Small business taxes are like vampires… and no, not one of those cute vampires you see on TV. Unfortunately, you can’t just wave some garlic around and make them go away.
Start running payroll and benefits with Gusto
BUT you can reduce your tax liability by maximizing the amount of tax deductions you take.
Tax deductions directly impact how much money you owe in taxes each year. The more you understand them, the more you can write off—and the less you’ll have to pay.
If you’re an online seller, or in other words, a business that makes money by selling products or services on the internet, tax deductions can be confusing. Many online sellers miss valuable write-offs because they don’t know how to translate the traditional deductions to an online model.
While it may seem like your deductions are limited to software, shipping, and inventory, there’s so much more that you could be writing off. Slay your taxes with this super-long list of tax deductions for online sellers.
Deep breath. Here we go.
1. Advertising and promotion
Everything you spend on promoting your online business is deductible, such as:
- Marketing: Facebook Ads, Google Adwords, ad placements in digital and print publications, ad placements on websites, sponsored ad placements on seller platforms (like Etsy, Amazon, eBay), email marketing software, fees for sponsored content by influencers, and more.
- Website stuff: Domain names, hosting, subscription website services (Wix, Squarespace) themes, plugins, stock photos, and other things you buy for your website.
2. Auto expenses
Think you don’t drive as an online business owner? Think again. While you may not commute to clients and job sites, you’re probably driving to the post office, office supply store, business meetings, and networking events. Am I right?
There are two ways to write off your auto expenses:
The easiest way to write off your auto expenses is by tracking your business mileage and taking the mileage deduction at tax time. Every year the IRS sets a standard mileage rate. At the end of the year, you just multiply your annual business mileage by the rate, you’ve got your mileage deduction.
Here’s an example: You drive 1,000 miles to take care of business errands. The IRS mileage rate for 2020 is 57.5 cents per mile. The formula is: 1,000 x 57.5 cents = $575. Your deduction is $575!
The second way to write off your car is by writing off a percentage of your total vehicle expenses. Vehicle expenses include insurance, gas, repairs, oil changes, and car washes. The percentage you write off depends on how much you use your car for business travel vs. personal travel.
- Here’s an example: You drive a total of 10,000 miles and 3,000 miles are for business. You can deduct 30% of your expenses. Let’s say you spend $6,000 on your car. The formula is: $6,000 x 0.30 = $1,800. So your deduction is $1,800!
Regardless of which method you choose for calculating your auto deduction, parking and tolls for business travel are 100% deductible. So keep feeding that hungry meter.
3. Bank fees
Fees associated with your business bank and credit card accounts are deductible.
- Bank fees: You can deduct monthly service fees, ATM fees, overdraft fees, deposit fees, and wire transfer fees.
- Credit card fees: This includes annual fees and late payment fees.
4. Business insurance
Did you know that your liability and professional insurance are deductible? So protect yo’self and then claim that deduction.
5. Business licenses and permits.
Any fees or costs associated with a license, permit, or certification that you need to run your business are deductible.
6. Charitable contributions
This means cash and in-kind donations you made to charity. But take note, you can’t write off the value of the time that you donate to charity. Also, for a donation to be tax deductible, the organization must be categorized as a 501(c)(3) non-profit. Remember, always request a donation receipt for your taxes, since you’ll have to include that when you claim the deduction.
Commissions are what you pay to affiliates and partners to promote your products or services. This chunk of change is entirely deductible.
8. Cost of goods sold
Cost of Goods Sold (COGS) is a special type of expense that pertains to the cost you, the seller, absorbs to manufacture or sell an item. This is anything directly or indirectly related to the cost of creating your product.
These are the raw materials needed to manufacture and sell your product.
- Example: You sell hand-embroidered t-shirts on Etsy. The t-shirts, threads, and branded labels are part of your COGS.
Direct labor related to manufacturing a product means the people directly involved in producing the product, not the people you hire to help you sell a product.
- Example: You sell hand embroidered t-shirts on Etsy and hire someone to sew your labels onto the shirts. What you pay this person for the sewing is part of your COGS.
This is defined as merchandise you purchase to resell. You can only write off the cost of inventory that is sold. If you have unsold inventory that is considered an asset.
- Example: If you sell five cases of hand-poured candles, you could write that cost off. But if you have 10 cases gathering dust in your warehouse, you can’t.
Nobody knows everything about running a business right away and, on the tax side, the advantage is that you can write off the cost of learning new things. However, this educational stuff must connect to your business or the art of running a business. For example, if you sell bike locks online you can’t take a scrapbooking course and write it off since it has nothing to do with your business.
Here are the things you can write off:
- Books and reference materials: Printed books, ebooks, magazine subscriptions, newspaper subscriptions, audio books.
- Workshops and trainings: Online courses, online summits, mastermind groups, membership site subscriptions, in-person workshops, conferences, lecture series.
Gifts to clients or business associates can be deducted, but only up to $25 per recipient per year. Yes, that means if you buy your client a $60 Furby, you can only deduct $25. Sorry.
- Note: As a business, you can reimburse owners for things like home internet and home office expenses, which we’ll get into below. Those reimbursements are tax deductible. However, keep in mind that these are deductions for business owners—not for the business itself.
11. Home internet
If you run your online business from home, you likely use A LOT of internet. The cool part is that you can write off a portion of your home internet bill. The percentage is based on how much of your home internet is for personal vs. business use.
- Example: You use 60% of your home internet for work. Your monthly internet bill is $100/month. The formula is: $100 x 0.60 = $60. Over one year, your deduction is twelve times the business portion of your monthly bill, or $720.
12. Home office expenses
Ah, the magical home office deduction. If you have an online business you’ve probably heard that it can greatly reduce your tax liability. But first, what is a home office?
Per the IRS, a home office must meet two requirements. First, it must be a space in your home used exclusively for business purposes. That means no, your kid’s playroom cannot double as a home office space.
Second, it must be used regularly for business purposes. You can’t take a call once in your garage and call it a home office.
Have a space that meets both of these requirements? Then let’s calculate your deduction. You need to figure out both the total square footage of your home and the square footage of your exclusive home office space. Then, divide your home office square footage by your home square footage. This is the deductible percentage of your home expenses.
- Example: Your home is 1,000 square feet (don’t laugh- I live in the Bay Area!). Your home office is 250 square feet. The formula is: 250 sq ft/ 1000 sq ft = 0.25 = 25%
Okay…I know this is a lot of work, but stay with me. NOW you can deduct a percentage of your home expenses for business use.
- Example: Your rent is $3,000 a month (Bay Area!!!!). Your home office is 25% of your home. The formula is: $3,000 / 0.25 = $750. Over one year, 12 x $750 adds up to $9,000!
You can write off a percentage of the following expenses:
- Rent or mortgage.
- Renters or homeowners insurance.
- Utilities (like gas, electric, water).
- Repairs to your home office space. In fact, any repair made directly to your home office is 100% deductible.
It’s important to keep a record all of your home office expenses in case you’re ever audited by the IRS.
13. Interest expenses
This includes credit card interest, finance charges, and loan interest for any business liabilities. Nobody likes to pay interest…but at least you can write it off.
14. Meals—but not entertainment
Oh geez…meals and entertainment. Since the new 2018 tax law, the meal write-off has been hotly debated among tax professionals. The new tax law has some grey areas when it comes to writing off the cost of food, but here’s what we know:
- Meals while traveling (as an owner or for an employee): 50% deductible
- Meals with employees for meetings: 50% deductible
- Meals for employees during work shifts for the convenience of the employer: 50% deductible
- Meals with business clients and associates: Perhaps 50% deductible. The new tax law is unclear about the deductibility of these meals. Always check with your tax preparer to get their take before claiming a deduction.
Wait! Where’s client entertainment? Gone. As of 2018, you can no longer write off any part of the cost of entertaining clients.
15. Merchant processing fees
If you run an online business, you likely accept credit cards. Many fees associated with processing credit cards are deductible, including fees from:
- Stripe, PayPal, Authorize.net, Square, Braintree, Intuit payment processor, and many other payment gateways and processors.
16. Payroll expenses
These are expenses related to running payroll for your employees.
17. Photography and videography equipment
You already know that captivating photos increase sales. Luckily, photography and videography equipment for your business is deductible. Anything under $2,500 is an expense, and therefore can be deducted, while anything purchased for over $2,500 may be considered a non-deductible capital expenditure as well as an asset that depreciates over time.
Expenses that you can typically deduct if they’re under $2,500 includes:
- Equipment like a camera, video camera, lens, and flash.
- Supplementary equipment like lighting, tripods, filters, camera bags, backdrop stand, and paper.
- Repairs and maintenance for your equipment.
18. Professional fees
Legal and professional consultations for your business are deductible, including:
- Legal fees for an attorney or online legal service.
- The cost of purchasing templates for contracts, terms and conditions, and privacy policies.
- Accountants and bookkeepers.
19. Office expenses
Just because you’re online doesn’t mean you don’t have to buy office supplies. From software to file folders, office expenses are defined as the day-to-day costs that keep your business operational.
Large equipment purchased for office use such as computer, tablets, printers, and copiers. (Keep in mind that equipment over $2,500 in value may be considered an asset and depreciated over time rather than deductible at the time of purchase.)
Depreci-what?! Depreciation is a method of allocating the cost of an asset over the lifespan of the asset. For example, if you purchase a $5,000 computer and plan to use it for five years, each year, the computer would depreciate $1,000. While you couldn’t deduct the initial $5,000 purchase, you can claim that $1,000 annual depreciation expense on your taxes.
Software and online services
These are one-time and ongoing software subscriptions for accounting software, scheduling software, task management software, cloud storage, social media schedulers, cart software, apps, and other tools you use to run your business.
Consumable goods, or products that get used up, like office supplies fall into this one. Specifically, this can include paper, pens, ink, and file folders.
Even if your business is online, you may still have non-office rental expenses such as:
- Co-working space fees (one-time or recurring).
21. Salaries and benefits
Wages and benefits that you provide to your employees are deductible, including:
- Wages, salaries, and employee commissions.
- Employee benefits like health insurance, 401(k) matches, HSA and flexible spending accounts, life and disability insurance.
22. Seller fees
You can deduct the fees you pay to sell your items on popular ecommerce platforms or to host an online storefront. These are not fees to process credit cards but rather fees to use the platform to sell your products.
Seller fees from Amazon, eBay, Etsy, and Shopify are all valid examples.
23. Shipping and packaging
You gotta get your products to your customers somehow. And that’s where shipping and packaging expenses come in.
You can deduct things like:
- Postage and subscription postage services.
- Delivery charges.
- Dropshipping fees.
- Packaging materials like boxes, envelopes, packing peanuts, bubble wrap, packing tape, and labels.
A subcontractor is anyone you hire to perform a service for your business that is not an employee. If you pay this person more than $600 in a tax year you will need to file a 1099 return.
You may hire a contractor that works as a:
- Virtual assistant.
- Graphic or web designer.
- Software developer.
25. Telephone and communications
Like the home internet deduction, you can also write off a percentage of your personal cell phone bill. That percentage is based on how much you use your phone for business vs. personal use.
- Here’s an example: Let’s say you use your cell phone 50% for business. Your monthly bill is $80/month. The formula is: $80 x 0.50 = $40. Over one year, your deduction is $480!
If you have a cell phone exclusively for business use, you can write off the entire bill.
Skype and VoIP fees
If you use an internet phone service or spring for a 1-800 number for your business, you can deduct the entire cost of those fees.
It’s a smart move to document how you calculate this deduction. That way, in the unlikely event you get audited, you’ll have evidence for how you determined your percentage and that it’s been applied consistently year to year.
Need to travel for a conference or trade show? Or to meet a potential distributor? You can write off the costs as long as your trip has a business purpose and you are away from the area where you typically work overnight.
You can write off:
- Airfare: The cost of your plane ride.
- Ground transportation: Like Lyft, Uber, taxis, public transportation, and rental cars.
- Lodging: This is the cost of a hotel, Airbnb, VRBO, or other short-term rental.
- Local transportation: Not leaving town? You can still write off the cost of traveling within your local area for business purposes. Just like ground transportation, you can write off taxis, public transportation, Lyfts, and Ubers.
Shocked by how many deductions you have as an online seller? Think of these write-offs as your wooden stakes… the more you use them in your business and tax strategy, the less draining your taxes will become.
Plus, you’ll feel like a total badass knowing that you single-handedly slayed your taxes.