Starting an online-based business is a lot easier than starting a physical store. An online business also allows business owner’s to cater to a larger audiences scattered in different regions compared to one location.
Individuals starting their online store will often use websites to promote their business and reach out to clients, most are not aware of the different types of online business expenses which may qualify as tax deductions. Specific types of expenses, unique to online businesses may qualify as necessary, and ordinary business expenses.
Claiming these business expenses on one’s tax return will reduce their taxable income, thus reducing the tax payable.
Tax Deductible Online Business Expenses in U.S. & Canada
Business Marketing and Advertising Expenses
These days, to manage their business promotion activities, most online businesses are using:
- Online advertising such as Facebook and Google’s advertising services
- Mass mail services, such as: Mailchimp, Mailerlite,
- Websites, used to schedule Facebook, Twitter, LinkedIn and other social media posts such as: HootSuite, and
- Feedback survey websites, such as: SurveyMonkey.
Considering the competition in today’s market these expenses are absolutely mandatory for the business, making online marketing and promotion expenses tax deductible business expenses.
NOTE: For Canadian business owners, it is suggested to consult a tax professional regarding these expenses. Currently, a business cannot deduct expenses for advertising directed mainly to a Canadian market when they advertise with a foreign broadcaster. The government is currently working on regulations that may expand this to prevent taxpayers from claiming advertising expenses incurred on foreign websites, such as: Facebook and Google.
Website Domain Address, Hosting, and Other Services Cost
Initial expenses incurred for obtaining a domain name, and setting up the website is tax deductible, along with the annual website hosting fee. If you are selling products online, you may also be subscribed to certain e-commerce facilitating and customer relationship management service websites, such as: Shopify, Zoho, etc. All these expenses are tax-deductible as they may qualify as ordinary and necessary for the business.
Payment Processing Fees
Credit card processing fees or merchant processing fees, generally apply to e-commerce companies selling products online that allow online payments. These processing fees range from 2.5% to 4% made to companies like Paypal, Square, Stripe, and other such services.
Many business owners deduct this processing fee and report the net sales as their ‘gross income’ on their tax return. However, the correct way to report the sale is to include the full amount of the sale as income and the processing fee as a deductible expense.
Software Purchased for Business
Online business owners often subscribe to various services, such as: Dropbox, Evernote, Search Engine Optimizing software, such as: Yoast, All-in-One SEO, picture purchasing and editing software, such as: Canva, Shutterstock. Getty, and other similar web services to use in their business. These subscription costs are equally deductible as any other types of software you buy for installation on your computer.
Home Internet Service Cost
The internet service facility used to carry out your online based business qualifies as a tax-deductible expense.
However, since many online businesses are operated from the business owner’s house, it is recommended that the business owner monitor the percentage of internet used for business purpose and for personal use.
For example, if the internet monthly cost is $100, and it is used for 8 hours a day for work purposes and 2 hours to check the news or personal email, then the total amount that can be written off as business expense will be $80 (8/10 or 80% of the total cost). And don’t forget any Wi-Fi expenses you use when you travel such as internet packages purchased on a plane or at a hotel.
Smart Phones Data Service Cost
The advantage of e-commerce business is the convenience of using a cellphone to stay in-touch with customers, and continuous business promotion on the go for which one needs data service. These data service charges may also qualify as ‘business expense’, depending on the percentage of the time the phone is used for business.
As this can be a complex calculation and claiming a significantly high amount could make the tax authority suspicious, therefore, it is highly recommended to maintain a cellphone number that is used strictly for business purposes to avoid any confusion while claiming the expense.
Subcontractor and Other Freelance Service Providers
Sometimes business owners may hire SEO (Search Engine Optimization) professionals to enhance their website’s online visibility, photographers and graphic designers to improve the website’s appearance, bookkeepers and office assistants. These professionals’ often work on freelance basis as contractors, and any payments made for their services are tax-deductible.
U.S. business owners should note that they will need to file a Form 1099 for sub-contractors and freelancers to whom they pay more than $600 during a tax year. While Canada has no reporting requirement, Canadian freelancers or subcontractors providing services should be aware of their tax responsibility as Canadian taxpayers.
Skill Enhancing Online Programs
Often business owners may attend webinars, or short-term programs related to enhancing their business promotion skills, or enhance their business’ online presence. The fees paid for these webinars, short-term online courses, and other such similar skill enhancing skill costs may be claimed as ‘tax-deductible’ business expenses. Taxpayers should keep in mind that the course should be relevant and related to their business.
Home Office Expense
The attraction of an online business is that it can be carried out from your home. Both the Internal Revenue Service (IRS) and Canada Revenue Service (CRA) allow taxpayer to claim their home-based office expenses as tax deduction if the space in the home is used exclusively for business. The home-office must also be the taxpayer’s main place of business.
To calculate the home office deduction, the actual expenses of the home, such as: rent, mortgage interest, property taxes, utilities, etc. are allocated based on percentage of the home used for personal-purpose and office-purpose.
Other than using the actual method, the IRS also allows a standard amount to be claimed based on the square feet area of the house used for office purpose. However, in Canada, only the actual expense method may be used.
It is important to maintain records of all the expenses if the taxpayer uses the actual method.
In addition when the portion of the house allocated for office is used strictly for work purposes, taxpayers may fully claim the expenses related to the furniture, shelving, etc.
If your computer and printer, are used exclusively for business they may also be claimed. If the computer is used for both personal and business use, only the percentage used for business will be allowed as a deduction. These higher income items may require to be depreciated over a number years rather than claimed in the current year.
Office supplies are everyday supplies such as paper, printer ink, notebooks, pens, , file folders, envelopes, and postage that you need to run your business. These are things that are small and that wear out or are used up over a small period of time.
Having said that, sometimes the business owner may incur significantly high expenses for items that last a longer period of time, such as an expensive camera to take pictures of their products to put online for reference. These expenses will be considered ‘capital expenses’ for tax purpose, and the cost will be claimed over a number of years through the use of depreciation (capital cost allowance in Canada).
It is highly recommended to consult an online business tax expert regarding the tax treatment of certain complex business expenses or expenses that need to be divided between personal-use and business use. Additionally, always maintain proper record of business expenses as they would be necessary to support your tax deduction claims.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
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- Retirement planning
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To obtain a quote or to arrange for a tax consultation to discuss your US Canada cross border tax queries, please contact us at:
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