List of Tax Deductions for Online Biz Owners

Q:  What are the main deductions common to home based/online/ebay businesses?

A:  You are allowed to deduct expenses against your business income as long as they are ordinary and necessary for your business.  This basically means that if it’s a common expense for your type of business and it’s necessary in order for you to run the business, it’s probably deductible.

If in doubt, write it down, and let your accountant decide if it’s deductible.

Here is a list of the most common deductions that online business owners typically will have:

* Inventory
* eBay fees
* PayPal fees or shopping cart fees
* Shipping fees and supplies
* Postage
* Office supplies – pen, paper, toner, folders, etc.
* Advertising – Google Adwords, ezine ads, website
* Mileage – use your car for business purposes
* Phone – cell phone or second line
* Bank charges – business checking account
* Accounting and legal fees
* Computer and software
* Internet, website and faxing services
* Contract labor – VA, coaches, web designer
* Furniture and office equipment
* Membership fees – Mom Masterminds, Client Abundancing Coaching Cafe, Jimmy Brown’s List and Traffic, etc.
* Continuing education – ebay classes, accounting classes, marketing classes
* Home office expenses – will discuss in detail later

This list is not all inclusive, there are a lot more expenses you could incur, but these are the most common deductions that online and home based business owners will have.

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My free report '5 Tax Saving Tips for Ebiz Owners' includes tips to help you get all the deductions and credits you're entitled to, so you don't overpay Uncle Sam!

Can I Deduct Internet and Phone Expenses?

Q:  My biggest question is deducting things like internet, phone etc. Do you have to save your statements in order to deduct that?  And can you deduct all of it or just a percentage? 

A:  Yes, you should keep statements or receipts for all of your expenses.  If you ever get audited and you don’t have written proof, the IRS will likely disallow that deduction.  Plus, you’re less likely to miss a deduction if you keep good records of it.

You should  only deduct the business use of certain expenses, such as internet, computer expenses, etc.

For example, if you have internet access, and you have a family of four using that internet, then you can’t deduct 100% of the internet. 

You should use your best judgement to determine the business percentage.  If you’re not sure keep a log of who uses the internet and for how long to get an idea of how much time is spent on the internet for business vs personal use.

Do this exercise for all expenses that are part personal and part business.

A quick note about deducting your phone…  You can NOT deduct your primary land line.  You can deduct a second line, or a cell phone, but not your primary home phone.

Got more tax questions about your home based or online business?  Check out ‘Your Top Online Biz Tax Questions Answered’, a new audio/ebook program for online and home based business owners.

Related Stories:
Home Office Tax Tips
Do I Have to Report My Online Income?
Can I Deduct My Expenses if My Online Business Had a Loss?

What’s the Best Way to Keep Track of My Income and Expenses?

Q:  I’m a first-time Ebiz owner and am interested in knowing about software or methods that people use to keep track of their finances (for tax purposes).  What’s the best way to keep track of my business income and expenses?

A:  Everybody is different, so it’s really what works best for you. 

Most of the small businesses I work with prefer to use a software program such as QuickBooks or Quicken Home & Business.  But I have other clients who prefer to use spreadsheets.

If you’re not a numbers person, and you won’t keep up with or don’t understand how to keep track of your expenses, you may need to hire a bookkeeper. 

The most important thing is that you keep good records so that you get all of the deductions you are entitled to at tax time, and so you know where your business stands financially at all times.

Got more tax questions about your home based or online business?  Check out ‘Your Top Online Biz Tax Questions Answered’, a new audio/ebook program for online and home based business owners.

Do I Need to Make Estimated Tax Payments?

Q:  Am I required to make estimated tax payments, and how do I do that?

A:  The federal income tax system is a pay-as-you-go tax system.  That means you pay taxes as you earn income throughout the year.  If you are an employee of a company, you do this through withholding.  If you are self employed, you do this through estimated tax payments.

The general rule is that you must make estimated tax payments if you expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and tax credits, then you may need to make estimated tax payments.

Also if you haven’t paid in at least…

*  90% of the tax due on your current year tax return, or
*  100% of the tax due on last year’s tax return

then you may need to make estimated tax payments.

Generally, you will estimate your tax liability for the entire year and divide that amount by four to determine your quarterly estimated tax payments.  IRS has calculators on their website to help with this. 
The due dates for estimated tax payments are:
April 15
June 15
September 15
January 15 the next year

Use Form 1040-ES to make estimated tax payments.  Your accountant should calculate and prepare coupons for you every year.

Got more tax questions about your home based or online business?  Check out ‘Your Top Online Biz Tax Questions Answered’, a new audio/ebook program for online and home based business owners. 

Q&A: Can I Deduct My Expenses If My Online Business Has a Loss?

Q:  IRS rules say that a business must show a profit 2 or 3 years out of 5 years. My tax preparer says that if you are actively trying to build a business, that does not apply…that I can still take all my deductions and show a loss. What is your opinion on this?

A:  Actually, the rule is that if your business is profitable for 3 out of the last 5 years, then the IRS will presume that the business is carried on for profit, and is not a hobby.  That means if you aren’t profitable for 3 out of 5 years, the IRS MAY reclassify your business as a hobby, but that doesn’t mean that they will automatically determine that it’s a hobby.

It’s important that you treat your business like a business and not a hobby because if the IRS determines that you have a hobby you will have to report that hobby income, but you may not be able to deduct all the expenses you would be able to deduct if you have a business.  If you don’t itemize your deductions, then you could lose the ability to deduct ANY expenses!

Also, many businesses incur a loss in the first year or two of business.  If the IRS determines that you have a hobby instead of a business you won’t be able to deduct those losses.

Things to do to keep from being classified as a hobby include:

* get a tax ID number
* keep separate business and personal checking accounts, credit cards and PayPal accounts too
* register a business name
* hire an accountant, attorney or coach
* create a business plan
* keep track of the time you spend in your business and what you do

So… just remember that the IRS will make exceptions to the hobby loss rules, even if you have a loss for more than 2 years, if you treat your business like a business and not a hobby.

For more great questions and answers about online business taxes, please see ‘Your Top Online Biz Tax Questions Answered’, my new audio/ebook program for online and home based business owners.

Do I Have To Report My Online Income?

Q:  I just started my home based business this year and expect to just break even this year. Do I still need to report my income, even if I don’t actually make a profit?

A:  Yes, you must report all income earned.  It’s a common misconception that if you don’t earn much or if you’re just doing it as a hobby that it’s not reportable or taxable.  That’s not true.  All income is reportable from the first dollar earned. 

It doesn’t matter if you receive a 1099 or not.  It also doesn’t matter if you earn less than a certain amount.  Another myth is that if you earn less than $600 you don’t have to report the income.  Again, it’s just not true. 

You are allowed to deduct business expenses from your income, so in your case, just because you have to report the income doesn’t mean you’ll have to pay any taxes.  If you have expenses that are as much as or greater than your income, you won’t owe any taxes, and may even be able to use that loss to reduce other taxable income.

Got more tax questions about your home based or online business?  Check out ‘Your Top Online Biz Tax Questions Answered’, a new audio/ebook program for online and home based business owners.