Before I get started let me point out that I am NOT a tax professional, or licensed to give tax advice. I am, however, an experienced business person, who has dealt with tax issues for over 20 years. Nevertheless, before taking any of my advice, you should consult a tax professional.
It doesn’t matter whether you sell on eBay, Amazon, Shopify, your own website –or all of them. If you sell online, then you are a business –and that means you owe Federal Income Taxes on your profits. I put that in boldface because many new sellers think you owe taxes on your sales, or on the amount of the 1099 forms you get from Amazon or PayPal. That is NOT the case –you only owe federal income tax on your profits, after you deduct the cost of goods sold and ALL your business related expenses.
There is an old saying among tax professionals – Taxes delayed are taxes saved. That is especially true for this year. With the election of Donald Trump, he has promised steep tax cuts starting in 2017. (Of course, he has to get those through Congress, which is not a sure thing).
Since tax rates may be lower in 2017 –any expenses you can prepay in 2016, will reduce your taxable income in 2016 –and increase it in 2017 –but hopefully the tax rates will be lower in 2017, so if that happens, you will save substantial amount taxes in both 2016 and 2017 taxable years.
(Note – This post is only about income taxes –not state sales taxes. That is a completely different subject).
Here is how you calculate your annual profits:
(Please Note – This is a simplified method to help you understand the concepts. The actual methods are slightly more complicated, which is why you want some professional help with your taxes)
- Calculate your total sales for the year
– subtract any returns you get.
– Add in what you charged buyers for shipping.
This will give you your Gross sales
- – Add up your shipping costs (both to customers and Amazon, if you use FBA)
– Add up the wholesale cost for everything you sold
– Subtract both of these numbers from your gross sales
This will give you your net sales
3. Now add up your business expenses. These include things like
- office in the home expense
- If you plan to purchase a computer, printer or Fax machine – do it now.
- legal, accounting or tax help
- car expense (If you are using your personal car for business, then you have to keep a log of business miles driven)
- labor or any independent contractors you hired during the year
- Educational expenses including any courses you bought (Such as my course The Complete Amazon Marketing System)
Note – these do not have to be courses you attend – self study books, DVDs etc. are allowed as long as they relate to your business.
- Any subscriptions or dues related to your business (This includes any business magazines [online or hard copy] you subscribe to such as Fortune, Forbes, Business Week, Wall Street Journal, etc.
- Any third party services you subscribe to such as Inventory Lab, TaxJar, Sellers Toolbox, Merchantwords, Refunds Manager and so on
- Monthly ISP and email fees
- Telephone service (including cell phone if you use it for business)
- Advertising (for example money spent on Amazon, Facebook or Google PPC ads)
- Office supplies, labels, shipping supplies and tools (tape guns, label printers, etc.) and any printing you do. Note – one of these items is shipping supplies. All the major carriers have announced that shipping rates will go up in January or February 2017, which will make your shipping supplies even more expensive –so it’s best to buy now.
- Bank fees or service charges
- Interest expense on any money borrowed for your business (including any credit cards used for business)
- Fees for licenses or permits
- Professional fees (webmaster, etc.)
- Any State or local business taxes
Once you add up all these fees – subtract them from your net sales, and you will have your profit before taxes. (This is the amount you will owe taxes on –not the amount listed on your 1099.
Now that you understand how profit is calculated –lets look at some end of year tax planning.
Basically anything on the expense list that you can prepay in advance (By Jan 31st) is a good idea to do.
This would include, purchasing the yearly (instead of monthly), subscriptions to business magazines, third party services and pre-purchasing several months of office and/or shipping supplies. Also, see if you can prepay any website hosting fees (Many hosting companies offer 3-year deals that come at a good discount), ISP or domain fees.
If you plan to buy any training courses – buy them now before the end of the year.
If you haven’t incorporated (or set up an LLC), then late December is a great time to do it. This way you can start running all the business through your corporation from January 1st. And, if you incorporate in the last few days of 2016, your tax expert (I recommend a CPA), can show you how to take some other deductions retroactively. Also, all the fees to incorporate can be taken off your 2016 income –even if you don’t start running business through the corporation until 2017. [If you incorporate, and plan to buy a new vehicle soon, then wait until January 2017 to that. [I don’t have tine or space here to explain, but your tax professional can show you why].
If you owe money for tax prep, or legal and/or accounting fees incurred in 2016 – pay them now.
You may think you only want to do these things if you made a hefty profit in 2016, but you should also do this if you had a loss. Why? Remember – any business losses you have can offset any other income you had in 2016, including W2 income from a job.
One thing you need to be careful of, is the IRS rule, that you must make a taxable profit in at least 2 years out of 5, or the IRS will define your business as a “Hobby Business.” If that happens, the IRS will not allow you to carry losses over to your other income for any of the 5 years –but, you will still owe taxes for any year you made a profit.
So there you have it – my tips to reduce your federal income taxes in 2016. Please remember what I said about this being a simplified explanation and about consulting a tax professional.
This will be my last post for the year, so From my family to yours, for this holiday season,we wish you every blessing that the Lord can bestow on you.
May your health and your family’s health continue in strength and endurance.
And may the love that binds families together continue to grow and strengthen in your family.
Merry Christmas, Happy Hanukkah and a very Happy and Prosperous New Year to all of you.