eCommerce Business Expenses: What are they?
eCommerce businesses have become the norm and now deliver a large variety of services. These businesses are not the same brick and mortar businesses. They have different expenses. Despite being different, those expenses can be deducted from your company’s income and reduce its taxable income. The reduction in taxable income allows you to keep more of your hard-earned revenue in your pocket and to reinvest it or at least hold it in reserve just in case it is needed to support your business during hard or challenging economic times.
eCommerce Business Expenses
The U.S. Internal Revenue Service allows you to deduct the following expenses from your business’ income:
|Website Building and Hosting||Domain names, website builder, plugins, hosting platform fees, costs related to content creation, SSL certification fees, payment processing fees|
|Platform Payments||Payments for access to usage of third-party platforms (e.g., eBay, Amazon, Shopify), referral fees, fees based on percentage of sales|
|Business Use of Home Office||Space, computer equipment, utilities, rent, property taxes, repairs, maintenance|
|Permits and Licenses||General business permit, Doing Business As (DBA) license, professional trade licenses (e.g., insurance, financial planning, accounting), health inspection certificates (if selling food)|
|Utilities||Electricity, internet access fees|
|Shipping||Costs related to packaging (e.g., boxes, tape, shipping labels), shipping, warehouse storage, taxes (e.g., import, export, sales, VAT)|
|Returns and Refunds||Restocking fee, payment refunds, return shipping fee, loss or disposal of product|
|Equipment and Asset Maintenance||Machinery, tools, computer equipment, disposal of assets, replacement of assets, maintenance of assets|
|Inventory Management||Costs of theft, mismanagement, misplacement, damaged products; inventory management software, personnel management costs|
|Storage||Rent, insurance, warehousing|
|Marketing and Advertising||Print ads, digital ads, conferences, podcasts, exhibition fees, blogging, social media posts, email newsletters, designing fees for logos and packaging,|
|Subscription Services||Slack, Trello, QuikBooks, Intercom, Hootsuite|
|Transaction Costs||Fees paid to collect credit/debit card payments and payments from third parties (e.g., PayPal, Payoneer, Stripe), banking|
|Cybersecurity||Antiviral software, firewall maintenance, email encryption, employee training, computer security service/personnel|
|Insurance||Business, property, business interruptions, product liability|
|Taxes||Federal, state, import/export|
|Employee Compensation||Salaries, wages, bonuses|
|Employee Benefits||Dental insurance, health insurance, paid vacations, free meals at work, company supplied transportation, paid sick leave, paid maternity leave, free dry cleaning, 401(k) contributions|
|Sourcing Products||Anything used to source products (e.g., software, agencies, meetings with industry professionals, magazine subscriptions)|
|Product Maintenance Costs||Product testing, development, sampling|
|Professional Services||Legal, accounting, tax preparation, training, consulting fees|
|Raw Materials/Product Supply Costs||Cost of raw materials needed to produce business’ goods and services|
|Maintenance and Repair Costs||Costa for maintaining and repairing equipment and facilities|
|Merchandising||Costs for producing items that market your company(e.g., hats, pens, pencils, bumper stickers, cups, t-shirts, hoodies)|
|Trade Memberships||Membership fees for the Chamber of Commerce, industry-related organization|
Deducting Business Expenses
All the business expenses listed in the chart above and more can be deducted from a business’ income. The business’ net income, gross income minus business expenses, is the business’ taxable income if that income is retained by the company.
The way in which different business expenses are deducted on a company’s annual tax return depends on the useful life of the item being expensed, and the methods permitted by the IRS. For example, the cost of a large vehicle used for business may be completely deducted in the year the vehicle is purchased. However, the purchase price of a building cannot be completely deducted in the year that it is purchased. In addition, the IRS carefully reviews business deductions for meals and entertainment.
Finally, there are different types of deductions available to startups and established businesses. For example, businesses should investigate what deductions are available to them based on their expenses and the level of development of the company. For instance, companies should check whether they qualify for the qualified business investment (QBI) deduction and/or the startup costs deduction.
The Cost of Depreciation
Businesses are permitted to deduct annual or accelerated loss of value of assets that have a useful life that exceeds 1 year (e.g., vehicles, buildings, machinery, tools). There are several kinds of depreciation that can be used by ecommerce businesses. Before choosing a specific type of depreciation, the business owner or the business owner’s financial consultant should carefully consider how the types of depreciation permitted will affect the tax liabilities of the business in that tax year and future tax years.
For example, accelerated depreciation may allow the business to deduct 100% of the cost of some expensive purchases, but if the business didn’t make a lot of money in its first year, then it may be better for the business to not use accelerated depreciation. Instead it could use straight line depreciation, or some other form of depreciation that allows it to reduce its tax burden significantly when the business is bringing in more income.
Business expenses incurred during the operation of a business may be deducted from the business’ income for that year, or in some cases deferred until a later tax year. The tax strategy should be part of an overall business plan to reduce the business’ tax burden, not just a plan to reduce its taxes for the current fiscal year.
Moreover, all business expenses should be recorded when incurred and have receipts or invoices to substantiate the expenses recorded. These records and receipts/invoices will be needed if the business is audited by the IRS or requested by financial auditors who are reviewing the company’s finances and expenditures.
If you are not sure about how to classify various expenses, which depreciation methods to employ, and/or how to develop and implement long-term tax strategies, contact the Free Cash Flow (FCF) Agency to find out how it can help you with your accounting, financial document preparation, and tax filings.