Tax season is a lot of work for any business owner, including e-commerce. Layer top multiple sales channels and financial systems, then add the complex tax codes, and the whole world can seem to crumble down. To make tax season less difficult, Chris Rivera, CPA and founder of The Ecommerce Accountants, gives great advice for e-commerce businesses to get ready for their tax season.

Common Mistakes E-commerce Businesses Make During Tax Season

Some owners of e-commerce businesses make several common mistakes when preparing for the tax season. These mistakes may cause the owners to face expensive consequences and unnecessary stress. One of the biggest mistakes is treating accounting as just a yearly affair. Rivera made the point that many business owners even wait until tax season to get their books in order. This is very bad, especially for e-commerce businesses, which usually use multiple platforms such as Shopify, Amazon, Stripe, and PayPal. Apart from that, businesses that delay reconciling their financial data are at risk of errors and inefficiencies. 

Another mistake made by quite a few people is using platform payouts as actual revenue. Amazon and Shopify, for example, are platforms that owners can use to sell their products. They make payments to business owners only after deducting fees, refunds, and adjustments. If business owners make these kinds of deposits in their revenue, the financial statements and tax filing can become inaccurate. 

Rivera points out that one has to use the correct revenue figures to ensure the financial statements are accurate. In addition, many e-commerce businesses do not perform the inventory and cost of goods sold (COGS) reconciliation. Very accurate inventory accounting is a must for profit determination; if inventory quantities are off, taxes will be affected as well. It is very important to conduct the physical inventory count regularly and report COGS correctly to ensure an accurate tax filing process.

Financial Reports Every E-Commerce Owner Should Review

Rivera points out that, prior to tax filing, it would be helpful if every owner of an e-commerce business reviewed a few key financial reports. These provide a business with a clear understanding of its financial status and also support the accuracy of tax returns:

• Profit & Loss Statement (P&L): This report is very important as it shows a business’s income, costs, and profit for a particular period. It gives business owners a clear picture of their earnings, spending, and profit after costs are deducted.
• Balance Sheet: Essentially, the balance sheet lays out the major financial elements of a business: assets, liabilities, and equity. In fact, reviewing this statement is a good way for e-commerce retailers to understand their finances, which is a must-do step in tax planning.
• Inventory Valuation Report: This report details the valuation of the inventory a company has on hand. As inventory levels directly impact Cost of Goods Sold (COGS), it is very important to have an accurate valuation for tax purposes.
• Sales Channel Reconciliation: If you are going to market your products across multiple platforms, it is imperative to reconcile sales data from each platform. That will give you a clear picture of revenue and also help you identify and eliminate discrepancies.

E-commerce businesses can identify potential problems early and address them before they become tax issues by continuously monitoring these reports.

Handling Sales Tax Across Different States

Sales tax is yet another point where e-commerce businesses run into complications. Since regulations differ from state to state, figuring out where and how to collect sales tax is often confusing. Rivera suggests that e-commerce businesses first determine where they have both an economic nexus and a physical nexus. Economic nexus refers to a company’s sales reaching a certain state, whereas physical nexus concerns a company’s physical presence in that state. After determining nexus, companies must apply for sales tax licenses in the relevant states. Following the application, it is very important to gather, submit, and pay sales tax in accordance with each state’s legal requirements.

Another difficulty arises with marketplace facilitators like Amazon and TikTok Shop, which are tasked with collecting and remitting sales tax for sellers. Understanding how these platforms manage sales tax is extremely important for compliance. E-commerce companies need to stay informed about changes in sales tax regulations to avoid violating any state or local tax laws.

Frequently Overlooked Deductions

E-commerce business owners are often so busy running their businesses that they miss out on identifying and deducting certain expenses that can reduce their taxable income. Rivera shares some of the most common deductions that are missed:

• Payment Processing Fees: These are fees that you pay to various platforms like PayPal or Stripe. This type of fee is the most commonly ignored business expense deduction you can claim.
• Software Subscriptions: Most online stores rely on various software solutions for inventory management, marketing, and customer relations. Paying for these subscriptions is classified as discountable spending.
• Chargebacks and Refunds: If a firm has issued chargebacks or refunds, most of the time, these can be written off.
• Home Office Expenses: If you are a business owner who operates from home, a portion of your expenses, such as rent, utilities, internet service, and others, may be deductible to you.

By monitoring these commonly disregarded costs, e-commerce companies will be able to better manage their taxable earnings and settle on a reduced tax payment.

Preparing for Next Year’s Tax Season

According to Rivera, e-commerce companies should implement measures to simplify their tax filing next year. Chief among these is keeping monthly account records. Business people who handle their money matters regularly rather than in a last-minute rush will not only have up-to-date financial data but also less stress at the end of the year.

Tracking inventory is another essential task, a proper one. In fact, conducting routine stock checks will help ensure there are no discrepancies between the accounting records and the ledger figures. Besides that, Rivera recommends that companies make their estimated quarterly tax payments so they do not end up with a single unusable large tax invoice at the end of the year. Those installments will continue to help businesses stay on the right path and avoid penalties for underpayment.

Doing these things now can help e-commerce companies have a less complicated tax time ahead, as their behavior will have changed.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute professional financial, legal, or tax advice. While the insights shared are based on expert opinion, each business’s tax situation may vary, and it is recommended that e-commerce business owners consult with a certified public accountant or tax professional for personalized advice tailored to their specific circumstances.