by Chris Rivera
Consumers have been relying on and indulging in ecommerce way more than usual during the coronavirus pandemic, which is boosting sales for online merchants. As of April 27, ecommerce orders were continuing to surge, with order volume increased by 50 percent compared to 2019.
From a personal perspective, my ecommerce accounting firm is seeing an increase in new and first-time e-tailers opening as a way to generate additional income. We’re also seeing current clients reporting sales numbers that are equivalent to the high volume of sales that happen during Q4.
Tax planning is an important part of owning an ecommerce business. With the uptick in sales that you might be currently experiencing, now is the ideal time to strategize to place you in the best possible position for the 2021 tax season.
Reducing Your Tax Burden
Taxes are inevitable. In order to save on the amount of taxes your business must pay, it’s key to plan ahead, take the right available deductions, and prepare your tax returns properly. I can’t stress enough how important it is to understand that tax planning to reduce your tax burden happens during the tax year, not after it. An accountant can’t restructure your business to save money on taxes during the tax season; it has to be customized and planned in advance to be effective. The steps you take before the end of the tax year are the most crucial to helping your business save money almost immediately.
If your sales are up because of COVID-19, or due to other circumstances, now is the perfect time to get everything squared away. Failing to properly manage your taxes might end up getting your business charged with IRS penalties and interest and/or leave you with hefty tax payments. Knowing how to efficiently minimize the amount of taxes you pay means you might get to keep more of the money you earn.
Identify How You Can Save on Taxes
To make this less of a daunting task, you can consider working with a professional, such as an ecommerce CPA, to help you handle your business taxes and plan in advance to take advantage of all applicable deductions. Here are some common ways to save on taxes that you can start planning for now:
- Contribute to a retirement plan. For many retirement plans, such as traditional IRA and traditional 401(k), contributions are 100 percent tax-deductible. Additionally, payments made after the close of the year can be deducted as long as the contribution is made before April 15 each year. For example, a contribution made on March 15, 2020, can be deducted on the 2019 tax return that’s due on April 15, 2020.
- Adopt an “Accountable Plan.” An Accountable Plan is an IRS-approved reimbursement program that allows a business to reimburse employees for business expenses they incur as part of their work, which could include you as a business owner if you are also an employee of your business entity. If an Accountable Plan is set up, then you are able to deduct those reimbursed amounts as if the business had incurred the initial expense itself.
- Become an S-Corp. S-Corps can save you up to 15.3 percent on your tax bill if implemented correctly. What’s great about this strategy is that if you have an LLC you can file an election with the IRS to request to be treated as an S-Corp for tax purposes even though you still have an LLC for legal purposes.
Keep Current with Legislation
Tax law is constantly changing with major legislation, court cases, and IRS rulings appearing frequently throughout the year. Many of these developments present positive tax opportunities for businesses. Currently, an example of this would be the COVID-19 Employee Retention Credit. For qualifying companies, 50 percent of the first $10,000 is tax-deductible as long as you can prove that your company has been affected by the virus. You are eligible for this credit for all employees as long as your company has less than 100 employees.
High-growth periods for ecommerce sales are exciting, and if your business is lucky enough to be experiencing an influx now, that’s great. However, you don’t want to get caught up in the increased sales and let your e-commerce tax obligations and responsibilities take a back seat. Planning for your taxes should not commence as the 2021 tax season begins; efficient planning should start now for the best results and opportunity to lower your tax burden. Working with a professional that specializes in e-commerce tax services, accounting, and business structuring can save you a lot of money (and headaches!) in the long run.
Chris founded the E-commerce Accountants in 2019 which specializes in tax, accounting, and business structuring for eCommerce companies including Digital Marketers, Drop Shippers, Amazon Automation, Amazon FBA, and Internet Coaches/Gurus. Chris works with some of the most high-profile and influential individuals and businesses in the eCommerce space.