The Ultimate Guide to Amazon Tax Deductions: 12 Business Expenses You Can Write Off in 2020
February 15, 2020
Are you ready to build your Amazon empire? There some things you already know come with the territory: suppliers, shipping, choosing products. However, there is one HUGE thing most new sellers don’t think about until it’s too late. Yes, we’re talking about taxes.
Being self-employed means the government takes a huge chunk out of your paycheck. However, if you know have some basic knowledge and an excellent tax professional on your side, you can expense all of your business costs to free up money for your Amazon empire-building.
According to the IRS, any business expense is deductible as long as it’s “ordinary and necessary.” We’ve compiled a list of the 12 biggest tax deductions your Amazon business may qualify for.
Disclaimer: I am not a licensed tax professional accountant, nor do I wish to become one. Nothing in this blog post is tax advice. These are simply ideas I’ve used while managing my own business. Please run any of these thoughts by your personal tax professional before putting them into use.
1. Inventory (COGS – Costs Of Goods Sold)
This will likely be an Amazon Seller’s biggest (and most straightforward) deduction. Put simply, it’s the cost of the product you sell. The cost of goods sold is calculated by deducting gross receipts from your sales, which equals your gross profit for the year.
Sometimes, a seller may include additional expenses when calculating COGS (like manufacturing costs on a private label product). This is generally allowable as long as you don’t try to deduct it again as a business expense.
2. Home Office Deduction
If you run your Amazon store from home, you may qualify for a home office deduction. The size of this deduction depends on how much space is dedicated to your business.
To take the deduction, your space must meet the following qualifications:
- It can only be used for business activities. (If you occasionally work from your living room couch, it won’t cut it.)
- The claimed work area must be the principal place of business for your company. If you work out of another co-working space or warehouse, the deduction no longer applies.
- The majority of the time you spend working in the space must be related to your business. It’s a bad idea to try and double up a room like your kitchen.
There are two ways to calculate the home office deduction. The first is a simplified method -- just multiply the square footage your business uses by $5, with a max of 300 square feet ($1500). Most business owners opt to use this method, as it’s less likely to attract IRS scrutiny.
The second is to use the regular method, which isn’t nearly as simple (though it may net you a bigger deduction if you use a large amount of space.) First, figure out the percentage of your home’s square footage you actively use for your company (see rules from the simplified method). Add up any home expenses you have (utilities, mortgage payment, interest, property taxes, etc.) and apply the above percentage to your final number. If you use the regular method, you must report expenses on Form 8829.
As you figure out which method is most beneficial, be aware that the IRS is a stickler on home office expenses. Each year, make sure to have any paperwork needed to back up your deduction. This can include pictures, work schedules, square footage maps, etc.
3. Mileage Deduction
Does your business require daily drives to the UPS store or post office? Do you meet with suppliers or drive to trade shows? Every mile you drive your business is deductible, and the amounts add up quickly. The standard rate for 2019 is .58 per mile, so you can probably imagine how this can turn into hundreds (or thousands!) or dollars.
Tracking every mile can be a time-consuming job, especially if you’re still opting to use pen and paper. Luckily, the past few years have seen an influx of mileage-tracking smartphone apps including TripLog, MileIQ, and TrackMyDrive. Each of these programs automatically detects car time and track mileages with extreme accuracy. One less thing on your plate!
Any good Amazon business is bound to use a host of suppliers in a given -- boxes, bubble wrap, tape, and polybags add up quickly. Any supplies you use from a Dymo to box cutter is deductible. It’s easy for these small costs to go by the wayside, so don’t slack in your tracking.
Shipping is the name of the game when it comes to Amazon FBA. Your product gets shipped multiple times -- first to you, then to Amazon, then to the customer. Each time you pay for your product to be on a boat, train, ship or truck, the cost is deductible.
Continuing education is one of the best investments you can make in your business. If you bought a book, course, or seminar about improving your Amazon business it is 100% deductible. This also goes for coaching/mentoring costs -- if you invested in knowledge, write it off.
7. Amazon Fees
For every $100,000 in FBA sales you do, Amazon takes at least $33,000 in fees. This is one of the largest tax deductions your e-commerce business can take. You can view an annual breakdown of these fees in your Amazon account dashboard:
- From the Reports link, select Payments
- Select Date Range Reports. You will need to generate a report for both Standard and Invoiced orders (if applicable).
- Click Generate Report
- In the Generate date range report pop-up box, proceed as follows:
- Select report type: Summary
- Select reporting period: Month or Custom, and the specified date information
- Click Generate
- Review your report in the list on the Date Range Reports page
- Filter the type column by Order
- Add the total of Product Sales + Product Sales Tax + Shipping Credits + Shipping Credits Tax + Gift Wrap + Gift Wrap Tax + Promotional Rebates + Promotional Rebates Tax for both Standard & Invoiced Orders (if applicable)
Any software you use in the normal course of business is deductible. This includes repricers, product research, accounting, tax assistance, etc.
9. Home Office Repairs/Improvement
Any major changes to your home office such as remodeling or repairs are tax-deductible. The only caveat is the improvements must be depreciated over a certain number of years, which can be complicated to calculate. Plan ahead on this one: before paying any renovations, talk to a tax professional to make sure you’re classifying it correctly an doing the math right.
10. Professional Services
Do you have a bookkeeper? CPA? Lawyer? Good news! These are all “professional services” and are 100% deductible. This deduction applies to When you hire a business lawyer, CPA, bookkeeper, online bookkeeping service, or tax consultant, their fees qualify as deductible business expenses.
11. Independent Contractors
Even if you don’t have employees, there’s a good chance you hired an independent contractor during the year. This is anyone who a) you have paid at least $600 during the fiscal year and b) works outside of your physical office and is not on your schedule/payroll. Did you pay someone to drive shipments to the post office, write bullet points for your listings, or take photographs of your products? They’re likely an independent contractor and their payments are deductible. Always double-check this with your tax professional.
This is one of the more straightforward deductions: any dollars you spent on advertising are deductible. This includes PPC, coupons, Google ads, etc.
When Amazon refunds a customer, you get hit twice: first with the cost of the product (since it will often come back lost, damaged, or not at all) and second with seller fees, which Amazon doesn’t reimburse. Make sure to track these refunds and fees with the Refunds report in Seller Central. As long as Amazon didn’t reimburse you, they can all be written off.
What’s your best tax tip? Did I miss any deductions? Comment below or shoot an email to [email protected].