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:
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).
What Else Must You Report?
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.
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).
- 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.
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.
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.