As a business owner, you have likely heard this advice before—you need to have a tax strategy in place and take care of your taxes all year round, not just during tax time. This advice is given time and time again because it works. Taking action before the tax season makes managing your taxes much easier when tax time does roll around. With the right preparation, filing will be a breeze.
To give yourself a leg up, you’ll need to create a tax strategy. As an e-commerce business, your tax strategy is going to look slightly different compared to other types of businesses.
Here are seven elements your e-commerce tax strategy should include to be successful.
1. Proper Inventory Tracking
As an e-commerce business, your cost of goods sold (COGS) is often one of your most important numbers. Managing inventory and calculating the correct COGS is vital to streamlining tax return preparation.
Tracking inventory properly also aids in your overall accounting strategy, not just at tax time. As an e-commerce business, you know that your inventory drives your business. If you cannot produce, you can’t make money. The critical role that COGS plays cannot be overstated—it’s all about making a profit.
2. Understanding Sales Tax
Your tax strategy should not stop at income taxes. Instead, you need to get a firm grasp on your sales tax obligations for your business and industry. E-commerce sales tax obligations are often outside of normal sales tax requirements, and they usually vary from state to state. They change frequently, and you need to keep a close eye on compliance.
While sales tax can get complicated, there are tools that can help you keep them straight. Here are a couple of recommendations:
- TaxJar
- TaxJar uses a cloud-based platform to automate the entire sales tax lifecycle across all of your sales channels.
- Avalara
- Avalara offers tax compliance management and so your business can run more efficiently and free from errors.
When it comes to sales tax, it’s important to understand all of the ways that it can affect you or use software that handles it for you so you can improve your overall tax strategy.
3. Knowledge of Potential Tax Deductions
In some cases, tax deductions can save businesses thousands of dollars year after year. You should be aware of what deductions exist and what you need to do to take advantage of those deductions. Many deductions require that your business take certain steps or meet certain qualifications. Occasionally, you can qualify without doing much, but in many situations, qualifying to take a deduction will require some forethought.
For example, you might be able to take advantage of 100% bonus depreciation for equipment or office furniture. Knowing those deductions ahead of time might trigger you to make larger purchases that you might not otherwise make for your e-commerce business.
You can also take a deduction for the creation of a retirement plan for both you and your employees. Adding this benefit not only helps your personal retirement planning but can also save you money at tax time.
Knowing which deductions you might be able to use ahead of time will allow you to take the needed steps to take advantage of these deductions throughout the year.
4. Track Transactional Data
Some smaller or even mid-sized e-commerce businesses make the mistake of only gathering their sales information in preparation to file their income taxes. If you track all of your transactions throughout the year, you will know where all of the information is and make completing your taxes much more streamlined.
Utilize tools that pull all of that information into one location to make this process even easier.
5. Time Major Expenses and Profits
Timing is important when it comes to purchases and income as they relate to your tax obligations. By accelerating expenses and deferring income, you can significantly decrease your tax obligations.
Here are a few examples of ways you may be able to take advantage of this strategy:
- Delay sending invoices from the fourth quarter to the first quarter of next year
- Make large purchases before year-end
- Pre-pay expenses you know will be incurred early in the following year
Keep in mind that this tip may not work well in some situations. For example, if you know you will have higher income next year even without deferring income, you may not want to delay getting out invoices until the next quarter. In that situation, the delayed income will make a high tax obligation year even worse.
Of course, expense and income tracking generally are important so you can make accurate budgets and forecasts. This ties back into your overall accounting strategy as well.
6. Craft a Payment Plan
Creating a payment plan now to address tax obligations can take a lot of the stress out of making payments after you calculate the amount due. While you generally need to make quarterly payments for your income taxes, you can also create a savings plan to address any potential additional obligation that you are expecting over and above these payments.
Setting aside money each month to at a minimum, make the same income tax payment as you did last year will be a big help to actually make your tax payments when due.
7. Partner with an Experienced Accountant
As a business owner, you often do not have time to research tax deductions or keep track of the day-to-day financial aspects of your business. Partnering with an experienced accountant will take some of that load off your plate—and a good accountant will help you create and implement a workable tax strategy, meet deadlines, and track and locate the data you need.
Consider working with Pasquesi Partners to address your accounting needs and build a tax strategy that works for your business. Learn more by visiting our website.