If you’re an independent seller or an online reseller, you know taxes are not just a menace that come around once a year, but a chore that needs to be maintained all throughout your selling career.
So, what does tax preparation for independent sellers involve? For some, it’s all part of a day’s work, and they’re prepared to take on the task. They have bookkeeping systems in place and have talked to tax professionals who have set them on the right course. But for others – especially resellers who are new to the business – it’s a mad scramble to gather reports, receipts, and forms – and then try to figure out what to do with them.
Tax Preparation Essentials: Reports, Expenses, Mileage, and COGS
We asked Mark Tew, a CPA and the owner of Not Your Dad’s CPA who specializes in assisting e-commerce sellers, for his tips on tax return essentials. According to Tew, “a lot of your selling activity will not show up on your bank statement, so unless you have been entering that selling activity into a bookkeeping program like QuickBooks, you’ll have to pull it straight out of your selling platform.” Tew continues to note that having separate bank accounts for personal and business use is a must.
Here’s a rundown of the reports and data independent sellers need to complete their tax return.
Summary Reports: Marketplace platforms such as Amazon, eBay and others provide sellers with access to useful monthly and annual reports. It’s important to retain the following information for reseller tax preparation:
- Sales Report Summary
- Fee Report Summary
- Expense Report Summary
Third party processors like PayPal also provide access to useful year-end reporting for your selling activity.
Expenses: Record any expenses you incur for your reselling business by category – such as office supplies and office equipment. At a minimum, Tew advices keeping your books up-to-date on a monthly basis. At the end of the year, you can run a simple report that provides all your expenses broken down by category.
Mileage: Keeping track of mileage used for business purposes can result in a significant tax deduction. You can either write down each trip in a traditional mileage log, or by using a smartphone app which can track your trips automatically. If you did not record your mileage for 2017, Tew recommends that make your best effort to recreate a log for the year, because the deduction can work in your favor.
Example: The 2017 standard mileage rate, was 53. 5 per mile. If you drove 2,000 miles for business, you’d have over a $1,000 deduction against your business taxable income.
Note-For 2018, the standard mileage rate has increased one cent from 2017 to 54.5 cents.
Cost of Goods Sold (COGS): “Cost of goods sold is usually your most significant deduction, but it’s also one of the most poorly tracked,” Tew said.
By keeping track of your inventory in a spreadsheet or software program, it should be fairly easy to run a report on your annual cost of goods sold (COGS) and your inventory levels. But if you haven’t been doing that, which is often the case for newer resellers, you have to do your best to estimate your COGS.
Tew says this can be done by using the following formula that involves your beginning inventory, your purchases, and your ending inventory.
Take the total cost of your beginning inventory at the start of the year, add in all your purchases throughout the year (which you should be able to retrieve from your business bank statements or receipts), and then subtract your ending inventory, and that will tell you your cost of goods sold.
Home Office Deduction Expenses: If you operate your reselling business out of your home,
it’s best to consult with a tax preparer to determine whether the simplified method for home office deduction or the standard method is best for your situation.
The simplified method is based on square footage of your space, while the standard method considers shared personal and business expenses such as homeowners insurance, utilities, repairs and maintenance, and other expenses.
And here’s a bonus!
If you store inventory in your home, a tax pro can also determine if you can include that space as a home office deduction.
Preparing Your Tax Return
Should resellers prepare their own tax returns? There are a lot of good self-preparation tax programs available, so Tew says it depends on your experience and your comfort level.
“You might be able to do your own taxes, but it’s possible that you can make an error, or that you may not notice something that may save you a lot of money,” he says.
According to the IRS’s website, 2018 tax filing season begins January 29, with tax returns due by April 17.
So, as February, 2018 comes to a close, it’s the perfect time to set up your new systems, complete your bookkeeping for the month, and set the pace for the rest of the year. Consult with a tax professional who can help set you on the right path, because tax rules and changing regulations can be challenging!
Heck, even famed physicist Albert Einstein said, “The hardest thing in the world to understand is the income tax.”