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#76 Alan Chen from FreeCashFlow.io Shares The Top 3 Tax Deductions All E-commerce Owners Should Know About
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#76 Alan Chen from FreeCashFlow.io Shares the Top 3 Tax Deductions All E-commerce Owners Should Know About
When store revenue is collected as tax, does it still count as a profit? Alan Chen doesn’t think so. We’re doing something a little different for this episode of The Eccom Show: let’s take a look at tax and what you need to know about maximizing real profit.
Alan is the Founder of FreeCashFlow.io, a company that helps e-commerce and online businesses with US tax laws, planning, sales, filing, threshold strategies, and cloud-based bookkeeping. According to Alan, tax planning is the highest ROI activity you can do in your business.
Tune in to hear Alan and our podcast host and CEO Daniel Budai discuss how e-commerce brands can minimize their tax bill and:✔️ When to Hand Over Tax Planning to an Expert
✔️ The Biggest Pitfalls in Business Tax
✔️ Nexus Sales Tax
✔️ The Top 3 Tax Deductions E-commerce Owners Should Know About
✔️ Alan’s Advice for Q4
When Should You Hand Over Tax Planning to an Expert?
Alan recommends that you seek expert tax advice when your business is making 350k to 400k annual revenue. That’s the stage where there are enough deductions to give you a decent ROI on what you’ve paid to get the service done.
FreeCashFlow.io draws up a monthly or quarterly plan for their clients and calculates what deduction they can take. When April 15 rolls around, they’re going to pay a lot less money.
“I just want people to know that having proper tax planning just equals more money for you. Real measurable value that you see in your bank account that you don’t pay out.”
When Alan says he doesn’t think you should be worried about tax, he doesn’t mean put it on the backburner. He means to hand it over to the experts. Daniel recalls digital marketer Roland Frasier’s advice: spend time with what you’re best at and invest your money into your weak spots.
The Biggest Pitfalls in Business Tax
Sales tax is one of the biggest problem areas right now. E-commerce sellers face particularly strong state scrutiny for this. And this isn’t exclusive to US sellers - Shopify just rolled out a sales tax dashboard reminding its users that they’re responsible for sales tax liabilities for 45 US states.
The higher your revenue, the more you are affected by sales tax. Alan wants businesses to understand that as they take off, they need someone taking care of sales tax. To complicate matters further, every state has its own sales tax. Some states require payment in a matter of days once a business crosses a tax threshold, others wait until the next calendar year.
That’s why it’s so important to have visibility on when your business is and isn’t going to cross tax thresholds. It’s crucial to be prepared, stay compliant, and avoid paying anything you don’t have to. No matter how much your Shopify store makes, revenue is about net profit and your bank account. Tax payments, Alan argues, are not in your profit.
What is Nexus Sales Tax?
Nexus = affiliation, or a connection to something. So if you have an office and a warehouse somewhere, that’s your physical nexus to that location. 5 to 6 years ago Nexus sales tax was great for businesses and drop shippers that had no physical location. There was no way for sales tax to be enforced on a location that didn’t exist.
That all changed following the 2018 South Dakota vs Wayfair court case. This changed the game for e-commerce and online businesses because its ruling introduced an economic nexus. An economic nexus is triggered by a concentration of customers in a certain state. If a business ships products work $100,000 to a particular state they are liable to pay sales tax to that state. Now there are two types of nexuses sales tax: physical and economic.
Moreover, e-commerce owners using Shopify are fully responsible for their sales tax. It often is not automatically deducted.
The Top 3 Tax Deductions E-commerce Owners Should Know About
- The Home Office Deduction
This skyrocketed during 2020 when more and more people began working from home. Alan reveals that there are two ways of calculating this deduction.
The first calculation is the simplest but also the most limited. The highest tax deduction possible is only $1500. The second calculation is more complicated but lucrative. The actual expense method. This takes the square footage of your office space as a percentage of your total home. You can take a tax deduction from that percentage. This includes rent, mortgage, or even repair maintenance. The biggest deduction Alan saw from this method is $14,000 - his client runs a phone case business and basically uses half their home as office space.
If you’re operating out of your home, Alan advises, take advantage of the actual expense method.
2. Startup Cost Deduction
The startup cost allows entrepreneurs to claim a $5000 deduction for any cost made up until the point their business is created. This includes product research, travel, work with lawyers or accountants - the deduction rewards entrepreneurs for even thinking about starting a business. Just make sure that you keep documentation.
“So for people thinking about starting a business but are still unsure, now you know that there is a $5000 deduction waiting for you."
3. Celebrate Your Expenses
Paying for expenses in advance significantly increases your tax deductions. Cash coming in is revenue, cash going out is expenses. So prepay for software and take out yearly subscriptions.
Alan also sees businesses pre-purchase inventory to sell in the next tax year. The expense deductible is higher if the revenue hasn’t yet been generated. This takes a lot of planning and forecasting to ensure that business owners don’t end up with dead inventory. Above all else, they need to know that they can sell their inventory.
Alan cannot stress enough how important it is to understand and track your business’s selling trends, profits, inventory, and problem areas.
“Bookkeeping is the lifeblood of any business.”
Alan’s Advice for Q4
Alan advises that the next two months (November and December) are your last chance to play catch up on tax planning. This is the biggest time of year, the top lines look great, but be aware of your net profit. Collect as many emails as you can, but don’t give away too much. Watch your bottom line.
Follow Alan on LinkedIn visit FreeCashFlow.io to see how your business can make a real profit.
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