Filing taxes isn’t anyone’s favorite task. It’s stressful and time-consuming, especially for Amazon FBA sellers juggling their daily business operations. However, amidst the hassle, there are some perks to tax season, particularly in the form of tax deductions tailored for Amazon FBA sellers.
Tax deductions can help reduce how much you owe in taxes, ensuring that your business maintains the best profit margins possible. In this blog, we’ll review what expenses qualify as tax deductions for Amazon FBA sellers this tax season and provide a list of the most important expenses to keep an eye on throughout the year as they can eventually become potential tax deductions.
What is a tax deductible?
A tax deductible is a legitimate business expense that reduces your taxable income. By subtracting these expenses from your adjusted gross income, you ultimately pay taxes only on your profits, thereby decreasing your tax liability and saving money for your Amazon FBA business. In some cases, tab deductions can even turn your tax payments into refunds, providing additional funds to reinvest in your business.
In order for an expense to qualify as a tax deductible, according to law, the expense must be both ordinary and necessary. What does this mean for Amazon FBA business expenses?
Ordinary Business Expenses
Ordinary business expenses are common purchases or transactions that similar businesses would incur as an ordinary and regular part of operating an Amazon FBA business. Basically, any tax expert or accountant would see this as a reasonable expense and a typical deduction.
Necessary Business Expenses
Necessary business expenses include those that are appropriate and help you do business. This does not mean that the expense has to be a critical need–plenty of expenses can be necessary even if your business could run without them.
Tracking and Managing Expenses
Since there are so many business expenses that could potentially qualify as tax deductions for Amazon FBA sellers, it’s crucial that you track your expenses throughout the year. By hanging on to all of the receipts related to your Amazon FBA business during the year, you’ll make tax season less stressful for you and your accountant. You’ll also guarantee that your tax return is fully optimized and saves your business as much as possible.
1. Cost of Goods
While it may seem obvious, it’s important to remember that the cost of goods sold (COGS) is an expense that the IRS allows you to include among your tax deductions. This means that not only is the price of inventory included in tax deductions for your Amazon FBA business, but also any production costs, labor, packaging, and more.
What goes into your COGS depends largely on your method of accounting, so it’s important to understand the specifics for your business. You don’t want to accidentally count an expense twice as you might find yourself in trouble with your CPA, or worse, the IRS.
2. Storage
Storage costs are also a critical tax deduction for Amazon FBA sellers, with the potential to save you lots of money. Amazon fulfillment centers are expensive and come with a range of fees that become steeper than expected quickly. And, even if you’re not using Amazon FBA Storage, you can still write off warehouse or storage facilities costs as a tax deduction.
Amazon FBA Storage
In order to utilize the privileges that come with Fulfillment by Amazon (FBA), you’ll need to pay storage and handling fees. These fees vary by the size and weight of your products, time of year, and more. During the holidays there is often a major increase in the cost of FBA fees, so plan accordingly. Make sure that you track all of Amazon’s charges as they can be one of the biggest tax deductions for Amazon FBA sellers.
3. Shipping & Packaging
Depending on how many individual orders you’re asking Amazon to fulfill on behalf of your business, the cost of getting your products from storage to customer can wrack up quickly. When you’re using Amazon FBA you can deduct the fees that Amazon charges for handling inventory, along with storage fees. However, be careful not to deduct these fees twice as you can inadvertently end up creating problems with your taxes.
While Amazon handles packaging for Amazon FBA orders, if you choose to fulfill any amount of orders at home or through a third-party logistics company, you should keep records of all your costs. Potential tax deductions include things like labels and envelopes, printing costs, boxes and tape, inserts, and anything else you use during the shipping process.
4. Software and Technology
Do you pay for technology to support your business outside of Amazon’s Seller Central? This can include time tracking, CRM, Microsoft Office, or a Google Suite subscription. Monthly software licenses seem small, but can add up to huge tax deductions for Amazon FBA sellers who use a wide variety of tools to keep their business running.
Don’t forget potential tax deductions including:
- Website software licenses, including domain costs
- Website hosting fees
- Plugins, themes, and add-ons
- Email services
- Office software like spreadsheets and word processing
- Amazon software for advertising, reporting, or automating
- Business and accounting software, including payroll
5. Communications
It takes a lot of small interactions to make any business run, and Amazon FBA businesses are no different. That’s why you can subtract things like your internet and phone access, web conferencing software (like Zoom and Skype), and more as tax deductions. Just be aware that if you use devices like your cellphone for personal and business use, there may be rules regarding deductions.
This type of tax deduction also includes marketing and advertising expenses for your business.
Marketing
For many Amazon FBA businesses marketing is one of the expensive parts of eCommerce. Marketing expenses that can be considered tax deductions for Amazon FBA sellers include business cards, printing, and sponsoring, on top of advertising and PPC campaigns online. Make sure that you keep track of exactly how much you spend boosting your product listings so that every transaction can be deducted.
6. Amazon Fees
Outside of your Amazon FBA storage and handling fees, there are still a wide variety of fees that Amazon sellers are expected to pay. These fees can be included in your tax deductions, ensuring that you get something out of all those costs.
Referral Fees
All Amazon sellers are required to pay a “commission” to Amazon for every item sold on their platform. The referral fee is normally a flat percentage around 15% or less.
Individual Item or Subscription Fees
Depending on if you have an individual or professional Amazon seller account you will either pay an individual per-item fee each time you make a sale or a monthly subscription fee, respectively.
Refund Administration Fees
If a customer requests a refund on a product that you’ve already been paid for and Amazon issues the refund, Amazon charges the seller a fee to process it. The fee is either $5.00 or 20% of the refunded charge, whichever is smaller.
Low Inventory Fees for FBA
For Amazon FBA sellers only, as of April 1, 2024 Amazon will introduce a new low-level inventory fee that applies to most standard-sized products that demonstrate consistently low inventory.
7. Bank Fees
Although banking fees should be a thing of the past, especially for eCommerce businesses, many still require maintenance and process fees. Make sure that you include all account maintenance, processing, international transfer, and credit card fees of your tax deductions to fully maximize your savings. While they may seem like small, forgettable expenses they add up quickly and can help secure that tax refund for your Amazon FBA business.
8. Employee Salaries
Even if you’re embracing Amazon FBA to manage operations and logistics, there are still plenty of moving parts that you need to consider when running your business. If you’ve hired anyone to help with your daily operations, or even just to delegate tasks to an in-house expert, you can reduce your tax burden by writing off their salaries.
9. Contractors & External Services (Including an Accountant)
It’s not just the salaries of in-house employees that can serve as tax deductions for Amazon FBA sellers. If you’re hiring an agency, contractor, or temporary employee to help provide work or advice their payment can also be deducted, including: accountants or tax advisors, business lawyers, consultants, photographers or videographers, virtual assistants, and repair persons for your office.
10. Education & Conferences
A huge part of growing an eCommerce business is professional development and networking, both of which often require an investment. Many Amazon FBA sellers choose to attend conferences, such as Prosper Show, Amazon Lit, or EcomSummit, to participate in sessions and connect with other sellers. Other eCommerce entrepreneurs might choose to join a mastermind group, such as TopDog, to connect and receive expert advice.
Whether you’re taking online classes to improve your Amazon advertising skills or attending events IRL, any educational activity that directly impacts your day-to-day Amazon business operations falls under this category. This also means that reading materials, like newspapers or digital periodicals, that are relevant to your business research are included as possible tax deductions for Amazon FBA sellers.
11. Travel
If you end up hitting the road to attend a conference, source products, or meet with suppliers, those expenses also qualify as tax deductions for your Amazon FBA business. However, be mindful that you only include travel that is relevant to your business and follow guidelines set forth by the IRS.
Use of Your Vehicle
If you’re using your personal car for business use it’s important that you carefully calculate the mileage related to business. You can do that by either:
- Carefully and diligently tracking miles and dates that were covered in the name of business travel.
- Keeping receipts for the actual amount you spent on things, especially gas, while using your car for business purposes.
12. Home Office Supplies
Even if your orders are entirely managed and filled by Amazon, you still likely need a space to run and manage your business out of. This includes the furniture to set up your office, office materials (think your classic printer, paper, pens, etc.), and any other necessary items keep your Amazon FBA business functioning.
When in Doubt, Hire an Expert
It can be tempting to use deductions liberally in order to reduce your tax liability at the end of the year. But, taxes are not the place to get creative as they can put your business health in jeopardy with the IRS and Amazon. By maintaining clear and accurate records throughout the entire year you can reduce your taxes and grow your business sustainably.
The best way to ensure that you get the most out of your taxes each year is to hire a knowledgeable accountant or CPA that can become familiar with your Amazon FBA business and provide guidance. While solid tax experts have an upfront cost associated with them, they can save your Amazon FBA business immensely on taxes in the long run. If you’re looking for that extra boost to the budget to hire one, it might be time to seek out funding from Viably.
