Continuing the guidelines to deal with sales tax compliance for online sellers, this post will go on with other important points to equip you with a better understanding of what to do about it.
Step 5: Apply to legally lengthen your tax deadlines
Please be aware that an extension of time to file your tax return doesn’t grant you an extension of time to pay your tax bills. If you owe taxes, you still suffer from penalties, fees, and interest. For individuals, in order to extend your tax return due date, form 4868 has to be submitted. For business and corporations, file form 7004. Those are e-files that can be sent online to the Internal Revenue Service (IRS) before 15th April for individuals, and 15th March for businesses. If there is any problem with your form, you will receive information from the IRS. Otherwise, your deadlines will be automatically extended.
Step 6: Understand how you can write off your tax liability
While you cannot escape tax season, you can make it less painful by claiming all deductions you are eligible for as an online seller. Here comes the long list of deductible expenses that are applicable to e-commerce businesses.
If you spend the bulk of your time working from home like many other e-commerce entrepreneurs, your home office becomes eligible for the deduction with below 3 criteria:
- It must be solely designated for business activities. That means there is at least one room used only for work, sitting with your laptop in the living room doesn’t count.
- It is the principal place of your business.
- You must spend the majority of your time performing business tasks while in your home office.
You can use the simplified option to claim this deduction, the IRS allows you to deduct $5 per square foot of home used for business (maximum 300 square foot). If you own a larger home office, you might benefit from the regular method, which calculates the deduction by taking the percentage of your home that you use for business divided by the total space of your apartment.
Filing form 8829 is necessary to declare your expenses for business use of your home.
Education and training
Obviously, continued education helps you stay posted in your industry and remain competitive. It is also a great e-commerce tax deduction. Deduct the payments or reimbursements of educational expenses if they are a qualified assistance program.
If you use your phone to contact with customers, doing interviews, calling vendors, or other business purposes, you can deduct the cost for the portion of the bill that’s relevant to your business. Typically, e-commerce business owners deduct 50-70% of their cell phone bill.
Apparently, an online business can’t run without an internet connection, which means your internet bill is also tax-deductible. The deduction for your internet cost is the same as your cell phones. You can write off a portion of this charge based on the percentage of time that you use it to operate your business.
Please be noted that in order to take these deductions, you got to make them legal by proving it on paper, keep the bills to support your claims.
Online service fees
Generally, you can deduct almost all website-related expenses that are direct to your business. They can be domain names, website hosting service cost, professional themes, plug-ins, stock photography, subscriptions to e-commerce website services, etc.
For example, if you are running a store on Shopify and purchase some professional themes to make your online venture more attractive to customers, this expense is totally deductible. And if you actually do, check out these Shopify apps to boost sales significantly.
Everything that you pay to subcontractors such as independent web developers, graphic designers, photographers, content writers, bookkeepers, accounting services, temporary office assistants, legal services, or anyone not on your payroll, is 100% deductible. If you pay a contractor more than $600 for the year, be sure that you file form 1099 for them.
As you send your products to different places, you’ll be likely spending money on shipping cost and packaging materials like boxes, tape, labels, paper, bubble wrap, etc. All those items are entirely tax-deductible.
Transportation and travel
Any vehicle used for business purposes is eligible for deductions. Even it also serves your personal use, you can still deduct a percentage. Mileage should be tracked throughout the year using a journal or a digital tool. Overall, you have 2 options to claim deductions for business mileage: using the standard mileage rate or using actual costs of gas, oil changes and other vehicle-related expenses it took to get there.
Other travel-related deductions include airfare, taxi expense, parking fees, tips, meals and conference tickets.
Office supplies, equipment, and soft-wares
Furniture, computer, printer, camera gear (to shoot your merchandize), postage meter, inventory management software, even paper clips that are used for business purposes are subject to tax deductions. You can choose to either deduct these costs as standard business expenses or depreciate it over the years. If you decide to use depreciation methods, there are also multiple options.
Moreover, you are not required to use one depreciation method for all of your items. Each can have its own method. Does it sound too complicated? Consult with your accountant to find the ways that are most beneficial to you.
Step 7: Work with a tax expert
By meeting a pro, you’ll be able to ask any questions about tax deductions and better strategize how you can prepare for tax season next year. Every little bit will help you lower the amount of tax you have to pay. Make sure you save your tax reports and receipts from previous years, as you may be asked to bring them.
We do hope the 2 parts of this article provide you with a better understanding of sales tax for online businesses. At first, it might sound like a daunting topic, but with our steps, you will surely find it easier to breathe in and make it flow.