eCommerce Tax Deductions: A Complete List For Online Sellers

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June 9, 2023 Business

No matter what kind of business you run, your goal is naturally to increase profitability as much as possible. One tried-and-true method to enhance your profits is minimizing tax burdens, reducing the amount of money that you owe to Uncle Sam. Depending on the nature of your business, there may be any number of deductions you can claim on your tax returns, allowing you to preserve your profit margins as much as possible.

It’s not just the legal structure of your business that makes a difference, but also the arena in which you sell. For example, there are specific tax deductions available for eCommerce brands. Whether you have an LLC in Texas or a Sole Proprietorship in Maine, if you’re selling products online, there are a few tax deductions you should know about.

What are Tax Deductions for Ecommerce Stores?

First things first: When we talk about tax deductions, what specifically are we talking about? Basically, these are monetary incentives that are intended to lower your taxable income. Often, they are related to some of the startup costs associated with launching a new eCommerce venture.

To take full advantage of these tax deductions, we really recommend working with a tax prep specialist who has experience serving eCommerce stores. For now, consider just a few of the most common deductions.

1. Marketing costs

Your eCommerce store won’t succeed without a real investment in marketing. Simply put, you have to expend some time and resources letting people know about the products you sell, drawing leads into your sales funnel.

The costs associated with marketing an eCommerce company can really add up, encompassing everything from professional product photography to digital ad spend to advertising automation software. Thankfully, the costs associated with marketing or advertising your e-commerce business are all tax deductible.

2. Shipping expenses and office supplies

When you sell products online, that obviously means you spend a lot on shipping. As such, you may wonder whether shipping expenses can be tax deductible… and thankfully, the answer is yes!

Be sure you put processes in place to document your company’s spending on postage, envelopes, labels, packaging materials, and related supplies. You can even deduct things like pens, markers, and tape. Really the hardest part is hanging on to all of your receipts and records from these supply purchases. For most online sellers, though, it’s going to be well worth it for the tax deductions.

3. Employee costs

As your eCommerce business grows, you may decide that you need to enlist some employees to help things run smoothly. Anyone who’s ever built a workforce knows that personnel costs can add up fast, but thankfully, they also provide some significant tax deductions. These include deductions for employee salaries as well as benefits. You can even deduct the expenses associated with professional development and training opportunities.

A word of warning, though: Be sure you classify your employees properly. The IRS tends to look unfavorably on businesses that try to minimize taxation by erroneously classifying full-time personnel as 1099 independent contractors.

4. Website

We already noted the importance of investing money into marketing and advertising. The central element of any digital marketing campaign is a website. And for eCommerce merchants, a website is especially vital, serving as an online storefront.

Designing a website that’s aesthetically pleasing, responsive, fast-loading, and easy to navigate usually requires a significant expense. Again, there’s good news: The costs associated with developing and operating an eCommerce website are tax deductible. Keep records of these costs, including domain and hosting costs, SEO expenses, stock images that you purchase, CMS software, and any designer fees you pay.

5. Travel Costs

Generally speaking, eCommerce merchants don’t have to do a lot of travel for work. But if you ever do go to a conference or a trade show, or if you have to travel somewhere to pick up a physical product, know that these costs can be deducted from your taxable income.

You can deduct costs associated with fuel, cab fare, vehicle maintenance, and parking. The trick is, you can only deduct costs for work-related travel, not personal travel. So, when keeping records, make sure you keep these categories separate.

6. Office space

Do you run your eCommerce business from your basement, garage, or kitchen table? If so, you likely qualify for a home office deduction. More specifically, the IRS will let you deduct your home office space assuming it’s the primary place where you do business, and assuming that you use the space chiefly for business purposes.

To get the best deduction on your tax return, keep track of the square footage you use for running your online business. Note that you can usually deduct not just rent but also maintenance fees associated with the workspace. Again, the tricky part is just holding onto receipts and invoices.

7. Utilities

This deduction goes hand-in-hand with the workspace deduction. A number of utilities can be subtracted from your total taxable income, including water and heat, electricity, Internet, and phone.

The challenge here is that you can’t deduct all of your household utility bills; just the portion that corresponds with running your business. For example, if you work from home but are only actively managing your eCommerce store for eight hours a day, then you’ll have to deduct just a fraction of your utility costs. You can talk with your tax prep specialist about running the numbers, or use some of the online tools that the IRS provides.

Making the Most of eCommerce Deductions

The bottom line: Every online seller wants to maximize profits. One of the best ways to do so is by claiming all of the pertinent tax deductions, meaning less money is lost come tax filing season.

As with anything tax-related, you should run any questions by an accountant or tax prep specialist. By doing so, you can ensure that you’re maintaining legal compliance without leaving any money on the table. That’s a major step toward running a more profitable eCommerce store.

About the author:

Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.