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If there’s one thing that Amazon business owners can collectively agree on, it’s that no one likes to file taxes. The good news, though, is that many of the expenses of running a small business can reduce how much you owe. Here’s the shortlist of tax deductions Amazon sellers should look out for.
Disclaimer: This article should not be considered tax advice, legal advice, or a tax opinion, and Intrinsic recommends that all business owners work with a tax advisor when filing taxes.
According to tax law, a deductible business expense must be both ordinary and necessary. What does that mean?
Ordinary business expenses are common ones - that you and other similar companies would incur as an ordinary part of doing business. Basically, this means it’s something that any tax expert would see and accept as reasonable.
Necessary business expenses are ones that are appropriate and help you do business. It doesn’t have to be a need vs. want scenario, though - expenses can be necessary even if your business could run without them.
Because there are so many things that could be tax-deductible for professional sellers on Amazon, hang on to all of the receipts related to your business during the year. Having your receipts available to discuss with your CPA will make sure you can deduct every possible dollar.
Unless this is your first year filing business taxes, you’re aware that the Cost of Goods Sold, or COGS, is something that the IRS allows you to include as a tax deduction. These are the costs that you incur to produce a health or wellness product for your consumer.
You may include things such as:
However, what goes into your COGS depends on your method of accounting, so it’s important to know what your COGS includes. You don’t want to double count expenses - because otherwise, you may find yourself doing some explaining to your CPA, or worse, the IRS.
One cost to keep an eye on is storage. Are you shipping most of your product to Amazon fulfillment centers, or are you storing your Amazon products yourself? Whatever you’re paying to store them is a tax deduction.
If you’re using Fulfillment by Amazon (FBA), you will be paying storage and handling fees for the privilege. These fees not only vary by the size of your products stored, but also by the time of year. The holiday season sees a major increase in the cost of FBA fees, so make sure you plan accordingly - and track all of Amazon’s charges so you can deduct them.
As an Amazon business selling health and wellness products, you have to meet these criteria to write off a part of your home as a business expense:
Depending on how much you store, you could be in for a big deduction. Make sure you keep track of all of your costs, and discuss them with your CPA to make sure you can maximize this big-ticket deduction opportunity.
While we’re on the topic of home storage, it’s worth considering whether your home office also meets the criteria as a tax deduction. Do you meet these requirements?
If so, you could be in luck! Talk to your CPA or a tax advisor about possible tax deductions like mortgage interest, insurance, depreciation, and ongoing home expenses. The use of your home in business can get murky, though, so be sure to review the IRS Publication 587 (2020).
As an Amazon business, you have the option to fulfill orders in Seller Central or let Amazon manage it via Amazon FBA. Either way, the amount you pay to get your product to the consumer who wants it is a cost you can deduct from your taxes.
If you’re using Amazon FBA, you can deduct the fees that Amazon charges for handling your inventory, much like you can deduct the fees they charge for storing it.
But if you’re fulfilling the shipping of Amazon products yourself, or if you sell from your website as well, make sure you keep records of all of your costs. Don’t forget things like:
And it doesn’t end there, because all of materials you need for shipping are potential tax deductions, too.
Boxes, envelopes, tape, and those air-filled plastic bags - these costs can add up for an Amazon business. Keep track of all of these costs, including:
Even if Amazon manages your inventory storage and shipping, you’ll still have some of these expenses to track. If you’re using Amazon FBA exclusively, many of these materials will be deductible as office supplies instead.
Do you have a website? Do you pay for time tracking, CRM, or even for Microsoft Office? These monthly software licenses seem small, but they add up. Don’t miss tax deductions like:
And while you’re tracking down what you’ve paid for software over the year, carve out a category for communications tools. This includes internet access, phone access, web conferencing (like Zoom or Skype), and maybe even your cell phone.
If you don’t have dedicated lines or accounts just for business use, check with your CPA or tax advisor. You want to make sure that you don’t overestimate the deduction you can take for something that does double duty keeping both your business and social life humming.
You can’t overlook marketing, one of the costliest - but most critical - parts of doing business online. Business cards, printing, or sponsoring a banner at your child’s ball field - there are many things can could count as “marketing.” However, the one you’re most likely to think of - and least likely to miss - is advertising.
If you pick one place to spend a little extra money each year, this is the best bet. You can get your business in front of more potential customers - and improve your tax return.
You’re likely already deducting your advertising budget (especially since Amazon PPC can be so expensive) but anyone you pay to help you write ads, design images, or optimize advertising should be tracked as a 1099 contractor. Doing so makes sure you can track, report, and deduct what you paid for expert advice.
Wondering what a 1099 contractor is? If you’ve been doing everything yourself to date, it’s time to start delegating to experts - and reducing your tax burden while you do. But everyone you pay for advice or work should be tracked accurately, including:
You can find expert help such as these as business services, or as contractors. These are different tax situations, and require different documentation.
Many of the services above may run as a business, where you could interact with one of the employees, depending on your need at that moment. In most of these cases, you’ll have access to invoices and a contract to track and record for tax purposes.
Other services may come in the form of a sole proprietor - many web designers and marketing professionals work this way. If this is the case, you need to make sure to collect a 1099 form before you start work, and file it with the IRS appropriately.
Need some ideas on when to outsource, or where your budget would best benefit your health and wellness company? Intrinsic can help - we can talk through your specific Amazon business to help advise where you can augment your own skill set.
Besides the experts in your pocket, there are probably other fees you’re paying in order to do business. This could include:
Whatever other fees or premiums you pay to keep your business running, keep those receipts. They’re likely deductions.
Do you go to Prosper Show every year? Did you join an Amazon Mastermind group that requires a fee? Are you taking online classes to improve your Amazon advertising skills? Great news, any of these would be tax deductible expenses. Any course or program that directly impacts your day-to-day Amazon business operations falls under this category. And keep the travel receipts, because those are tax-deductible, too.
If you prefer to read your way to a better Amazon business, you may be able to deduct the cost of your magazine or digital periodicals. However, these need to be specific to your area of health and wellness - no general business magazines are eligible.
If you do hit the road in the interest of educating yourself, or doing business, you’re likely well aware that most of those expenses are ones you can deduct. However, there are some potential traps.
Unless you have a car exclusively for business use, you need to carefully calculate how much of your vehicle usage was business-related. You can do that by either:
Since this is another area where the IRS can be particular, discuss your particular situation with your CPA.
You may be tempted to pick up the tab while you’re on the road, but be aware: generally, only 50% of these costs are tax deductible. And - they’re another area that the IRS keeps an eye on.
If you’re going to deduct these expenses, be ready to provide solid documentation, including:
Like vehicle use, you should always consult with your tax advisor or CPA if you have questions about these expenses so you can avoid unnecessary scrutiny.
It can be tempting to stretch the letter of the law when it comes to reducing your tax burden. But when it comes to taxes, it’s best not to get creative. Focus on keeping good records and spending your budget on things that will both reduce your taxes and grow your business.
If you need help, the first step is to find a knowledgeable tax advisor or CPA that can become familiar with your Amazon health and wellness business and give you direction on anything that comes your way.
There are other tax deduction opportunities in addition to these, and a CPA can help you uncover every deduction you’re entitled to claim.
Maybe tax deductions are just one of the questions you have about how your business is going to grow and scale in the future. Intrinsic is here to help you take your next step towards growing - and ultimately selling your Amazon business. We are experts in building Amazon health and wellness brands and helping them grow.
If you’re ready to get the details about your brand and it’s value, start by getting a business valuation. We can talk through your specific situation, and guide you transparently about the right next steps for you.
If you’re interested but need more time, schedule a consultation. We can help you navigate the next months - or years - with target milestones in mind. During your free consultation, we’ll discuss your vision and your goals, as well as the concrete steps you can take in the coming months to increase your consumer health brand value.
We’ll also advise you to consult with a tax professional as well as legal advice to discuss all of the topics we’ve covered in this article, as well as your specific and unique situation.
Regardless of your mindset today, it’s always a great choice to think about the future. Get started on your next chapter by connecting with Intrinsic.