eCommerce accounting involves juggling a wide range of expenses, from maintaining stock levels to marketing. The good news is that many of these costs are tax-deductible, which means you can claim them against your taxable profits to reduce your liabilities.
In this article, we explain how maximising your deductions can help you get the most out of your online business and boost your bottom line.
How to maximise your deductions in eCommerce accounting
eCommerce businesses registered as limited companies must claim their business expenses when filing their corporation tax return, also known as Form CT600.
Meanwhile, if you run an eCommerce business as a sole trader, you’ll need to claim deductions via income tax self-assessment.
Regardless of your business structure, HMRC may ask you to provide evidence for your expenses. As a result, accurate recordkeeping is a legal requirement — but it can also help you maximise your tax deductions.
The more detailed and up-to-date your records are, the easier it will be to keep track of all your expenses. As a result, you should always hold onto your receipts.
Working with a professional bookkeeper make this task more manageable, and an expert can also help identify which costs qualify as allowable expenses.
Tax deductions in eCommerce accounting
So what counts as an allowable expense? Here are a few things to keep in mind:
1: Core business functions
- Web hosting and domain costs: Websites are integral to eCommerce businesses. Domain registrations and hosting packages often come with annual or monthly charges, and their ongoing expenses are tax-deductible.
- Inventory purchases: Your products are your eCommerce business’s lifeline. Every penny you spend buying and creating goods – whether they’re tried-and-true products or new items you’re testing out – constitutes a business expense.
- Software and subscriptions: The digital tools that keep your eCommerce business running cost money. This can include CRM suites, plugins that add features to your website, or monthly fees for platforms like Shopify or WooCommerce. These recurrent costs can add up quickly, but documenting them can make it easier to maximise your deductions.
2: Home office deductions
If you run your eCommerce business from home or maintain a home office to support its operations, you may be able to deduct costs related to it, including:
- Utilities: The overheads of running a home office involve more than just space. The lights, internet connectivity, and heating contribute to your professional success. A percentage of these costs – equivalent to the proportion of your home office space – can be written off.
- Office supplies and equipment: The tools facilitating your daily operations, such as PCs and stationery, are all business expenses – though the rules for investments expected to last over two years (e.g. computers) are more complex as these can be claimed as capital expenditures.
3: Shipping costs
Your shipping costs can eat into your profit margins. Fortunately, these costs are generally tax-deductible.
- Packaging material: As an eCommerce entrepreneur, you need to invest in good packaging materials. From boxes and bubble wrap to branded labels and custom-printed thank-you notes, everything that goes into the package could be accounted for as a business cost.
- Delivery charges: Shipping can be expensive for eCommerce businesses, so make sure to account for all your delivery costs.
4: Marketing
If you run an online business, you’ll know how crucial marketing can be in getting your brand out there — but is also represents a significant cost. Thankfully, you can usually deduct your marketing expenses from your tax bill, such as:
- Digital advertising: Whether you’re paying to rank higher on Google’s search results or placing ads on Facebook or Instagram, digital advertising can be expensive. Thankfully, claiming the costs on your tax return can reduce your taxable income.
- SEO and content creation: If you invest in SEO services to enhance your visibility or commission a freelancer to create SEO-led content, you’ll be able to deduct these costs on your tax return.
- Email marketing platforms: Do you use platforms such as Mailchimp or SendGrid to improve customer engagement in your eCommerce business? Your subscriptions should be tax-deductible.
Making the most of your expenses
With so many business expenses to manage, eCommerce accounting can be complicated. If you want to maximise your savings, you’ll need to understand what counts as an allowable expense and maintain solid bookkeeping practices throughout the year.
The best approach will differ depending on your circumstances and how you choose to structure your business. The rules for limited companies are generally more complex, though you can claim many of the same costs.
Want to streamline your bookkeeping processes, improve accuracy, and maximise tax deductions? Get in touch to discuss our eCommerce accounting services.