7 Tax Deductions Every Ecommerce Business Needs to Know
Like many other businesses, ecommerce companies are required to pay several taxes at the end of the year.
But there are ways to avoid paying an unnecessarily high bill thanks to tax deductions.
This article will explore some of the different types of tax relief available to small businesses to help you free up cash for your business.
First of all, let’s understand what exactly is meant by the term ‘tax deduction’…
What is a tax deduction?
A tax deduction is an expense you can use to lower your taxable income, thereby reducing the amount of taxes owed.
Using tax deductions doesn’t mean avoiding tax or taking advantage of the system, as you’re still contributing the full amount owed.
Instead, it’s something you are entitled to do as a business to ease your burden and boost your personal take-home pay and/or company balance sheet.
Some tax deductions are industry-specific, while others depend on your business structure, such as whether you’re a sole trader or a limited company.
Each tax break also comes with its own set of criteria that determine whether you’re eligible, so it’s always best to check with an accountant to make sure you qualify.
If you run your store from home, you may be entitled to an ecommerce deduction. The amount will depend on how you use the space to carry out your business.
You need to meet some requirements; for example, the workspace must only be used for businesses reasons. This area must be the principal place of business and the majority of the time you spend in your home working area must be devoted to doing business.
You must be able to prove this, so take pictures of your work area and maintain a copy of your schedule for working there. Keep them filed with your tax records and receipts so that you have them on hand each financial year.
If your home qualifies as a workplace, then it also means a percentage of your household utilities such as heating, water, and electricity can be deducted on your tax return.
Likewise, if you have to pay for any improvements or repairs to your home working space, this may qualify as an expense on your tax return.
It is possible to work these out yourself, but it can get a little complicated, so it may be best to speak to an accountant to help you figure it out.
As your ecommerce business grows, you may consider hiring staff to help out.
In the US, business owners can take a tax cut on providing employee benefits, compensation, and perks if they are deemed “reasonable” and “necessary.” These can include:
- Employee pay
- Vacation pay and sick time
- HSA employer contributions
- Employee assistance programs
- Life insurance coverages
- Meals and lodging
Just keep in mind that claiming any of these will depend on your business structure, so it is important to check with an accountant first before assuming you’re entitled to all of the above.
Ecommerce businesses in the UK may also reduce their National Insurance payments, a form of tax, by taking advantage of Employment Allowance. Check the British Government website or speak to your accountant to determine if you’re eligible.
Whether it’s traveling to the post office to send packages or heading to a coffee shop to meet with clients, running an ecommerce business can mean you’re often on the move.
Using your own vehicle for work-related reasons may qualify as a business expense.
If the vehicle is used for business purposes only, then you can deduct the full expense of how it’s run, such as paying for fuel, maintenance, and repairs.
But if you need the vehicle for both business and personal usage, you will have to calculate the percentage of the cost that applies to business, which can be quite tricky.
Other travel expenses such as parking fees and cab fares may also be claimed as a travel expense, providing they are incurred during the cost of running your business.
Again, an accountant can help you out here, although if you want to work it out yourself, the necessary information is probably available on your Government website.
As an ecommerce company, shipping is more than likely one of your main priorities, and unless you’re a dropshipping business, it’s your responsibility to make sure your customer receives their order.
So shipping is seen as an “ordinary and necessary” business expense meaning postage, shipping meter subscriptions, and delivery charges are all deductible from your tax bill.
The packing itself, including envelopes, paper, tape, labels, packing materials, and printer ink, is also considered in this deduction.
5. Website fees
It's impossible to run an ecommerce business without an online presence, so for that reason, your domain and web hosting are considered tax-deductible. This also includes features such as stock images or web design templates.
If you use Shopify, then you'll be pleased to hear that their fees also qualify as a business expense, along with any payments to upgrade your store's theme.
In addition to the website itself, the other services you use to run your business may also be tax-deductible, such as the cost of SEO tools or software to schedule social media posts.
Some small businesses may be put off the idea of spending huge amounts of money on marketing, so knowing the cost of advertising is tax-deductible could come as welcome news.
Whether you advertise your business on Instagram or in a local directory, the cost of placing an ad is considered a business expense.
Hiring a designer, copywriter, or any other marketing professional to produce adverts can also be deducted from your tax bill.
The cost of software or apps that help manage email and Facebook campaigns may count towards your tax deductibles too, so it’s another avenue worth exploring.
If you produce free samples to give away that feature your logo, you can claim for the cost of producing and distributing these, too.
Training costs, like qualifications or refresher courses, are also a fee that can be deducted from your tax bill.
So long as the training helps you improve your skills and knowledge to benefit your business, of course.
Although it may extend to cover less specific forms of education such as a photography class to help you take better pictures of the products you sell.
The class could qualify as a tax deduction, providing it is intended to directly improve how you run your business.
You may also be able to claim the cost of any transportation required to get you, or your staff members, to the class as a travel expense.
Make Life Easier
Taking advantage of tax deductions is a great way to free up cash for your business—and knowing which ones you qualify for can also help make filing your tax returns a little less daunting.
Another way to make tax season easier is to switch to a fully automated invoicing solution.
Meet up with Djimi from Sufio
Do you have questions about invoices and taxes for your online store?
Let's have a chat! I'll happily answer your questions, as well as provide you with insight and assistance on getting started with Sufio.Book a free consultation
Sufio is an app that integrates with your Shopify store to allow you to automatically send customers invoices, reminders, or credit notes straight to their email inbox, making it easier to keep an electronic record of transactions.
With all of your invoices in the app, you can export all the necessary documents ahead of time. Filing your taxes has never been easier!