What Ecommerce Tax Deductions Can You Claim?

Operating an ecommerce business involves a variety of expenses, many of which can be deducted to lower your taxable income. These deductions are not loopholes but are defined by the Internal Revenue Service (IRS) as ordinary and necessary expenses incurred while running a business. Properly identifying and claiming all eligible deductions allows you to recover some of the costs of your operations and retain more of your earnings for growth, investment, or personal income.

Calculating Cost of Goods Sold

A primary calculation for any ecommerce business is determining its Cost of Goods Sold (COGS). COGS represents the direct costs of producing or acquiring the goods you sell. This figure is subtracted from your gross revenue to determine your gross profit.

The formula for COGS is: Beginning Inventory + Purchases – Ending Inventory = COGS. Beginning inventory is the value of products on hand at the start of the period. Purchases include all costs to acquire new inventory, such as wholesale prices, freight costs to your warehouse, and import duties, or the cost of raw materials and direct labor if you manufacture products.

For example, an online t-shirt seller with a $5,000 beginning inventory purchases $12,000 in materials during the year. If their ending inventory is valued at $4,000, their COGS would be $13,000 ($5,000 + $12,000 – $4,000). This $13,000 is then subtracted from total sales to calculate gross profit.

Costs not included in COGS are deducted elsewhere as operating expenses. These indirect costs include marketing, website hosting, and salaries for non-production staff. The cost of shipping products to customers is also an operating expense, distinct from the freight costs to acquire inventory.

Common Operating Expense Deductions

Beyond the cost of your products, an ecommerce business incurs numerous other expenses to maintain its daily operations, all of which can be deducted. These operating expenses are categorized separately from the Cost of Goods Sold. Claiming them is key to reducing your overall taxable income as they represent the costs to find customers and manage your business.

• Marketing and advertising: This includes payments for social media ads, pay-per-click (PPC) campaigns, fees paid to influencers, and costs for email marketing services or search engine optimization (SEO) tools.
• Online platform and software fees: Deduct monthly subscription fees for ecommerce platforms like Shopify, seller fees on marketplaces like Amazon or Etsy, and the cost of operational software like QuickBooks or project management tools.
• Shipping, packaging, and payment fees: The cost of postage from carriers like USPS or UPS, materials like boxes and tape, and payment processing fees from services like Stripe or PayPal are all deductible.
• Professional and legal services: This covers the cost of hiring an accountant or lawyer for tasks like business formation or trademarking. Premiums for business insurance, such as general or product liability, are also deductible.
• Salaries and contractor payments: Wages paid to employees and fees paid to independent contractors for services like web design or content creation are deductible expenses.
• Business-related education: You can claim costs for online courses, webinars, or other training that helps you improve your marketing or business management skills.
• Office supplies and travel: This includes general office supplies like paper and printer ink. It also covers business travel expenses for trips to trade shows or to meet suppliers, including airfare, lodging, and a portion of meal costs.

Deducting Business Use of Personal Assets

Many ecommerce entrepreneurs run their businesses from home and use personal assets, like their home and car, for business activities. The IRS allows deductions for the business use of these assets, but specific rules and calculation methods must be followed. These deductions involve prorating costs between personal and business use.

The Home Office Deduction

To claim a home office deduction, you must meet the “exclusive and regular use” test, meaning a specific area of your home is used only for your business on a regular basis. This space can be a section of a room, but it cannot be used for personal activities. A desk used for both business and personal tasks would not qualify.

There are two ways to calculate the home office deduction. The Simplified Method allows a standard deduction of $5 per square foot of business space, up to 300 square feet for a maximum of $1,500. This option is straightforward and requires less recordkeeping.

The Actual Expense Method involves calculating the percentage of your home used for business and deducting that portion of your actual home expenses, such as mortgage interest, rent, utilities, and insurance. For instance, if your office occupies 10% of your home’s square footage, you can deduct 10% of these costs. This method often results in a larger deduction but requires meticulous recordkeeping.

Business Use of a Vehicle

Deducting the business use of a personal vehicle also involves choosing between two methods. The Standard Mileage Rate allows you to deduct a specific amount for every business mile driven, a rate set annually by the IRS; for example, it was 67 cents per mile in 2024. You must keep a detailed log of your business trips, including the date, purpose, and mileage.

The Actual Expense Method involves tracking all vehicle operating costs for the year, including gas, insurance, repairs, and depreciation. You calculate the percentage of miles driven for business and deduct that percentage of the total costs. For instance, if 25% of your total mileage for the year was for business, you could deduct 25% of your total vehicle expenses.

If you choose the standard mileage rate in the first year you use a car for business, you can switch to the actual expense method later. However, if you initially choose the actual expense method, you cannot switch to the standard mileage rate for that same vehicle in subsequent years.

Required Documentation and Recordkeeping

To support your deductions, you must maintain thorough and organized records. In an IRS audit, the burden of proof is on the taxpayer to substantiate every expense. Without proper documentation, legitimate business expenses may be disallowed.

Key documents include receipts showing the item, date, amount, and vendor for all business purchases. Bank and credit card statements provide a secondary record of transactions. It is a good practice to use a separate bank account and credit card for your business to avoid mixing personal and business funds.

For specific deductions, more detailed records are necessary. If you claim the business use of your vehicle, you must maintain a mileage log detailing the date, purpose, and miles for each trip. For the home office deduction, you need records to support your calculations, such as utility bills, rent or mortgage statements, and measurements of your office space.

You should also keep copies of all invoices and contracts with suppliers and independent contractors. For your Cost of Goods Sold calculation, detailed inventory records are a must. These records should track your beginning inventory, all purchases, and your ending inventory count.

How to Claim Deductions on Your Tax Return

After calculating your deductions and gathering documentation, you must report them on your tax return. The form you use depends on your business structure. The process involves reporting your total income and subtracting expenses to determine your net taxable income.

Most sole proprietors and single-member LLCs report business income and expenses on IRS Form 1040, Schedule C, “Profit or Loss from Business.” This form is attached to your personal tax return, and the net profit or loss from the business is carried over to your Form 1040.

Schedule C is divided into several parts to organize your financial data. You will report your gross receipts or sales, then enter your Cost of Goods Sold calculation to determine your gross profit. Next, you list your various operating expenses in dedicated categories. The home office deduction, calculated on Form 8829, is also entered here. After totaling all expenses, you subtract them from your gross profit to find your net profit or loss.

Businesses structured as partnerships or corporations file different tax forms, such as Form 1065 for partnerships or Form 1120 for corporations. While the forms differ, the principle is the same: report all business income and subtract all eligible expenses to determine taxable income.