Happy New Year and welcome to 2013! After you have taken down the decorations and finished up the left overs, it is time to get back to work on your online business. One topic on the minds of many sellers this time of year is how to improve their business for the coming year, which often includes getting more organized and getting ready for tax time. My colleague Vickie Stewart, creator of the eCommerce book keeping spreadsheet system I use, has prepared the following post to help you get on track for 2013.
Can you believe it’s the end of another year? You may want to be brainstorming how to generate more revenues in the New Year but you should not forget to take advantage of any tax deductions that could save you money.
During the year, if you keep good records, organize your receipts and have a bookkeeping system in place – you can greatly reduce your stress when it comes time to prepare your taxes.
Here are 9 basic year-end tax tips that online sellers may use to reduce taxable income and the taxes you may owe.
1. Stock-up on Office & Shipping Supplies
Catch some year-end sales and stock up on supplies for the home office, shipping supplies like boxes, tape and bubble-wrap and even warehouse supplies such as a new shipping scale. Legitimate office & warehouse expenses can help to reduce your tax bill.
2. Purchase New Office Equipment
Thinking of buying a new camera, tablet or laptop in the New Year? Go ahead and purchase before the end of the year and you may be able to depreciate it over time or consider taking the full deduction to reduce the clutter on your balance sheet & lower any taxes owed.
3. Retirement Account Contributions
Have an IRA or thinking of opening one next year? You have until April 15, 2013 to make contributions to an IRA for the year 2012. The maximum amount that individuals can contribute to a traditional IRA is $5,000 or $6,000 for those who are age 50+.
4. Business Mileage
Did you track the miles driven this year to purchase inventory to sell, buy office supplies, run out to USPS, UPS or Fed-ex? This year the IRS mileage rate is 55.5 cents per mile. That can be a nice deduction! I keep a small notebook in my car, draw columns and write down beginning/ending mileage, the date and where I traveled. Only takes a few seconds. Then I transfer it over to my spreadsheet, which keeps a running total for the year and keeps it together with all of my other business-related material.
If you have any damaged inventory, you may want to write-off and discard it. Maybe you have some slow-movers and just want them out of inventory. You could donate these to your favorite thrift store and possibly take a charitable donation deduction. Both of these strategies will decrease your inventory year-end valuation and increase your cost of goods sold which could equal more tax-savings.
6. Home Office Deduction
If you work out of your home, you may want to consider a home office deduction. You would want to add this to your discussion list for your accounting professional. I have a dedicated room that is my office and I use 75% of my garage as warehouse space. I had kept the builders spec sheet when I bought my home so I had a sketch of the lay-out & dimensions which made it easy to determine square footage etc. With my CPA’s help, I created a template to use each year for this deduction with all the info needed. In addition, my CPA recommended for my situation, to “invoice” my business, using the same percentage, for the mortgage, electricity, phone, internet, insurance, etc. I just made an excel workbook with a billing invoice on 12 tabs (Jan-Dec) for my records and a totals sheet. Again, talk with your accounting professional.
7. Contract Labor
Did you pay someone to help you in your business? You may be able to deduct those monies paid as contract labor. I have a teenager in the neighborhood that helps me with various projects as a contract laborer and we keep it under the $600 mark to avoid the 1099.
8. Membership Fees
Do you pay fees to join groups such as Online SellingCoach, My Silent Team, and others? Those membership fees could be deductions if they relate to your business.
9. Legal & Professional Fees
Don’t overlook fees you pay to an attorney for legal advice on how to structure your business and other business related reasons. In addition, fees you pay to an accounting professional to assist you with set-up of your bookkeeping and what records to keep, etc could be deductible. Accounting software and tax preparations fees could be deductible, as well.
The most important thing to remember is to keep good records. For example, if the IRS audits you and you cannot provide documents showing how much you paid for an inventory item, they may claim that your cost basis is $0, which means you could pay tax on 100% of the sale price of an item instead of just paying tax on the profit.
Take advantage of all deductions that you can legitimately claim to reduce your tax bill. Consult your tax and/or accounting professional for advice.
(If you have not yet checked out Vickie's spreadsheet, developed specifically for online sellers, find more info here. Vickie has offered a 20% discount on this fantastic tool to members of my Facebook group to ring in 2013. Just visit my group here and look for the pinned post at the top about book keeping.)
Disclaimer: I am not an accountant nor CPA and information within this article is not intended as professional advice. Please consult a professional if you need advice related to accounting, bookkeeping, taxes, etc.