As an online business owner, you have the same tax responsibilities as your bricks-and-mortar counterpart. You can’t avoid tax season, but you can make it somewhat easier for yourself. Every type of business has the right to claim certain tax deductions to reduce their taxable income.
By calculating all your assumptions and keeping tax records and receipts related to those deductions, your company could even reduce its tax burden.
In this guide, we will go through different business expenses and costs that are eligible for deductions. We will also address the question of how do online business tax deductions work.
What Can Small Business Owners Write Off?
Tax deductions, in some cases referred to as ‘write-offs,’ are various expenses that your online business, therefore, your tax liability.
According to the IRS, expenses that are eligible for tax deductions are deemed ‘ordinary and necessary.’ This means that your business can’t function normally without incurring these costs.
While several business expenses aren’t eligible for deductions – such as fines, penalties, legal fees, personal expenses, and many more – particular expenses are tax-deductible. This guide will go through some of the essential business-related expenses that you can deduct from your tax return.
Shipping
This aspect of running an online business applies to e-commerce business owners. All costs incurred during shipping are tax-deductible – postage, delivery costs, and packaging materials (such as boxes, wrapping paper, envelopes, printers, tape, etc.).
Workspace
Here are some key deductions you can take from your office space expenses:
Home Office
Businesses that are operated from home are entitled to some home office deductions. However, the amount of deducted expenses depends on how much your home office space is used for your business. For you to write off your office expenses, your home office must be:
- Exclusively intended for business activities and nothing else
- Your primary place of business means that you aren’t supposed to have an alternative place to conduct business
- Regularly used for doing business
If your space meets all these requirements, you are allowed to deduct $5 per square foot of your home office. This rule applies to an area used to operate businesses that can be up to 300 square feet.
Office Supplies
Your office supplies are tax-deductible as well since you need them to operate your business. Office supplies don’t only include materials such as paper, pens, toner, tape, but equipment as well. Every office needs printers, computers, laptops, phones, and possibly other devices.
Furniture
Apart from the necessary equipment to run your business, an office space generally needs basic furniture – desks, chairs, tables, cabinets, sofas, etc. All of these are 100% deductible from your tax return, but these items must be exclusively used for business. If you use something for both business and personal use, only a percentage of that item is tax-deductible.
Utilities
If you work from home, your household utilities (electricity, water bill, heat, internet, etc.) can be deducted from your tax return. The expenses can vary, depending on how much of your home is used to run your business. For example, if your home office takes up 30% of your home’s square footage, then 30% of your energy usage is tax-deductible.
Banking, Retirement Plans, and Insurance
If your business has a separate business bank account, or if your business is in the process of paying off a loan, the interest you pay can be deducted from your tax returns. This rule can also be applied for credit card and bank account maintenance.
When it comes to retirement plans, you can deduct the cost of the following savings plans: the simplified employee pension, the savings incentive match plan for employees, and the qualified plan.
Business insurance can be tax-deductible if you run an e-commerce business. Moreover, you can qualify for a health insurance deduction if you are self-employed. This type of tax deduction applies to your family members as well.
Professional Services
Hiring professional services is an expense you may be able to deduct on your tax return, too. This can include hiring business lawyers, accountants, bookkeepers, online bookkeeping software, tax preparers, tax advisers, or other professionals who help you with your company’s finances. This rule also applies to legal fees that come with hiring attorneys or legal aid software.
Workers
The cost of hiring workers is tax-deductible, whether we are talking about employees or independent contractors. If you hire an independent contractor who will only work for you temporarily, make sure to obtain a copy of their 1099 forms for the IRS.
When it comes to your employees, you can claim deductions on their benefits and compensations, such as salaries, vacations, sick leaves, maternity leaves, life insurance, education programs, etc.
Marketing
Marketing is a crucial factor of any business, including online companies. Advertising fees, marketing tools, and services can all be deducted from your taxable income. This can include paying for ads, marketing campaigns, email subscriptions, social media, etc.
Website Fees
Owning a website for your online business comes with its own set of costs, which are usually tax-deductible. This can include the cost of your domain name, web hosting, and paying for website building tools such as web design templates, plugins, graphics, stock images, and many more.
Education
It’s possible to include education costs as tax-deductible if they necessarily bring value to your business. Education fees can include online courses, seminars, certifications, classes, webinars, books, and magazines directly tied to your field of business, etc.
Travel
Business travel fees and vehicle costs (such as gas and maintenance) can be tax-deductible as well. This applies to businesses where you are using your vehicle to deliver packages, transport someone, or for any other business-related purpose. As long as your car is exclusively used for business, you can deduct its expenses from your tax returns.
When it comes to business trips or any other work-related travel expenses, you can deduct the payments from your taxable income, so long as the trip is deemed necessary for your business.
FAQs
How Much of My Internet Bill Can I Claim as a Business Expense?
When it comes to your internet bill deductions, it depends on how much your internet usage is for business. If you use a separate internet provider for your business, then it’s 100% tax-deductible. However, if you use one provider for personal and business use, you can only deduct a percentage of the internet bill.
Can You Write Off a Business Website?
Your business website cannot be directly deducted from your tax return. However, different features and services can be tax-deductible, such as web hosting, web design, your domain name, and many more features.
What Can I Write Off as an LLC?
Limited liability companies (LLC) can make deductions from business expenses as well. An LLC's most common claimed deductions are rental fees, charitable giving, tangible property, insurance, meals, entertainment, professional expenses, cost of goods sold, independent contractors, etc.
Can You Write Off Groceries as a Business Expense?
If you work from home, you can’t write off groceries as business expenses. However, if you buy meals for your employees, these types of costs can be tax-deductible.
Can I Deduct My Meals if I Am Self-Employed?
If you are self-employed, you can only deduct business meals from your tax returns. This also includes entertainment for a work-related purpose. In this case, you are allowed to deduct up to 50% of business meals and entertainment.
What Can You Write Off Working From Home?
If you work from home, these are some of the expenses you can deduct from your taxable income: utilities, internet, and phone bills, homeowner’s insurance and association costs, real estate taxes, mortgage insurance and interest, and cleaning expenses.
Will I Get Audited by the IRS if I Take the Home Office Deduction?
Home office deductions from your tax return usually don’t result in audits by the IRS. So long as you’re a qualifying taxpayer, if you are self-employed, and if you meet all the requirements for running your business from home, there’s no need to worry.
Tax-Preparing Software
If doing your taxes is a hassle, or if you’d prefer to leave it to a professional, you can use an accounting platform that will do your taxes for you. One excellent software program for preparing your taxes is Bench.
Bench
Bench is an accounting platform that helps you prepare your taxes, and it offers year-round tax advisory support. This software also collects all the necessary documents for tax season before it files all your taxes for you. Everything gets done on time, which means that you don’t have to worry about tax liabilities. Even your fees for using Bench can be tax-deductible!
Be Prepared for Tax Season
There are many business expenses you can deduct from your tax returns as an online business owner. Knowing what online business tax deductions your business is eligible for is the first step. You also need to keep a detailed and organized system for your receipts and tax records.
Keeping all these factors in mind will get you will ready for tax season.
