If you have an online for-profit business, it is important to take note of your business expenses that can be deducted on your tax return this year. If you have a business and file a Schedule C with your tax return, here are some important expenses you should remember to deduct. Typically, all “ordinary and necessary” business expenses can be deducted from your business gross income when filing your tax return. Here are some great places to look for tax deductions for your online business.
Deductions if you Sell on Amazon.com or eBay
If you sell goods or services on Amazon.com or eBay, you pay commissions to both of these companies in the form of “Amazon Commission” and “eBay fees”. Commission expense can be deducted on a Schedule C under commission expense.
Also, you most likely pay for shipping on these goods. Postage and delivery can also be deducted since it is necessary for the conduct of online business. Postage and Delivery can be deducted as an other expense, and you would write in “Postage and delivery” in Part V of the Schedule C. You also can't forget the cost of the box and packing supplies for the item you are shipping. This is considered an “Office Expense”, and can be deducted as such on the Schedule C as well.
Finally, if you sell on eBay, you most likely conduct your transactions through PayPal, which takes a fee. This fee is a Merchant Account Fee, and is usually considered a Cost of Goods Sold, since you have to pay it to sell the good. As such, it would fall under the Cost of Goods Sold in Part III of the Schedule C, and can be considered an “other cost”.
Tax Deductions if you Run a Blog or Other Website
If you run a blog or other website, you also have some costs you can deduct from the necessary course of business. First, you have to register your domain and pay for hosting. You may also need to find an email service such as Aweber or Mailchimp, and a shopping cart service, such as e-Junkie.
For the domain and hosting, I usually consider these costs “Computer and Internet Expenses” and I place them under other expenses. You could also have online media storage fees, such as Amazon S3, which would fall under this same category.
If you have an email service, you could consider this a Computer and Internet Expense, or you could consider it an Advertising Expense, depending on how you use the service. If you consider it an advertising expense, you would deduct it as “Advertising” on the schedule C. Another very common advertising expense is paying for Google Adwords, or other internet ad service.
Finally, your shopping cart service would be considered a Merchant Account Fee as discussed above. You would want to consider this a Cost of Goods Sold since it is required to sell the goods you want to.
What About the Home Office Deduction?
You may think that since you are running your website or small business from home, you can claim the Home Office Deduction. There are two requirements to qualify your home office for a deduction:
- Regular and exclusive use: You must regularly use part of your home exclusively for conducting business (i.e. spare bedroom).
- Principal Place of Business: You must show that you use your home as your principal place of business. If you conduct business at a location outside your home, but also use your home substantially and regularly to conduct business, you may qualify for the deduction.
To qualify for regular and exclusive use, you must use a specific area of your home only for your business. For example, if you have a room you consider your “office” and it has a computer in it. If the computer is really the family computer, and not exclusive to your business, you cannot qualify for the deduction. Everything in the space must be exclusive use. Computers are cheap, so you may want to consider having one exclusively for your business if that is all that is preventing you from getting this deduction.
If you conduct an online business, you home is most likely your principal place of business. To be sure, you must conduct administrative or managerial work at this location (such as billing, bookkeeping, ordering supplies, meeting clients, writing reports, etc.).
If you have more questions about whether you can qualify for the Home Office Deduction, please read IRS Publication 587. There is a handy flow chart that can guide you.
For most people that's hard to qualify, and instead they look at simply renting rooms and taking the expense. It's almost easier to simply expense meeting rooms instead of having to prove you have a home office, especially if you conduct primarily online business.
The most important note for everything mentioned above is the need to stay organized. If you are trying to deduct a cost of doing business, you will need to justify that expense with a receipt or other record. Also, if you don't keep track starting in January, it can be difficult to put everything together at the end of the year.
You may want to consider using a program such as Quickbooks, which easily keeps a record of all of your business transactions. It can also help you manage clients and track payments and bills. Purchasing a program such as Quickbooks is also tax deductible business expense. You can also look at this list of the most popular cloud based accounting programs, many of which are free.
If you still can't do it yourself, you can always hire a bookkeeper. The cost of bookkeeping has come down in recent years with the advent of the internet. I know of several people who use online bookkeepers through services such as oDesk. Once again, paying someone for bookkeeping is also a business expense that can be deducted.
Hopefully this helps you make the most of your tax return this year!
What other tax deductions do you recommend for your online business?