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.
Keeping Organized
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?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
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Very detailed post Robert! You should also mention that this applies only when you have your business registered and wouldn’t apply if treated as a hobby (blogging, selling on etsy/ebay etc.).
Very good call out. But you can do this same thing for hobby income, it’s just a different form.
What form would I use? I sell on Ebay, but do not have a store. It is mostly used clothing from family members, but a few items from stores (buying on end of season clearance). My Ebay total was @ $500 for the year.
You would report on a Schedule C. Most online tax software will handle that all for you.
This is very comprehensive. I forgot to take my Amazon and eBay fees into account when I did my taxes this year. I also keep track of my business and personal calls for further deductions. My business is not registered as a corporate entity though, I operate as a sole-proprietor. I spoke with an accountant who told me that as long as I operated with the “intention of making a profit” I could claim business expenses.
Yes, you have to be in it to make a profit, even if you don’t. For example, you could lose money for a year or two due to start-up costs, but you need to show you are working to being profitable.
Too bad I cannot take deductions for blogging expense because I treat it as a hobby. Not too expensive hobby though. Better blogging than shopping, right? 🙂
Thanks for posting all these great things a business could use as a tax deduction. I was wondering if advertising could be a tax deduction. Now I know. Thanks!
Of course you can deduct advertising and other promotion tools that you use exclusively for your business.
If you purchase different programs over the internet for the
purpose of making a profit – can the cost of the program be deductible?
If you purchased them for your business then yes. You may also want to look at whether you have a hobby business or a real business.
Glad to find this post. It seems a bit hazy in one area. Fees taken by Amazon and eBay are commissions but PayPal is a merchant account and cost of goods sold. If sell on Amazon, they kind of handle it all and you get the end payment. In the case of Google Checkout, they are handling the fee and taking a 30% cut of a Android app sale. So is that a commission or a cost of goods when it is so lumped together like that in one transaction? Seems like good reasons to go either way.
I think you’d be fine either way, but I’d probably call it all a commission.
I have the cost of web hosting which is pretty straightforward. But may I also take some percent of my home internet connection as a cost of the blogging/writing business? If so, is there a percent that’s considered ‘reasonable’? Obviously all my net access isn’t for blogging. I have a home office, but not exclusive, so I don’t take any deduction there.
I started an on line business about 3 months ago. I have invested around $6000 for contact leads. Are these expenses deductible as advertising.
How did you acquire these leads? If you did it through a service like Google AdWords or Facebook Ads, then yes, it would be advertising. If you just bought names and emails from somebody, I would probably classify them as a commission. Either way, they are deductible and it doesn’t really matter too much.
If you have an item that cost you $20 and you sell it on Ebay for $30. Is the original $20 cost of good sold and your income is only $10 in this simplified example?
Yes, exactly.
If I work for Uber and purchase a phone stand for in-car driving, do I include the total amount of shipment for the deduction, or the item before shipment and taxes?
The entire amount.
What about shipping cost? Say the item I bought is $10, sell it to amazon $30 but free shipping for customer but cost u $8. Can you claim the $8 as expense?
Yes, shipping is an expense you claim.
Gross Sale – $30
Cost of Goods – $10
Shipping – $8
Box/Tape – $2
The profit you pay taxes on: $10