Eight Year-End Tax Tips for Online Sellers
By Barbara Weltman
While 2015 is waning, there is still time to take action that will have a positive effect on your tax bill for the year, and for the year to come. Here are some tax strategies you can use now that may be helpful to your tax picture.
1) Replenish inventory
What stock do you have on hand now? Re-order needed items, and pay for them now. While inventory-based businesses usually have to use the accrual method of accounting and treat inventory purchases as part of the cost of goods sold, you may qualify to use a special rule that allows you to use the cash method of accounting instead.
Doing this enables you to treat the cost of inventory items as materials and supplies, so items purchased are deductible when paid or used, whichever is later. Find details from the IRS about the two ways to qualify for the cash method: qualifying taxpayer and a qualifying small business taxpayer.
2) Stock up on supplies
If you use the cash method because you qualify under an exception described earlier, you can buy the shipping supplies, office supplies, and other materials you expect to use in the coming year and deduct the cost now. Ordering in bulk can save you money on supplies. But don't order so much that you won't have room to store them.
3) Buy needed equipment
Does your computer need an upgrade? Can you use another tablet or smartphone? Would a better camera be helpful to your business? If you buy it and put it to use before the end of the year, you likely will be able to write off the entire cost this year.
Using the Section 179 deduction - which is the term for this type of write-off - means expensing the cost (up to a dollar limit) now rather than depreciating the cost over a number of years. This is so even if you finance your purchase in whole or in part.
4) Pay down debt
While interest rates have been at historic lows for some time, they are poised to rise. Even though interest on business borrowing is tax deductible, the debt service is a serious drain on cash flow. Reduce or eliminate credit card borrowing and other outstanding loans to the extent that you can.
5) Decide on a retirement plan
Whether your online selling is a full-time endeavor or a sideline business, you can shelter your profits in a qualified retirement plan while saving for retirement.
For example, if you work alone, you can have a solo 401(k) for 2015 and contribute a substantial amount. As a self-employed person, you can add both an elective deferral and what would amount to an employer contribution.
Find your maximum contribution using a calculator for this purpose from Bankrate.com.
To take advantage of this opportunity, you must sign the paperwork with a brokerage firm, mutual fund, or other financial institution by December 31. You'll then have time in 2016 to make your contributions.
6) Review your final estimated tax bill
If you pay estimated taxes for your personal return, the final payment for 2015 is due on January 15, 2016. Make sure to check your projections so you don't overpay and have to wait until you file your return to claim a refund, or underpay and possibly owe estimated tax penalties.
Your estimated taxes should include not only income taxes, but also:
- Self-employment tax if you're self-employed.
- 0.9% additional Medicare tax on earned income (from a job and/or self-employment) if it is more than a threshold amount: $250,000 for married filing jointly; $200,000 for singles; $125,000 for married filing separately.
- 3.8% net investment income tax on unearned income. While online selling isn't unearned income because you actively participate in the activity, the profits boost your overall income, which can then expose your investment income to this added tax.
- Employment taxes for a household employee, such as a nanny.
7) Set your New Year's resolutions
Get started immediately to ensure that your actions next year will optimize your tax results. For example, decide to improve your recordkeeping of business expenses so you won't miss out on any legitimate deductions. And learn about new tax rules for 2016.
8) Touch base with your CPA
If you work with a tax advisor, as many small business owners do, be sure to have a meeting or at least a conversation, before the year closes. Ask for other suggestions that will be helpful to your particular tax situation.
The more attention you pay to your taxes, the more likely it is that you'll find ways to reduce your liability and improve your financial position. Happy New Year!
Edited 12/14/15 to add clarification in point number one about replenishing inventory.
About the author:
Barbara Weltman is an attorney, prolific author with such titles as "J.K. Lasser's Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business," and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of "Idea of the Day(R)" and monthly e-newsletter "Big Ideas for Small Business(R)" at http://www.barbaraweltman.com and host of "Build Your Business" radio. Follow her on Twitter: @BarbaraWeltman.
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