Plan now and maximize your eCommerce tax deductions in 2018
Tax time is often stressful and frustrating, especially for US-based eSellers that handle a high volume of revenue and expense transactions. And waiting until the last minute? That only adds to the stress.
While this may be an unusual time to think about your 2018 taxes, it’s also a great opportunity to map out your strategy for maximum tax deductions.
Acquire and use quality accounting software
A simple, but effective accounting software program is the best place to start to track your revenue and expense transactions as an eSeller. Quicken is a popular solution to meet both of these parameters.
Quicken allows you to set up multiple tax deduction categories. You can even add thorough descriptions to maintain control over the type of expenses allocated in each category. In addition, Quicken features a “Deduction Finder” tool that helps you identify missed opportunities for breaks in over 100 categories. This is a great feature for new eSellers or those unfamiliar with the types of business expenses that you can deduct.
Perhaps the greatest features of top software solutions like Quicken, though, are the reporting and transmission features. At any point in time, you can generate reports that break down deductions by category, or in formats that match tax forms. Even better, TurboTax allows you to automatically import your data from Quicken, which saves hours of time in manually inputting all of your expenses.
Create an organized receipt-filing system
A virtual record-keeping system is only half the battle; you also need an electronic or physical system to organize all of your expense receipts. File all physical receipts acquired on cash payment or point-of-sale purchases. For instance, when you go to the store to get supplies or materials to run your business, you need to file the receipt. If you plan to deduct expenses for home office space, you need to file receipts for utility bills that you pay. If these expenses were paid for online, save and print your receipts.
Keep track of your packaging and shipping costs
Packaging and shipping costs are among the most cumbersome to track for eSellers because they constitute the largest volume of activity. Thus, it is imperative that you have a well-structured system to track your expenses in these areas.
When you buy materials for packaging, keep this in your physical file. For shipping costs, you might be able to track those electronically if you use online tools from the postal services or other delivery services to prepare shipping labels. If you make physical trips to the post office, you would file the receipts like you do your packaging ones.
Do you work with a logistics company that helps manage your supplier and dropshipping needs overseas? Keep all receipts in order. Make sure they are provided in English to simplify the process with your tax accountant.
The biggest key to avoiding an overwhelming tax season is to start the year with clear organization. Trying to sort through a pile of hundreds or thousands of receipts within a few weeks of the filing deadline is no fun.
Set up your home office
Home office deductions are among the least utilized by people who run businesses out of their home. Fear of triggering a tax audit is a common reason people do not try to claim home office expenses. Another common problem is that people wait until tax time to think about these deductions, and it is difficult to gather all of the bills and materials you need to accurately file for them.
If you have space in your home that is dedicated to your eSelling operation, do not fear taking advantage of deductions that you can rightfully declare. Ideally, you have a space that is only used for your business that you can easily measure. Home office deductions are based on the percentage of your home that is used for business. It is calculated based on the percentage of use. Thus, if you have a 200 square foot area for eSelling, and your home is 2,000 square feet, your “home office” constitutes 10% of your space.
There are two basic options to declare home office deductions. The simplest approach is to take the IRS-standard $5 per square foot up to a 300-square-foot maximum. If you believe your direct and indirect expenses for property maintenance and utilities are much greater, you can manually enter deductions based on the percentage-of-space rule. Your tax planner, and leading software programs like TurboTax, can guide you through this process.
Other tips for maximizing deductions
In addition to these key planning and organizing strategies to maximize your eSeller tax deductions, the following are some helpful strategies and tips:
Track your travel: It is likely that you make trips to and from stores to purchase equipment, supplies, and materials necessary to run your business. Keep track of your mileage for these business trips as you can likely deduct them as travel expenses.
Marketing counts: Remember that when you pay to promote your business through traditional and digital channels that these are business-related marketing expenses that are likely eligible for tax deductions. In fact, you might consider putting more money into effective promotional strategies given that the costs are somewhat offset by expense deductions. Some digital strategies, such as paid search or social media, are easily tracked through the delivery platform for the year. Traditional marketing strategies may require the filing of invoices or receipts.
Memberships and insurances: A couple other expense categories that are often overlooked as deductions are organizational memberships and insurance costs. Some eSellers pay to participate in support networks or programs that offer resources for people in this line of work. You might also hold some type of small-business insurance to protect your financial risks.
As you can tell, the biggest keys to tax deduction optimization are to plan ahead and get organized. Many eSellers decide that it is too much of a hassle to maintain organized records and they miss out on hundreds or thousands of dollars in breaks. By using an effective software program and keeping physical records, the time investment is well worth the pay off when tax time comes around.