E-commerce entrepreneurs need to meticulously track every purchase they make in pursuit of business success, since there’s a high probability that the subtleties of your expenditure could be working harder for you than they currently are.
It all comes down to making the most of deductibles when the time to file tax returns arrives, so here’s an overview of how to optimize this process, and what aspects of allowable deductions are often missed out by busy online sellers.
Highlighting Overlooked E-Commerce Deductibles
It’s common for entrepreneurs in the e-commerce space to focus on the gross revenue their ventures generate, while the more nuanced story of deductible expenses remains a footnote. However, it’s often in the small details that the biggest savings can be found, so here are a few examples worth looking out for:
Software
Every retail site worth its salt is built on solid e-commerce software - whether that’s Shopify, WooCommerce, SquareSpace or one of the many other options on the market at the moment. The best solutions come at a price - and this can be claimed against on your tax return because it’s clearly a business expense.
Even things like the plugins, security solutions, and time management tools you pick up can fall under the remit of this, because they’re the building blocks that act as the basis of your nascent e-commerce empire.
Of course if you’re starting a site from scratch and building it in a bespoke way, costs can vary wildly, from around $1,500 to $6,000 or more - it all depends on how large and complex your site is planned to be, and what features you want to include.
Building and expanding a site can also be factored in as a deduction - although obviously to ensure you do everything by the book, it’s best to work with a certified accountant at all points in your journey to entrepreneurial success.
Analytics
The global e-commerce market will generate around $6.3 trillion in sales this year, and every one of these transactions is a valuable data point which needs to be analyzed in order to help online stores improve their performance in the future. This is why there’s a $16 billion market for e-commerce analytics, covering tools intended to dig down into the deluge of info and come back up with insights aplenty in hand.
For entrepreneurs, paying for access to analytics tools like Hotjar, Mixpanel and Glassbox is a good move in order to achieve growth - and in turn, this expense is another deductible to keep track of so you aren’t forking over more cash than you need to when IRS deadlines come knocking.
Marketing
Digital marketing is not throwing capital into the void - and in fact the ROI it generates can be amazing, with even something as simple as search engine optimization repaying itself at a rate of 2,200% by some estimates. Then there’s the importance of elements like social media ads and email campaigns, which are essential growth engines, and also deductible expenses.
Even if you’re a freelancer, you need to account for your deductions and include any marketing expenses as part of this. On top of digital marketing, you can claim for print ads, trade show booths, PR agency services and much more besides.
Shipping
Every parcel sent is a small triumph, and the even better news is that each postage stamp or courier fee is deductible.
So when you’re winning over new customers with swift, consistent shipping, you can also be clawing back some of this expense when tax time rolls around. Given that 70% of consumers crave free shipping, it’s important to balance the expense of supplying this against your available resources to keep your bottom line from bottoming out.
Mastering eCommerce logistics is crucial for optimizing your expenses and ensuring your business runs efficiently. These are just a few of the e-commerce specific deductibles that you need to have your eye on - and of course there are many other costs you can claim against, such as things like building rental, energy bills and more that we’ll touch on momentarily.
Further Leveraging of Business Expenses
Business deductions, when understood and applied with finesse, can paint a healthier financial
picture for your e-commerce operations. Here’s how to leverage common expenses:
Inventory Management
Your stock is both a warehouse full of products and an array of tax-deductible assets. And as with software procured for your e-commerce site, if you’ve splashed out on the latest and greatest inventory management solution to streamline behind-the-scenes operations, don’t forget to claim for this overhead.
Most importantly, this will also make it easier to track every sale you make so that this data is also available to be submitted as part of your returns.
Home Office Setups
For many entrepreneurs, home is where the business thrives - and a portion of your living space could qualify for a home office deduction if you spend some or all of your time overseeing your operations here, rather than in-person at your dedicated business premises. This might be particularly relevant to dropshippers - as this $284 billion market is still growing, and generally involves individuals working entirely remotely.
If you want to take the simplest route here, the IRS stipulates that $5 per square foot of used space may be deducted up to 300 square feet - and that’s certainly a neat sum to slip back into your pocket, and reinvest in your e-commerce site’s growth.
Tech Upgrades
That new laptop or subscription service that powers your business engine also serves as a deductible expense - and it’s basically a way of the government encouraging companies to spend money on growth, rather than holding back.
You can take this ethos and run with it, which may be a necessity rather than a nice-to-have if your online shopping site is growing rapidly and you want to keep up with demand rather than withering under it.
Various pieces of research into the proportion of small businesses that overpay their tax show that this is a rife issue, with some estimates suggesting that as many as 93% of up and coming companies fall into this niche, according to Forbes. That’s really down to the fact that it’s very easy for entrepreneurs to get overwhelmed by the rest of their responsibilities and leave tax to the bottom of the priority pile.
Key Takeaways
The main point that e-commerce entrepreneurs should walk away from this with up their sleeve is that tax deductions are there to be used as a tool to recoup some of the expenses that are inevitable when you’re building a business - so rather than letting this opportunity slip by, grab it with both hands.
Firstly, you need to focus on the specifics of your e-commerce operations - whether that’s the software platforms you use to run your site and glean analytical insights, or the price you pay for shipping and marketing.
Then, turn your attention to the rest of the expenses you are lumbered with as a business - from managing inventory to keeping space aside in your home for professional responsibility-handling.
Do all this, and get an expert accountant on your side to assist you, and you’ll start to look forward to tax season with glee, rather than feeling like it’s a time when money inevitably flows out of your organization.
