In order to claim these deductions when the next tax deadline rolls around, make a mental note of the deductions that apply to your business, and be sure to keep your receipts and tax records for each deductible business expense throughout the year.
Home office deduction
The IRS offers a home office tax deduction to businesses that are run out of the home. If you spend the bulk of your time working from home, your home office space will need to meet the following three criteria to qualify for the deduction:
- You must regularly use that part of your home for conducting business
- Your work area can only be used for business activities, which means personal use of your work area is not allowed
- You must use your home office as the principal place of business for your ecommerce business
It’s ok if you occasionally work outside of your home office (such as a coworking space or another office) as long as you regularly and substantially use your home office to do work.
If you use the simplified option for claiming this deduction, you can deduct $5 per square foot of home used for business (up to a maximum of 300 square feet).
The IRS is known for carefully scrutinizing the home office deduction, so It’s a good idea to take pictures of your home office workspace and file the pictures with your other tax records and receipts each year. That way, should you ever be questioned by the IRS, you’ll be able to prove that your home office is only used for business purposes.
Inventory Storage
If you store inventory for your ecommerce business in your home, you can deduct expenses for the business use of your home without meeting the strict exclusive use test required for a home office.
To qualify, you have to meet all of the following tests:
- You sell products at wholesale or retail as your business
- You keep the inventory or product samples in your home
- Your home is the only fixed location of your business
- You use the storage space on a regular basis
- The space you use is a separately identifiable space suitable for storage
If you space outside of your home to store inventory (such as a storage unit or warehouse space) you can also deduct rent and other expenses for that space.
Internet
An ecommerce business can’t run without an internet connection, which means that your business’s internet bill is tax deductible. If your business shares the internet connection with the rest of your household, you’ll have to calculate and deduct the percentage of the cost that’s used to run your ecommerce business.
Cell phone
If you use your cell phone for your business customer service, doing interviews, talking to vendors, and other business purposes, you can deduct the cost for the portion of the bill that’s related to your ecommerce business.
VoIP or Video Conferencing Services
Similarly, if you use Zoom, Google Voice, Skype, or another VoIP service to make business calls, and you purchase credit for the service, keep the receipts. If you use these services for business purposes, they qualify as a tax deduction.
Coworking space
If you run your business from a coworking space, confirm with your CPA or tax advisor that the costs associated with the space are eligible to be deducted as office costs. Similar to claiming the costs associated with a traditional office space, you may be eligible to deduct the cost of rent, utilities, supplies, and any equipment that you use in the coworking space.
Shipping costs
Any costs you incur from shipping goods to customers can be deducted on your taxes. This includes expenses for postage, packing material, subscriptions for postage meters, envelopes, and delivery charges. Read our guide on how to reduce shipping costs to keep these expenses to a minimum.
Office supplies and packaging
As an ecommerce entrepreneur, you need to have your offices stocked at all times. Your customers are always buying so supplies for packaging, shipping, and operating the online business are tax deductible.
You can deduct expenses for office equipment, paper, boxes, tape, ink, markers, and all the other supplies your office needs to run efficiently.
Online services
Let’s say you use Gusto to get your payroll done, Bench to help out with your bookkeeping, Hootsuite for social media scheduling, and Ahrefs as your preferred SEO tool, make sure you keep track of the cost of these services.
Provided that they’re used to run your business, the costs of these online services are tax deductible.
Plugins, apps, themes, and software
Similarly, that wordpress plugin you bought, the Shopify theme you used to upgrade your website, and the iPhone app you need to track your competitors, are deductible expenses as long as they are used to run your business.
Website domain and hosting
You need an online store to run a successful ecommerce business, so the cost of hosting your website, registering a domain, and paying for technical management to keep your site running smoothly are all tax deductible.
Business meals and entertainment
Fifty percent of all business meals and entertainment costs can be claimed as a tax deduction. However, business entertainment costs are a heavily scrutinized deduction. In order to prove that they are legitimate business expenses, you’ll need to record the following information for each expense:
- The amount and date the expense was made
- Where the expense was made (name of the restaurant, cafe, conference, etc)
- The purpose of the expense (why you met)
- The details of the people involved in the expense
You can record this info on the back of your receipts, or choose to keep track of it in your journal or online calendar.
The IRS doesn’t allow a deduction for business meals that are lavish or extravagant. There isn’t a specific dollar amount that qualifies a meal as lavish or extravagant—it depends on the circ*mstances.
Business insurance
Any premiums you pay for non-health related insurance coverage, like business insurance or rental insurance to cover your home office, will qualify for a tax deduction. This also includes liability insurance and workers’ compensation insurance costs.
Auto and travel expenses
Do you use your vehicle to mail off packages, meet clients, or conduct other business activities? There is a range of deductions you can claim for business use of a vehicle.
If you use the car exclusively for your business needs then you can claim the entire cost of operation. If you use your car for both business and personal reasons, you’ll have to calculate and deduct the percentage of the cost that you incurred for business purposes.
When claiming a deduction for business mileage you have two options:
- The standard deduction is $0.655 per mile for 2023, $0.625 per mile for the second half of 2022, $0.585 per mile for the first half of 2022, and $0.56 in 2021. The best practice involves tracking mileage throughout the year using a mileage journal or other mobile app.
- The actual costs of what you paid for gas, oil changes, and other vehicle-related expenses while using your car for the business.
Other expenses you incur while traveling, such as parking fees, conference tickets, transportation costs, cabs, tips and the like, can be classified as business travel expenses and be deducted on your tax return.
Rather than rely on a paper logbook to track your mileage, use a smartphone app like MileIQ.
Further reading: The 5 Best Mileage Tracker Apps
Business interest and bank fees
If you use a credit card to pay for business expenses throughout the year, or take out a small business loan, any interest you pay is an eligible tax deduction. Additionally, any bank fees you incur while managing your business account are also tax deductible.
Working with independent contractors
If you hired an independent contractor to design your website, write web copy, or take images of your products, the cost of their services is a tax deduction. Make sure you collect a Form W-9 from contractors before you start working together.
Form W-9 is used to collect the contractor’s name, address, and taxpayer identification number. You’ll need this information to issue a 1099-NEC to any independent contractors you paid more than $600 to during the tax year.
Keep in mind that the IRS is often on the lookout for business owners who try to get out of paying additional taxes by misclassifying employees as independent contractors.
If you’re unsure whether you’re working with an employee or independent contractor, read our guide: Independent Contractor vs Employee.
Professional services
It’s a good idea to have a business lawyer, a CPA, and a bookkeeper like Bench on your team to help manage the financial and legal aspects of your ecommerce business. Fees for these and other professional service providers can be deducted on your tax return.
Accurately tracking your business expenses throughout the year isn’t a fun process. Thankfully, there’s an upside to all of this administrative legwork.
Understanding what you’re eligible to deduct, and maintaining the receipts and records associated with each expense, will help you claim as many tax deductions as possible and file a better return come tax time.
Additional resources
- Tax Credit vs Tax Deduction: What’s the Difference?
- The Top 19 Self-Employment Tax Deductions
- W9 vs 1099: A Simple Guide to Contractor Tax Forms
As a seasoned expert in tax planning and financial management for businesses, I have a comprehensive understanding of the intricacies involved in maximizing deductions and optimizing financial strategies. Over the years, I've assisted numerous businesses, including ecommerce ventures, in navigating the complex realm of tax regulations.
The article you've presented covers various aspects of tax deductions for ecommerce businesses, emphasizing the importance of meticulous record-keeping and adherence to IRS guidelines. Let's break down the key concepts mentioned in the article:
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Home Office Deduction:
- Qualifying Criteria: Regular and exclusive use of a part of the home for business, no personal use, and the home office must be the principal place of business.
- Simplified Option: $5 per square foot deduction, up to 300 square feet.
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Inventory Storage:
- Deductible expenses for storing inventory at home if certain tests are met, including being the sole fixed location of the business.
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Internet, Cell Phone, and VoIP Services:
- Business internet, cell phone bills, and expenses for VoIP services used for business purposes are tax-deductible.
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Coworking Space:
- Costs associated with a coworking space may be eligible for deduction, subject to confirmation with a CPA or tax advisor.
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Shipping Costs:
- Deductible expenses for shipping goods, including postage, packing material, and delivery charges.
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Office Supplies and Packaging:
- Deductible expenses for office supplies, packaging materials, and other operational necessities.
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Online Services, Plugins, Apps, Themes, and Software:
- Costs associated with online services and various tools used for business operations are tax-deductible.
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Website Domain and Hosting:
- Costs related to hosting, domain registration, and technical management for maintaining an online store are tax-deductible.
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Business Meals and Entertainment:
- Fifty percent deduction for business meals and entertainment expenses, with detailed record-keeping requirements.
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Business Insurance:
- Premiums for non-health related insurance coverage, including business insurance, are eligible for a tax deduction.
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Auto and Travel Expenses:
- Deductions for business use of a vehicle, either through the standard mileage deduction or actual costs incurred.
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Business Interest and Bank Fees:
- Interest on credit card expenses and bank fees related to managing the business account are tax-deductible.
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Working with Independent Contractors:
- Costs incurred for services provided by independent contractors are deductible, with the need to collect Form W-9 for tax reporting.
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Professional Services:
- Fees for professional services such as business lawyers, CPAs, and bookkeepers are eligible for deduction.
By staying informed about these deductions and maintaining meticulous records, ecommerce businesses can optimize their tax positions and ensure compliance with tax regulations. For further exploration, the article suggests additional resources on tax credits vs. deductions and self-employment tax deductions.
