Are you an online business owner looking to reduce your taxable income? If you’re operating a small business or work as an online entrepreneur, there may be certain deductions you can qualify for. This can help you save some money come tax time.
As a small business entrepreneur, it can be challenging to track all your expenses (learn about bookkeeping here). If you’re not careful, you could end up paying more than you need in taxes. However, if you know what deductions are available to you and how to maximize them, your tax bill may be much lower. Often called tax write-offs, these deductions can be business-related expenses that can help save you a significant amount at the end of the tax year.
Below, we’ll help you understand tax write-offs and the possible tax deductions that can apply to you. Let’s dig in!
Business Tax Write-Offs: Overview
A business tax write-off (or tax deduction) is an eligible business expense that reduces the amount of income taxes you owe, allowing you to keep more of your earnings. Generally, these are business-related expenses that you can subtract from your yearly taxable income.
For small businesses, the IRS allows you to write off business expenses that are ordinary and necessary to run your business.
- Ordinary expenses are those that are common and accepted in your industry.
- Necessary means that the expenses provide a benefit to your business.
Do bear in mind that these deductions must be related directly to the business itself. You must have incurred the expense during the tax year in question; otherwise, it won’t count toward reducing your taxes on the current year’s return.
Possible Tax Deductions for Online Businesses
For small businesses, the tax deductions you can claim are as vital as the revenue you earn. That said, what expenses can you deduct from your taxes as an online business? As an online business thriving to succeed, it’s paramount to know what kinds of expenditures qualify as tax deductions, so you don’t miss out on any money-saving opportunities. Here’s what you need to know:
Compared to traditional businesses, you don’t need to set up a physical store to operate an online business. However, you have to prepare for some initial costs, including the development of your website and its content or registration with domain registries and web hosts. Depending on the nature of your business, you might also have to subscribe to some services and software, too. Starting your business LLC. All these expenses are considered tax deductions. In addition to your computer and internet fees, you can write these as deductibles in the same category. As per IRS, you can write off up to $5,000 in start-up costs.
When it comes to business advertising, the main cost you can guarantee is a steady stream of potential customers. For instance, if you pay for an email service for marketing, it can be a write-off under “advertising” on Schedule C. Some examples may include Google Adwords fees, facebook ads, and other internet services.
Cost of Goods Sold
If your business is an E-commerce, you probably use a shipping cart service and other merchant fees. These are the amounts you pay to sell your goods. Anything that falls under this category can be written under the “cost of goods sold” in part three of Schedule C. Meanwhile, shipping fees fall under the “postage and delivery” section.
Bookkeeping & Accounting Fees
Any fees you incur to deal with your bookkeeping and accounts can indeed be written off. These costs can be reimbursed, provided you include them on your next return. Pro Tip: these expenses actually help you keep track of all the other ones so they are a great place to start; do proper bookkeeping at the outset.
Home Office Deduction
If you run your business out of your home, you can deduct some of the costs associated with that space by claiming it as a home office deduction. Remember that you can only deduct your home office if you use it exclusively and regularly as your principal place of business.
To qualify, you must use a specific area of your home (such as a spare room) only for your business activities. Everything in the room must only be exclusive to your business. You must also show that you use your home as your principal place of business. Thus, bookkeeping, meetings, and deliveries of supplies must be done here.
In the end, tax write-offs aren’t to be overlooked. There’s great potential for reducing your tax liability, and the faster you start taking advantage of the deductions available, the quicker you can increase your bottom-line profitability.