Are you ready for tax season?

While most people groan and many try to procrastinate over anything tax-related, the fact is that the better prepared you are, the more likely that things will go well for you.

First of all, you really need to be keeping on top of anything tax and accounting all year around. If you let it build up to an onerous task for tax time, you’ll only make more work for yourself and possibly miss things which put you at a disadvantage.

Regardless of how you structure your bookkeeping though, there are some things which must be completed for tax time anyway. Here’s what you need to know and have ready:

Which tools are FBA sellers using for accounting? Get our quick guide here

Do You Need to File?

There often seems to be a lot of confusion around this which stems from the “$20k rule.” This rule means that all sellers who use marketplaces such as Amazon and make more than $20k of unadjusted gross sales or have more than 200 transactions will automatically have a 1099-K form filed for them by their payment provider.

In short, if you meet this criteria the IRS already knows about you so you had better be filing correctly. This doesn’t mean those who do less don’t need to file always check with a tax professional, but generally speaking, all income must be reported.

If you are based outside of the US and therefore not liable for US tax, IRS regulations require non-U.S. taxpayers to provide Form W-8BEN to Amazon in order to be exempt from U.S. tax reporting requirements.

(Check out Amazon’s information on third-party reporting to the IRS here).

US-based Amazon sellers will need to file taxes, even if below the threshold for an instant 1099K

Sales Tax Nexus

You should have already determined your sales tax nexus already, as we have mentioned in a previous post. FBA sellers are liable for collecting sales tax in all states where they have “nexus” – a physical business presence in a given state.

You have nexus in any state that stores or ships your products from an Amazon Fulfillment Center (Amazon has fulfillment centers in 20+ states). You probably also have nexus in your own home state, particularly if you maintain any kind of office or business-related facility there.

You could potentially have nexus in multiple states, so you will need to determine filing requirements (or use a service such as TaxJar which will autofile for you).

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Photo credit: NASA Earth Observatory via VisualHunt.com

What Else Must You Report?

Income

The IRS wants to know your gross annual income, which includes EVERYTHING that came in, not just the cost of the product for the customer. This means if there was a charge for shipping, then this is included in gross income.

One thing we will always recommend, particularly if you’re not sure is to consult with a qualified accountant. Under-reporting is a risk that you run which might catch up with you unpleasantly later on if the IRS decides to audit you. This means, as a general rule, just report every dollar that came into your business.

We highly recommend using automated accounting solutions such as A2X with Xero in order to make life easier. This way, your reporting can be automatically pulled and there will be little left for you to sort out manually.

Deductions

There are many expenses incurred by businesses which are permitted to be used as deductions from your gross income. These vary in their application, so again, do check in with a qualified professional to make sure you’ve got it right. Honestly, there are so many variations in the tax code that you may well be short-changing yourself if you try to do it on your own without knowing your full entitlements.

Common deductions might include:

  • Inventory costs (cost of goods sold).
  • Amazon Fees
  • Software and subscription fees.
  • Shipping and office supplies.
  • Education or business-related courses.
  • Donations of items.
  • Home office deduction (you may have a deductible percentage of your rent or mortgage).
  • Mileage
  • Health insurance plans (talk it over with an accountant this applies to specific types of plans).
  • Retirement plans (as above).
  • Travel and meals where business-related.

Of course, you need to keep track of all of these expenses throughout the year, or face a possible scramble trying to figure them out prior to filing taxes. The key is to have receipts for everything the tax code changes fairly regularly with new deductions permitted or some you were once allowed being removed. If it’s a business-related cost, file a receipt.

Storing Receipts

As an FBA seller, you probably get many of your receipts for expenses sent via email. If this is the case, then most good automated accounting programs (including Xero or Quickbooks) allow you to forward the email to them for automatic storage of your receipt.

If you’re not using a program with this capability, there are other receipt apps available via which you can forward email receipts, such as Shoeboxed. This app has other very useful features, including that you can scan physical receipts into it for storage and track any mileage with it. It helps you to create expense reports and even stores business card information if you need it as well.

Many business owners short-change themselves on potential deductions because they don’t have their receipts well-organized. If you’re stuffing receipts into a shoebox or searching through purses, pockets, wallets, cars and desk drawers, then you really need to be using a receipt app for organization.

Putting It All Together

If you’re a DIYer, you might choose to use a program like Turbo Tax and input everything yourself, which means you’ll need to have all summary figures of income and deductible expenses available. Keep all receipts and summary statements in a specific “taxes” folder marked for the particular year you are filing for.

If you’re walking more on the side of caution and visiting your accountant to have your taxes done, then here’s what they would like to see:

  • Financial statements. These might include a balance sheet, income statement and cash flow statement, although the one most important to your accountant for tax filing is the income statement.
  • Summary of business expenses, including cost of goods sold and any inventory write-offs or donations.
  • Vehicle log where applicable for business-related use.
  • Home office expenses. Here’s what Quickbooks has to say: “These expenses include a percentage of your utilities, repairs and maintenance, home insurance, and mortgage interest or rent. You can calculate your home-office deduction by dividing the square footage of your office space by the livable square footage of your house, or by dividing the number of rooms your home office occupies by the total number of rooms in the house. Using either formula, multiply your total home expenses by the home-office percentage. Some accountants will ask for all of your original receipts, while others will only want the summary; be sure to ask what your accountant expects you to provide and prep those documents.”
  • Form 1098, showing mortgage interest and property taxes. This is for the home office deduction if you have a mortgage.

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Final Thoughts

Hey, we know taxes aren’t the most exciting thing to be dealing with, but the fact is that successful businesses are often separated by how effectively they tackle financial matters. If your books are in a mess, what state is your business in?

Besides that, everyone is required to correctly file taxes. If you make mistakes, they can be detrimental to your business either by causing an audit and tax bill later on or by short-changing yourself on deductions you’re legally allowed.
In short, get your business ready for tax season early you’ll be glad you did.

Join the discussion 8 Comments

  • Nate says:

    well, looks like i didn’t charge sales tax for all of 2016. Am I going to be in serious trouble or have to shell out a lot of cash to pay the sales tax?

    • Scott Scharf says:

      Nate,
      See the post above for the basics. You have a risk management decision to decide where you are going to register, collect, file and pay sales tax. Then you need to decide if you are going to register and collect going forward or use http://www.wherestock.com to find out when you first had Nexus. Then pay any sales tax you didn’t collect in each (or a few) states last year. Note: for every $100K in sales per year, it creates $6K in sales tax liability over a year, plus interest and penalties.

  • LittleBlue says:

    Is there an IRS reference for the effective date of the FBA distribution tax liability?
    I am currently in AR and have Amazon set up to charge sales tax for all delivery addresses in AR.
    I used to drop ship from locations in GA and IA. I tried to get a tax ID to remit for delivery addresses in those states for products drop shipped from the corresponding state dropshipper. Neither state could provide me with a tax ID at that time because they were only set up to collect from locations with physical addresses in their respective states.

    Is there a notification from Amazon or reference at amazon.com that I missed concerning this liability?
    What about a customer who lives in MS and my product is FBA shipped from a warehouse in TN?
    Or the opposite? Say my product is shipped to a customer where Amazon has a center, but the product was not shipped from there but from a fulfillment center outside the delivery state? While this would not be the norm, it is possible perhaps if the last of my products is in a warehouse in KY but is shipped to CA.

    Does Amazon match up the warehouse and the delivery state to ensure the tax I enter is applied correctly?

    • Scott Scharf says:

      Jan,
      Sales tax for Amazon sellers is complicated. You have Nexus (where you have employees, property (inventory), or sales reps/affiliates) which is an obligation to register, collect, file, and pay any sales tax collected. You CANNOT collect without a sales tax license.

      You own your inventory until the consumer signs for it and Amazon FBA stores your products in 22+ states, so you have nexus in 20+ states that have a sales tax. You can go to http://www.wherestock.com to get a report showing when you first had inventory in the state and all states you have nexus.

      It doesn’t matter how the products are shipped to and from different warehouses; where you have products stored and where you are registered.

      It is a risk management decision on your part where you register for sales tax, then you need to configure Amazon to collect the tax, then I recommend using either http://www.taxjar.com or http://www.taxify.co to manage the process of filing and paying.

      Hopefully this helps. Great information on http://www.taxjar.com/blog/

      • Jan says:

        I am still a bit confused, Scott. Here in Arkansas, I have my home office and a warehouse, but I only collect and pay the state sales tax on products I sell that are delivered to Arkansas addresses. Are you saying that the tax laws require I charge sales tax as though my own local warehouse were a retail location and so collect the state, county and city sales tax from my customers based on my warehouse address and not on their delivery address elsewhere in AR?
        Then, paying sales tax based on the FBA storage warehouse the way you described it makes sense. What about the county and city taxes in those FBA storage locations?
        I will check out all of the links you have offered and truly appreciate the help.

        • Scott Scharf says:

          Jan, I could write a book on sales tax and how complex it is. There are 19,000 sales tax jurisdictions. So some states are Origin based (so the tax is based on where you ship FROM), some are Destination based (so the tax is based on where you ship TO). Amazon will calculate the tax when you configure their sales tax module, so don’t worry about the details that you know about your local taxes. Decide where your want to register, configure Amazon to collect sales tax, the sales tax collected comes thru your settlement statements, use TaxJar or Taxify to pull in the data from Amazon, will break out all the details by state, county, city, regional, special taxes, etc. configure the return, file and pay the sales tax you collected. FYI, for the most part, the only local jurisdictions you could worry about for ALL of the Amazon warehouses are the 2 AZ cities but it isn’t worth the pain to register there.

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