Tax Benefits For E-commerce Business
Regardless of the type of e-commerce business operated, we have proven that there is a myriad of benefits to enjoy. Nevertheless, this article focuses on the tax benefits of running an e-commerce business. There are plenty of them. Thus, I understand the importance of this article. And, I aim to help you not pay all your money to taxes because you did not know how to protect it. So, take this as a beginner’s guide for e-commerce taxes.
Why is it important? Well, when you start building your business, all you want is to make money. And, in e-commerce, there is money to be made, guaranteed. For example, in 2020 alone, an average seller on Amazon Marketplace, like you and me, made average sales of $160,000. With lean operating expenses in e-commerce, profit from this can easily surpass $100,000. Supposed it does, how will you feel about paying more than $50,000 of your profits towards income tax? I am sure that would infuriate you. It is the reason why many small businesses try to avoid paying taxes. But that is not the solution. It’s committing a crime that can get you heavily penalized or jailed.
But, the best you can do to lower the amount of taxes you pay is to learn about tax benefits. Understand the deductions and tax credits you can claim from your e-commerce business. As soon as you know about these, start the implementation journey. However, as we prepare to dive deep into tax benefits of an e-commerce business, hiring a tax professional to help you plan and prepare taxes is actually the best thing to do. Successful e-commerce businesses have a successful tax plan. This plan is designed with the help of a tax professional like myself. It leads to more financial benefits than when doing it by yourself.
So, what are the tax benefits of running an e-commerce business?
There are some expenses that you can write-off. These are plenty, but you just need to identify them and spend some of your profit on them. These expenses include marketing costs, shipping, workspace if it is a home office, banking costs, retirement plans, and insurance. You can also write-off expenses such as hiring professional services, employees, website fees, education, and travel.
Looking at the above expenses, some of them will actually bring more business towards you. For example, increasing a marketing budget does not only result in reducing your tax bill. But it also helps you draw many eyes to your products, which could lead to more sales. As such, this calls for a strategic review of your e-commerce business expenses. Do it so that you strategically spend on where you can kill two birds with one stone, like what marketing costs do.
Please note that you do not have packaging and delivery expenses if you are running a dropshipping business. These are all handled by the manufacturer. Dropshipping is when you run an e-commerce business that sells products produced and shipped by other suppliers. Your job will only be to market and connect the buyer and the seller. The profit you make is the margin between your selling price and the manufacturer’s selling price. For example, if someone sells sneakers for $80 and allows drop shippers to market their products, you can list their sneakers on your website and sell for $100. When a buyer buys from your site, you pocket the difference between $100 and $80.
Nevertheless, let’s have a look at some of the deductible expenses that I listed above.
Hiring professional service providers
I decided to start with this one because that is where I fit in as a practicing IRS Enrolled Agent. Suppose you call me for a meeting, and we actually meet. If I charge you the consultation fee, you can deduct it under the professional services deduction. The same applies to bookkeeping and accounting services. By the way, we all provide these services, including professional tax services; if you ever need them for your business, kindly call our office. Other professional services costs you can deduct are the fees you pay to your legal consultant or lawyer, virtual assistance, and so forth.
Insurance and retirement plans
Many of us think that we contribute to retirement plans for future use. But I have good news. You can actually use your retirement plans and insurance contributions to reduce your e-commerce business tax bill. This is a blessing to all self-employed individuals because you can deduct contributions to your retirement plans as an adjustment to taxable income. And, you may be eligible for a health insurance premium deduction. For self-employed individuals, health insurance costs can be deducted up to 100%, thanks to the 2010 Small Business Jobs Act. And this is not only for your plans, but also for your family. It includes your spouse, dependents, and your children under the age of 27 at the end of the tax year.
Also, you can deduct business insurance. Suppose you are running an e-commerce business. If it is either an S-Corp, self-employment or an LLC, business insurance is tax deductible.
As for retirement plans, all these plans are included; the Simplified Employee Pension (SEP) IRA, Savings Incentive Match Plan for Employees (SIMPLE.), and the Qualified plan. You can deduct contributions to any of these as an adjustment to taxable income.
Business banking costs
I understand that our businesses have business bank accounts. Those accounts, including business credit cards we may have, do accrue banking costs and interests. Well, the good news about this is that the banking fees charged by your bank and any interest you pay for your credit card during the financial year is tax deductible.
People have also asked the following
1. How do I build an e-commerce business?
To build an e-commerce business, you need a product to sell, a name, and a platform to do so. These are some of the popular e-commerce platforms you can use; Wix e-commerce, Shopify, Weebly, 3dcart, Esty, eBay, and Amazon.
2. What Are the Basic E-commerce Metrics I Need to Focus on First?
The best metric to focus on is traffic volumes to your site. The more people see your products, the more you are likely to make more sales.
3. What are the different types of e-commerce?
These are the main types of e-commerce; Business-to-Consumer (B2C), Business-to-Business (B2B), Consumer-to-Business (C2B), and Consumer-to-Consumer (C2C).
4. Is e-commerce profitable?
E-commerce is very profitable. Besides the money you make while selling products, you can also save more money through tax strategies – more than traditional brick-and-mortar stores. More so, the costs of running an e-commerce business are very low, increasing chances of profitability.
5. What is the best e-commerce platform for a small business?
If you search online, they will tell you their own best platforms, perhaps because they are being paid for bringing new sellers on. But the best e-commerce platform is the one that serves your interest best. If you are selling handmade or vintage items and craft supplies, Esty will be your best place to go. And, if you are collecting and selling books, you may probably choose to start your own e-commerce website from scratch. Therefore, before you decide on your platform, ask yourself what kind of a product you intend to sell.