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Nov

Best Practices for Filing Business Taxes as an E-commerce Seller

Ecommerce sellers are at the busiest of their busy schedule during the holiday season. This should be no surprise to anyone, least of all, those who are reading this article.

Accounting work is often pushed aside until the craziness passes which can often be late January or even later due to all the mayhem around sales returns, but right now is exactly when you need to be thinking about your accounting… before the calendar year ends and it’s too late.

Business Taxes

True, your business tax returns aren’t due until March 15th (or even September 15th if you extend), but that’s just your filing deadline. If you want to have an impact on the amount of tax you pay, in almost all cases, you need to take action by December 31st.

Now is when you’ll want to get your income tax advisor involved. A good advisor will want to help you estimate how much you’re going to owe in income taxes come March or April of next year so you can plan for that outlay of cash. You don’t want to pay in too much (you probably need that money for inventory), and you don’t want to pay in too little (and be assessed interest and penalties for underpayment of tax).

The most obvious way to limit your income tax liability is to reduce the amount of net income showing on your books, especially if you’re a cash basis taxpayer. Your tax advisor can best tell you if you can/should contribute to a retirement plan, invest in new equipment, or take other types of action to minimize your bill to Uncle Sam. They should also be making you aware of how to avoid common mistakes such as paying yourself reasonable compensation (if your business is an S corporation) or ensuring your distributions are pro rata (again, if your business is an S corporation).

But they can’t give you much good advice if your books are a mess. So that leads us to the next knot in this ball of string. Your books.

Your Books

Many business owners, especially new ones who haven’t been around this block before, will wait until early spring (or even late summer) before they start digging through receipts and pulling together records to give to their tax advisor to turn into tax returns.

Don’t do this.

Seriously, I realize it’s a pain to keep your finances in order, and honestly, for an ecommerce seller, it’s even harder for you than most, but having solid accounting records and someone in your court to help keep your numbers in order is critical to the success of your business.

If you’re not keeping track of your finances, it’s like playing a football game without keeping score. Yeah, you might be able to tell if you’re doing ok, but without statistics and keeping track of touchdowns, sacks, and fumbles, you don’t know what to work on to beat your next competitor. Financial statements quantify the health of your business. You need to keep score. It’s also much more helpful to know the score of each game (month) as you progress through the season instead of looking at a total combined score for the entire year… nine months after the season ended.

If you have the opportunity, I recommend you get your books cleaned up right away. But if you’re overwhelmed with holiday sales right now and your books are in disarray and you don’t already have an accountant lined up to help you… well, I’m sorry to say that it may already be too late for this year. Just make a New Year’s resolution so everything goes more smoothly for you next year.

Year End Wrap Up

If, on the other hand, you’ve been diligent about keeping your books up to date throughout the year, and you already have one or more accountants on your side helping you out, here are some year-end tasks you’ll want to do (or have your accountants do) to get your books in tip top shape for year end.

  • Reconcile ALL of your balance sheet accounts.
    • These are things like bank accounts, credit card accounts, physical assets, and loans.
    • Make sure you know where all your inventory is at and that you’ve properly accounted for it.
      • Do a physical inventory count.
      • Do you have inventory deposits showing on your balance sheet that have been shipped to you and should now be includible in your inventory?
      • Does the inventory on your balance sheet match your latest physical inventory count?
    • Now is a good time to think about your plan for paying off loans, particularly owner loans.
  • Double-check your open sales invoices (accounts receivable) and purchase invoices (accounts payable).
    • Is everything that’s showing up in your books as outstanding truly outstanding?
    • Or do you need to follow up with customers on overdue accounts or write-off uncollectible items?
  • Get ready to file your Forms W-2.
    • Make sure your books match your payroll reports. This helps ensure that you’ve “caught” everything that needs to be reported to the government.
    • If your business is an S corporation, you should be paying yourself “reasonable compensation” through payroll. Don’t forget about that. It’s a big deal and is a big red flag for the IRS if you don’t do it.
    • Do your total W-2s match the wages showing on your books? If not, why not?
    • Make sure owner’s health insurance, mileage, etc. are all included on W-2s if required.
  • Get ready to file your Forms 1099.
    • Make sure you’ve identified all 1099 recipients and that you have their required information (name, EIN, address) on file. Hopefully you’ve been collecting Forms W-9 from all your service providers throughout the year so you don’t have a mad scramble now. But if not, now’s the time to go get that information.
    • Some commonly overlooked service types are rent and professional fees, so don’t forget those.
  • Make sure you understand all of the numbers on the Balance Sheet and Profit and Loss Statement and that they look reasonable to you.
    • Do a “gut check” of your sales numbers. Are they close to what you’ve been seeing on your shopping cart reports? If not, why not?
    • Do a “gut check” of your gross margin by sales channel (i.e., sales minus cost of goods sold for Amazon, Shopify, eBay, etc.). Does this information look right and make sense to you?

Once you’ve done a thorough review of your books, have a conversation with your accountant. Ask any and all questions you have and listen to the advice they’re sharing with you. If your financial statements are your scoreboard, your accountant is the coach who can help you up your game.

 

Catching Clouds provides outsourced Ecommerce Accounting services for online businesses.  We Speak Ecommerce. This article is written by Patti Scharf, Co-Founder, www.catchingclouds.net, @CatchingClouds.

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If you enjoyed this content, consider joining us at PROSPER Show, March 13-14, 2018 at the Las Vegas Convention Center. 
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