So, you’ve opened a shop on Etsy and are selling your wares. Maybe you’re even doing pretty well. That’s terrific! Chances are, you’re familiar with at least the basics of paying taxes, including sales tax, on the goods you sell. Now that tax time is right around the corner, it pays to know which tax deductions you’re entitled to so that you can make the most of your growing business venture.
Supplies and Equipment
It should be pretty obvious that you can deduct the full cost of making or procuring the goods you sell. This includes any supplies or raw materials you had to buy to manufacture or transport your goods.
Deductions also may include any computers, phones, equipment, machinery, tools, vehicles, furniture, or fixtures you purchased. These are called business assets. Each asset can be deducted in full as a business expense if it costs $2,500 or less. Otherwise, the asset needs to be depreciated over several years – the time that corresponds with the useful life of the asset.
Home Office Deductions
When you use part of your home to operate your Etsy business, you may be able to deduct many associated expenses. For example, in addition to the supplies and equipment listed above, you may be able to deduct at least a portion of your:
- Repairs and maintenance
- Homeowners insurance
- Security system
- Real estate taxes
- Home mortgage interest
- Depreciation on your home
The exact percentage you can deduct depends on the size of your office space in relation to the rest of your home. So, you’ll need to know the square footage of both in order to claim these deductions.
Note that the IRS is pretty stringent about what does and doesn’t qualify as a home office, so make sure you know the rules.
Business Use of Your Car
You can deduct the business use of your car. If you use your car only for business, you can deduct all the associated expenses. If you use your car for both business and personal activities, you can only deduct the portion that applies to when you used it for business.
You may be able to deduct actual car expenses, but most Etsy sellers use the standard mileage rate for their federal deduction. If you do so, make sure you keep accurate records of all miles driven throughout the year. The IRS will want to see these records if you’re ever audited.
Entertainment and Meals
The Tax Cuts and Jobs Act of 2017 eliminated the deduction for business-related entertainment, amusement, or recreation expenses, like tickets to games and other events. But you can still deduct 50% of meals with a current or potential business customer, client, consultant, or similar business contact.
Such activities must be ordinary, necessary, and directly related to your business. Be sure to keep your receipts, and record all of the names of the people you were with and what specific business was done during a meal. Meanwhile, the IRS is still working to define its guidance on this deduction.
20% Deduction on Qualified Business Income
The Tax Cuts and Jobs Act also instituted a 20% deduction for small business owners who report their income on their personal tax forms (called “pass-through income”). This deduction is subject to some limitations and is set to expire in 2025, but for now it allows you to reduce your adjusted gross income, saving you substantial tax dollars.
These are just some of the tax deductions to which you may be entitled. Others include:
- Retirement plan contributions
- Advertising expenses
- Shipping and postage
- Bank and payment processing fees
- Interest on business loans
- Business insurance
- Professional services
- Employee pay
A knowledgeable tax accountant can help to make sure you take full advantage of all eligible deductions. The smart growth of your business may depend on it.