No one said taxes are supposed to be easy. Accountants make good money just by understanding the complicated tax system and navigating it for those that don’t. But even with accounting help, it pays (literally) to know a little about your own taxes — in particular which tax deductions and write-offs for ecommerce can save you the most money.
To keep you informed about how to reduce your tax payments, we scoured through the IRS Publication 535, their most recent (2019) document discussing business expenses. We pulled the 15 most relevant write-offs ecommerce companies and online retailers can deduct from their taxes.
1. Home Office
If you work from home, you’re eligible for a variety of home office deductions, including mortgage interest, insurance premiums, utilities, repairs, maintenance, and depreciation. To qualify, your home office must be used exclusively and regularly for your business. If you use your dining room, a desk in your living room, or work from your coffee table, those won’t qualify because they’re also for personal use.
Furniture like desks, chairs, and filing cabinets used specifically for your home office is completely deductible. If you buy computers and computer accessories that are only for your office, they can be deducted as well. Even if they’re sometimes used for personal purposes, you can still write off the percentage that you use them for your business.
There’s a lot of potential write-offs in home offices, so take a look at IRS Publication 587 (2020) for all the ins and outs on business use of homes.
2. Shipping Costs and Packaging Materials
This is a big one for online retailers — you can write off any costs from shipping goods to customers. This includes postage and delivery charges for starters, but also packaging boxes, tape, labels, envelopes, packing materials, and subscriptions for postage meters. This can help you determine whether to offer free returns and free shipping, two features customers adore but cost the seller a chunk of their profits.
3. Advertising & Marketing
Digital advertising — including social media advertising like Facebook Ads and search engine advertising like Google Ads — as well as print advertising are eligible for deductions. You can also deduct subscription fees for associated services, for example, a Hootsuite account. Additionally, you can deduct costs for your email provider and any services that you use to schedule social media advertising posts.
4. Website Expenses
As the primary place of business for many ecommerce brands, your website has a lot of potential write-offs. Domain names, hosting services, and subscription fees to services like Shopify are the big ones, but there are plenty of others.
For example, you can write off paid plug-ins, apps, or paid themes — that includes your WordPress plugins if you use WooCommerce. You can also write off any business software as well — including our own inventory management software Ecomdash.
5. Home Inventory Storage
Many online retailers who work from home use their living space as inventory storage. This, too, can be deducted, according to the IRS, as long as the following criteria are met:
- You sell products at wholesale or retail as your trade or business.
- You keep the inventory or product samples in your home for use in your trade or business.
- Your home is the only fixed location of your trade or business.
- You use the storage space on a regular basis.
- The space you use is a separately identifiable space suitable for storage.
This works great with retail arbitrage product sourcing, which doesn’t usually necessitate a warehouse or storage facility.
6. Financial and Legal Fees
Not just for ecommerce, but all businesses can deduct certain financial and legal fees like accounting and banking. Fees for professional services like a business lawyer, CPA, or bookkeeping service can potentially be deducted. Moreover, you can deduct your interest rates on any business loans or credit cards exclusively for business use, as well as regular bank fees for business accounts.
7. Communication Tools (Phones & Voice over IP)
You can write off a portion of your cell phone charges based on the percentage that you use for business. In the age of online business meetings, you can also write off any Voice over IP (VoIP) service charges, such as Skype credit.
The deduction for your internet costs is similar to your cell phone – you can write off a portion based on how much is used for your online business. This can help you support high-speed internet, essential for any ecommerce professional.
9. Merchant Processing Fees & Credit Card Convenience Fees
Whatever payment methods you use have associated fees, but these too can be deducted. That includes platforms like PayPal, Stripe, or Square, as well as convenience fees from major credit card companies.
10. Office Supplies
Office supplies may seem cheap, but these costs add up over time. Consider things like notebooks, printer paper, ink, file folders, envelopes, and postage. This also extends to smaller items like staplers, markers, pens, and pencils — even business-related books.
11. Photo and Video Equipment
Ecommerce photography can get pretty pricey, but luckily cameras and video equipment for business use count as tax deductions. Don’t limit yourself to just the cameras – any additional equipment like tripods, lenses, lighting, etc. are also deductible.
12. Freelancers and Subcontractor Costs
Everything that you pay to contractors like graphic designers, photographers, web developers, bookkeepers, content writers, and office assistance is entirely deductible. If you pay any contractor at least $600 for the year, be sure to file a 1099 to report their payments.
13. Travel Expenses
If you travel often for business, you may be able to deduct travel expenses like parking fees, transportation charges, cab fare, tips, conference tickets, etc. For car owners, there are even more opportunities for deductions.
If you use your personal car to complete tasks like mail packages, acquire inventory, meet with customers, or conduct other business activities, your vehicle becomes tax-deductible. Likewise, if your car is used exclusively for business needs, you can claim the entire cost of operation.
You have two options for deducting mileage in 2021, as per the IRS. You can either deduct the standard 56¢ per mile, or the “actual cost,” meaning the sum total of expenses like oil changes, emissions tests, and other costly car-related activities.
If you take online courses, attend webinars or in-person classes that relate to your business, you can deduct the enrollment costs. Be aware though, the courses have to be applicable to your business — not necessarily related to your industry or products, but related to your business in general. For example, a course on social media marketing would be considered legitimate for ecommerce business owners.
15. Charitable Donations
Certain charitable donations are tax-deductible, but only if they relate to business. For example, donating $100 to your local church is not deductible, but buying a $100 ad in your church newsletter is. This can come in handy if you need to give away some of your inventory, one of our recommendations for getting rid of dead stock.
Always Check with a Tax Professional
Good accountants pay for themselves — quite literally, considering that their services are write-offs as well. This guide is meant for you to take a more proactive role in your ecommerce taxes and uncovering new areas for saving money, but it can’t replace the work of a knowledgeable accountant. Feel free to bring up any of the above items that you’re curious about in your next meeting.
Editor’s Note: This blog post was originally published February 2017 and was updated in February 2021 to reflect more accurate and relevant information.