating home office expenses. So, if 10% of your home’s square footage is used for doing business, you can deduct 10% of your heat, water, and electricity payments.
Fortunately, all of this can be easily monitored thanks to the tracking service included with ePacket deliveries, giving customers peace of mind while their package is trying to reach them.
3. Improvements and Repairs
A necessary repair to your home office—for instance, fixing a broken window—can be reported as an expense on your tax return.
An improvement to your home office can also be reported, but it must be depreciated over a period of up to 27.5 years.
Work done on your home office is classified as an improvement if it involves “betterment, adaption, or restoration”—for instance, installing a larger window.
Before paying for improvement or repair, talk to your CPA to make sure you’re classifying it correctly.
4. Coworking Space
If you rent coworking space where you contribute to the cost of utilities and supplies, there’s a good chance those costs may be tax-deductible. Check with your CPA.
5. Business Interest and Bank Fees
If you have a business credit card or a small business loan, anything you pay in interest during the course of the financial year is tax-deductible. The same applies to fees charged by your bank for maintaining or using your business checking account.
6. Business Insurance
Business, rental, liability, and workers’ compensation insurance are all tax-deductible.
7. Bookkeeper, Accountant, and Tax Consultant Fees
Interesting fact: You can actually deduct the cost of meeting with a tax consultant who advises you on which expenses you can deduct.
It’s known as a “professional services” deduction, and this deductible expense actually applies to a range of professionals who help you manage your business. When you hire a business lawyer, CPA, bookkeeper, online bookkeeping service, or tax consultant, their fees qualify as deductible business expenses.
8. Legal Fees
If you hire or retain an attorney to prepare contracts, file trademarks, and copyrights, negotiate leases, defend your business in court, or perform other services for your business, you can write off their fees.
9. Independent Contractors
If you hire an independent contractor for any purpose related to your business—for instance, taking photos of products for your online store—the cost of their services is a tax deduction.
Always be sure to collect 1099 forms from independent contractors before they start working for you, and file it properly (you’ll need to submit a copy to the contractor, and another copy to the IRS, before the deadline).
The IRS is often on the lookout for employers who try to avoid paying employment taxes by classifying employees as contractors.
If your e-commerce business hires employees, their wages and benefits are tax-deductible.
Help your business grow, and pay fewer taxes while you’re at it. Whether you advertise your business on Instagram or in your local newspaper, the cost of advertising is tax-deductible.
This includes both the price of placing the ad and any fees you pay to have it written and designed.
If you hire a designer, copywriter, or another marketing professional to produce ads for you, you deduct their wages as you would any 1099 worker.
12. Marketing Tools and Services
If you use tools like Facebook Ads or Mailchimp to manage your emails or your Facebook Ad campaigns, they count as “ordinary and necessary” marketing expenses. The cost of your subscriptions can be deducted.
Shopify gives you all the tools you need to run an online store. As such, for any e-commerce business, Shopify fees definitely qualify as an “ordinary and necessary” business expense.
14. Domain and Web Hosting
You can’t run an e-commerce business without an online presence. Domain and web hosting are tax-deductible. If you purchase web design templates or stock images to use on your site, you can also deduct their cost. The same applies if you pay to upgrade your store’s theme in Shopify.
Beyond operating an online store, the services you use to engage with current or potential customers can be deducted.
So, if you publish a newsletter, you can deduct the cost of your email marketing solution. If you schedule social media posts, you can deduct the cost of Later.
If you take classes to upgrade your skills in a way that is relevant to your business, you can deduct their cost.
The class qualifies for a deduction if you take it in order to obtain certification—such as becoming an e-commerce consultant.
But even less specific forms of education—for instance, a photography class that helps you take better pictures of the products you sell—can be deducted. So long as the class directly improves your day-to-day business operations, it’s tax-deductible.
Subscriptions to trade magazines related to your industry are tax-deductible, too. Make sure they’re specifically connected to your industry, though. General interest business magazines do not qualify.
18. Business Vehicle and Travel Expenses
As an e-commerce entrepreneur, you’re probably mobile.
If you use your vehicle to transport packages (for instance, to the post office), meet with clients, or carry out any other business operations, you have a range of business expenses you can choose to claim.
When your vehicle is used exclusively for business purposes, you can deduct the full expense of its operation. But if you use it for both business and personal purposes, you’ll need to calculate the percentage of the cost of operation that applies to business.
Other travel expenses you incur in the course of doing business—parking fees, cab fares, or conference tickets, for example—can be claimed.