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Accounting & Tax For Amazon FBA, Youtubers, SAAS Companies

Question #38 I say we do pretty well…we do 8 figures annually. When should I hire a CFO or fractional CFO? – 0:00:01

Question #39 Is there an automated way to do Bank reconciliation for my Shopify eCom business? Is there a software that does this automatically? – 0:01:09

Question #40 How do I use depreciation/accelerated deductions to reduce my taxes for this year? – 0:02:28

Question #41 What’s the difference between a bookkeeper, accountant, CPA and CFO? – 0:05:20

Question #42 How do I pay myself out of my business? Am I taxed on company level and then taxed again on the personal income level? What is the best structure to pay myself to minimize taxes? – 0:07:30

Question #43 From your clients, which eCom business is the most profitable? – 0:11:29

Question #44 I’m dropshipping from a U.S. warehouse, does it give tax nexus in that state? or only if they are holding bulk inventory? – 0:13:56

Question #45 Can I use the form 709 to bypass the gift tax if I gift over $14k? – 0:15:11

Question #46 Can I put my net profit into a 401K in order to avoid paying higher income tax bracket? – 0:16:48

Question #47 What are some ways that I can reduce personal income tax when I own the business, and pay myself through the business? – 0:18:15

Question #48 What is a sales tax certificate/license and do I need to apply for it? When do I need to apply for it? – 0:22:21

Question #49 How do I calculate COGS on my amazon FBA business? – 0:22:35

Question #50 How to forecast cash flow in my Amazon FBA business? – 0:25:17

Question #51 How to value my eCommerce inventory? – 0:29:47

Question #52 What if I detect a large difference between my FBA inventory count and balance sheet? – 0:32:42

Question #53 “I’d like to sell one brand out of my portfolio but all of my business is commingled in one account. What do I do?” – 0:33:23

Question #54 Why is there a discrepancy between my Quickbooks online account and Amazon seller central account? – 0:34:47

Question #55 I’ve been selling through FBA since May of this year. I filed an LLC in April of this year and have not filed taxes at all yet. I had assumed it would be something I would have to deal with next April, but now I’m not sure. Do I need to file quarterly? How do I know if I do, and how do I know when they are due? – 0:36:02

Question #56 How can I find a buyer for my amazon FBA business/How do I sell my FBA business? – 0:37:19

Question #57 Do I have to pay merch by Amazon tax? – 0:40:28

Question #58 I don’t have enough cash flow to buy new inventory. When should I take a loan and how should I manage that cash flow? Can you please advise me? – 0:41:06

Question #59 What are quarterly estimated taxes and when do I have to pay them? – 0:42:41

Question #60 I am an influencer/youtuber, make money from Youtube Ad Sense, affiliate marketing, sponsorships. What taxes do I have to file? – 0:45:18

Question #61 When Youtube pays me Ad Sense, does YouTube take out taxes for you? – 0:46:33

Question #62 How much do you need to earn to pay Youtube taxes? – 0:47:33

Question #63 Do you need to set aside money besides Youtube taxes? – 0:48:02

Question #64 What are the top tax deductions you can take as a Youtuber? – 0:49:00

Question #65 How do you calculate your MRR? – 0:50:56

Question #66 How should I structure my accounts for my SAAS company?/What financial statements should I prepare for SAAS? – 0:52:02

Question #67 I’m looking to exit my SAAS company. What financial statements do I have to prepare for my SAAS company? – 0:54:23

Question #68 How do you advice to do revenue recognition for subscription based SAAS company? – 0:56:19

Question #69 Any software you recommend for SAAS startup for accounting/bookkeeping? – 0:58:42

Question #70 Deferred revenue vs. Accrued revenue for SAAS – 1:00:05

Question #71 How do I manage deferred revenue for subscriptions? – 1:02:22

Question #72 Why is it essential to do accrual accounting for SAAS? – 1:03:54 

Question #73 When do you need to hire a CFO for my SAAS startup? – 1:06:39

 

Is there an automated way to do Bank reconciliation for my Shopify eCom business? Is there a software that does this automatically?

Nothing automatic…but software helps for sure.

How do I use depreciation/accelerated deductions to reduce my taxes for this year?

Depreciation is the crazy tax deduction that no one talks about because i guess it’s not very well understood outside of if you read an accounting textbook. But basically Depreciation is a tax deduction you can take on a capital asset and it is for the wear and tear on an asset due to the passage of time. 

So Depreciation represents how much of an asset’s value has been used up. Usually you can have to take it in a straight line method which mean you reduce it by an equal amount every year so for example if you buy a piece of machinery and it cost 100,000 and it has a 10 year useful life. That means each year you can take a 10,000 deduction on your tax return. 

But with recent tax law changes, IRS and Congress have made it extremely beneficial for small business owners to invest in their business. So they have created laws specifically Section 179, which basically allows small business owners to take up to 1,050,000 deductions a year right away as long as they put the equipment in service the same year. 

So for example if you buy equipment for 1.2M or a bunch of computers for 700,000. you can take up to 1,050,000 of it as a tax deduction..RIGHT AWAY….it’s pretty insane but they really wanna encourage business owners to invest in their business in the US currently.

What’s the difference between a bookkeeper, accountant, CPA and CFO?

Bookkeeper- Unlicensed, can be one, just with 6 week of training..same with accountant….place like H&R Block and Liberty Tax…those ppl that you go to do your taxes? They just go through a 2-3 week course on basic taxes…and there u go they are there trying to figure out your tax situation. Don’t go to one of those…

I’m a Certified Public Accountant, CPA, for those that don’t know that means I am licensed to perform certain special accounting and finance functions that i would say just your typical accountants wouldn’t be able to do: **Prepare audited or reviewed financial statements and file a report with the Securities and Exchange Commission (SEC)**Represent clients in front of the Internal Revenue Service. (However, a non-CPA who is an attorney, enrolled agent, enrolled retirement plan agent, or enrolled actuary can also represent clients.)

Auditing and review

Tax preparation and consulting

Consulting services

Financial planning

Litigation consulting

Exam, Education, Work Experience to obtain this status..and it is also a privilege as we are held to the highest of ethical standards to ensure we are doing everything we can for the best interest of our clients.

I actually want to take it a step further, I would say not only do you want a CPA, you want a CPA specialized in your industry. So we like to present an analogy here. gist of the Tiger Woods story. His father gave him a putter when he was six months old. He was physically precocious and dragged it around everywhere in his circular baby walker, starting imitating a swing at 10 months. 

By 2 years old, he was on national TV showing off his swing in front of Bob Hope. By 3, his father started to media train him. Fast forward to 21, he’s the best golfer in the world. 

He’s very focused on golf — large amounts of deliberate practice where it’s like technical training. So in this case you want the Tiger Wood of CPAs to concentrate on your business. Someone who you know is gonna be very technically trained to understand the game of ecom from inside and out. Plays some gold on the side with his buddies, and drinks beer while on the course….he’s not gonna make sure u get all the tax profit back you deserve…he’s busy drinking his beer haha…

How do I pay myself out of my business? Am I taxed on the company level and then taxed again on the personal income level? What is the best structure to pay myself to minimize taxes?

Take a straight salary. It’s simple, easy to manage and account for, and is unlikely to raise any eyebrows. …

Balance salary with dividend payments. …

Take payment in stock or stock options. …

Take a combination of salary plus annual bonus. …

Create a business agreement to pay yourself later.

Select an Amount

Once you’ve determined the right type, your next job is to calculate how much to give yourself. Wait, I can’t just pick any number? Well, not exactly. You want to pay yourself an amount that ties to your duties, and also sets your business up for long-term success. Here’s a handy guide to help you figure out just how much to pay yourself.Related

Spend some quality time with your profit & loss (P&L) statements to see how much net profit you’re raking in each month. Then, deduct your own pay from that amount — not the total revenue. This is because you want to pay yourself from the amount left over after you tackle your important business expenses, like supplies, rent, paying your incredible team, and everything else needed to keep your venture running smoothly.

The IRS also requires that all employer compensation is considered reasonable, which just means that it should match the amount you’d make if you were working in the same role at another company.

If you feel like you wear a million different hats, try to pick out the most common responsibilities you take on, and then determine how much you would have to pay someone if you outsourced those tasks. This is sometimes referred to as your “true wage,” and it’s truly cool to think about your job in such a multifaceted way.

Take a look at this Income Statistics guide from the Small Business Administration to help you get a quick understanding of what your total should be.

  1. Owner’s Draw

Most small business owners pay themselves through something called an owner’s draw. The IRS views owners of LLCs, sole props, and partnerships as self-employed, and as a result, they aren’t paid through regular wages. That’s where the owner’s draw comes in.

It’s important to note that draws aren’t taxed at the time they’re taken out. However, be prepared to pay taxes on them when you file your individual return.

Which business entity is it suited for? Sole props, LLCs, and partnerships. If you’re an S corp, you’ll also have the option to take a draw in addition to your regular salary.

  1. Salary

Salaries are set, recurring payments that are taxed by the state and federal governments. Own a corporation and be involved in the day-to-day operations? Then the IRS will expect you to take a salary — not an owner’s draw.

Which business entity is it suited for? C corps and S corps.

Pro tip: Whatever payment style you choose, keep in mind that you will eventually have to pay taxes on that amount, if not immediately, then at some point down the road. It’s really crucial to plan for this ahead of time so you’re not stuck with a giant tax bill when you least expect it. Many payroll solutions will handle this for you automatically, so do your research upfront.

Select an Amount

Once you’ve determined the right type, your next job is to calculate how much to give yourself. Wait, I can’t just pick any number? Well, not exactly. You want to pay yourself an amount that ties to your duties, and also sets your business up for long-term success. Here’s a handy guide to help you figure out just how much to pay yourself.

Spend some quality time with your profit & loss (P&L) statements to see how much net profit you’re raking in each month. Then, deduct your own pay from that amount — not the total revenue. This is because you want to pay yourself from the amount left over after you tackle your important business expenses, like supplies, rent, paying your incredible team, and everything else needed to keep your venture running smoothly.

The IRS also requires that all employer compensation is considered reasonable, which just means that it should match the amount you’d make if you were working in the same role at another company.

If you feel like you wear a million different hats, try to pick out the most common responsibilities you take on, and then determine how much you would have to pay someone if you outsourced those tasks. This is sometimes referred to as your “true wage,” and it’s truly cool to think about your job in such a multifaceted way.

Take a look at this Income Statistics guide from the Small Business Administration to help you get a quick understanding of what your total should be.

From your clients, which ecom business is the most profitable?

The ones who have organic traffic figured out + they run paid ads to accelerate growth, or they have recurring revenue baked in. We have aggregated data to determine this among our clients…but honestly the most profitable clients we have are those that have an incredible grasp of their profit margin and are the most tax efficient.

I’m dropshipping from a. us warehouse, does it give tax nexus in that state? or only if they are holding bulk inventory.

Grey area. For US dropshipping usually no. If you’re warehousing inventory in the USA, then 1000% yes tax nexus. Yes, if you have any kind of physical presence you will create a nexus for yourself.

Can I use the form 709 to bypass the gift tax if I gift over $14k?

The annual gift exclusion for 2020 is $15,000. The applicable exclusion amount consists of the basic exclusion amount ($11,580,000 in 2020). Once you fill out Form 709 you can give bigger gifts to your family members and not have to pay the gift tax on it…

Can I put my net profit into a 401K in order to avoid paying a higher income tax bracket?

Oh yes…this is actually one of the smartest you can do to lower your taxable liability and also invest into your future.

What are some ways that I can reduce personal income tax when I own the business, and pay myself through the business?

Several things you can do:

Do Year-End Planning

While tax planning is a year-round activity, you can achieve dramatic savings by taking action at the end of the year. There are several strategies that can help you lower your taxable income just before the end of the year.

Delay billing for unpaid work until payment is received. If your business uses cash basis accounting, you can delay billing for work done at the end of the year until payment is received in the following year. This lowers your tax liability in the current year. Just don’t defer income if you are having a cash shortfall or have concerns about the customer’s ability to pay.

Purchase fixed assets and claim immediate depreciation. You can lower taxable income in the current year by claiming a portion of depreciation on recently purchased fixed assets. It is also important to revalue your assets that are listed in your books. This can help lower your net profit as you increase claimed depreciation. If an asset has no use or value, ask your accountant if you could delete it.

Write off bad debt. If you have an account receivable with a customer who is unlikely to pay, then you might be able to write this off as an uncollectible debt. This is known as a Bad Debt Deduction. It will be considered a loss and will allow you to lower your profits and taxes. However, to qualify for this deduction, you must have previously included the bad debt in your business income. You must also have intended the transaction to be a loan, such as a loan to clients and suppliers, credit sales to customers, or business-loan guarantees.

File and submit your taxes on time. When it comes to end-of-year planning, it’s best to have your taxes filed and submitted on time.There are separate penalties that apply for late filing and for late payment, so you should file on time even if you’ll need more time to pay.

Don’t Overlook Carryovers

Certain deductions and credits have limitations that can prevent you from using them fully in the current year but could permit a carryover to future years and carryovers are a way to reduce taxable income. Keep track of carryovers so that you won’t forget to use them in future years. This is done automatically by most tax preparation programs and should be done by tax professionals you may use. Examples:

Capital losses

Charitable contribution deductions

General business credits

Home office deduction

Net operating losses (limited to 80% of taxable income)

  1. Use Tax-Free Ways to Extract Income

Salary, bonuses, and distributions of your share of business profits are taxable. However, there are ways in which you can possibly benefit from your business’s success without triggering the tax. Consider talking to your accountant about:

Tax-free fringe benefits, including medical coverage, health savings accounts, and retirement plans.

Loans by the business to you on a no- or low-interest basis. If the loan interest is below IRS-set rates (also known as Applicable Federal Rates), the business may have to report interest from this arrangement. But with interest rates low, this isn’t too costly these days.

-Categorize your business expenses correctly. Find business purpose for everything.

-Retirement planning

  1. Make Smart Tax Elections

There are several ways to reduce taxable income by being strategic about your business expenditures. For example, you are allowed to deduct the cost of acquiring machinery and equipment in full, upfront, up to a set dollar amount. In 2018 that spending cap increased to $1 million per the new tax law.

However, if your business is just starting up or is not yet profitable, you can ask your accountant about depreciation for these items. It might be better for your overall tax situation if you can spread out the value of the purchases across your future tax years instead of deducting the full purchase price all at once. This can help produce deductions for future years when these assets may be more valuable to you.

For example, if you are in the 15% tax bracket now but expect to be in the 35% bracket in the future due to increased profitability, a $10,000 deduction would have you currently saving only $1,500 in taxes. Depreciation over five or seven years (depending on the type of item) would produce total savings in the 35% bracket of $3,500, or $2,000 more. 

Other options to ask your accountant about:Deducting vehicle expenses based on actual costs or the IRS mileage allowance (currently 58 cents per mile)

Deducting vehicle expenses based on actual costs or the IRS mileage allowance. Beginning in January 2019, it became 58 cents per mile.

Deducting home office expenses based on actual costs or the IRS simplified rate. The current standard deduction is $5 per square foot up to 300 square feet of space.

Claiming disaster losses on prior-year returns rather than on the return for the year in which the disaster occurs.

What is a sales tax certificate/license and do I need to apply for it? When do I need to apply for it?


A Sales tax Certificate gives you the legal right to collect sales tax from your customer for a certain state. You apply for it when you trigger certain nexus rules.

How do I calculate COGS on my amazon FBA business?


COGS are the direct costs associated with your sales. In e-commerce, this includes factors like:

The amount you paid the factory or supplier for your goods

Costs associated with fabricating your goods yourself

Tariffs and duties

Freight costs associated with obtaining your products

Other miscellaneous fulfillment expenses associated with getting your goods into your customers’ hands

There are two ways to determine your COGS, and each has their pros and cons.

Cash Basis Accounting

The pro of cash basis accounting is that it is the simplest type of accounting. For example, say you pay a vendor $10,000 for 1,000 units of an item. In your bookkeeping, you would expense this $10,000 right away.

However, the con of cash basis accounting is that you end up with terrible visibility into your actual profits. In months where you make large inventory purchases, cash basis accounting may make it look as if you lost money. While in months where you don’t make any inventory purchases you may feel that your business is insanely profitable. All the while, you may be somewhere in between, but you simply won’t know! Which brings me to…

Accrual Basis Accounting

In an accrual basis account, rather than counting inventory purchases as an expense the month you purchase them, you expense the items you’ve purchased as you sell them.

This more hands-on method requires you to “park” your goods in an Inventory account in your bookkeeping software until you actually sell the goods.

The pro of using accrual basis accounting is that you have up-to-date visibility into the actual financial health of your business.

The con of this method is, of course, that it’s more difficult to do than simply tracking each expense in the month that you write the check. However, most accounting professionals prefer sellers to use this form of accounting because it allows for greater visibility into your business’s financials.

Quick tip: The most important thing to note about accrual accounting is that, when it comes to keeping your books, spending cash doesn’t necessarily equal incurring an expense when it comes to your business bookkeeping. 

For example, say you purchased a truckload of products in October, but you didn’t actually begin selling those products until November. You would only count the money you paid for that truckload of inventory as an expense in November when you begin selling each SKU.

How to forecast cash flow in my amazon FBA business?

Now that you’re aware of how money enters and leaves your business, it’s time to forecast your cash flow.

recommends businesses at least perform a monthly forecast covering the next six to twelve months. Some larger businesses even forecast weekly.

No matter how far out you chose to forecast, just be sure to keep your analysis updated. Due to market forces, the availability of new inventory, technology and many other factors, e-commerce businesses can change as the wind blows. An out-of-date forecast is as useless as no forecast at all.

When creating your forecast, think about how cash flows in and out of your business in each of these categories:

Operations – Select your time period and predict sales, expenses and profits. Is this number good news or bad news? If it’s good news, you may find that you have cash to spare to beef up inventory or hire. If it’s bad news, you can make changes, or plan for lean months.

Financing – Calculate what debt you have due each month.

Investing – Consider 2 activities: 

1) If the owner adds money to or retains earnings in the business (Retained earnings (RE) are when the owner leaves money in the business rather than taking it out to pay themselves.) 

2) If the owner pulls money out as a profit distribution (some businesses call these dividends, but just think of this as money you, the owner, gets from the business that isn’t your salary.)

Inventory Purchases – Most businesses focus on Accounts Payable (AP) and Accounts Receivable (AR) here, but e-commerce businesses are singular in that AP is almost 100% related to inventory. So, inventory gets its own line in your forecast because purchases, deposits, etc. can crush the average seller if not planned for. 

Think ahead to times of year when you expect to actually spend cash on inventory.

Accounts Payable – This number can increase or decrease month to month. (It can also stay the same, but rarely does.) What you want to look at is the amount you expect your AP to change every month. If you expect your AP to go down, this harms your cash flow because you paid money to a vendor. If you expect AP to go up, this actually helps your cash flow because your vendor has “loaned” you money by allowing you more time to pay.

Taxes – Keep in mind that profitable businesses are expected to pay quarterly estimated taxes to the government in April, June, September and January. Don’t forget to add these tax payments to your forecast.

How to value my eCommerce inventory?

If you’ve spent capital on inventory that a new buyer will get to profit from, it’s important to make sure you’ll be compensated for the value of that inventory in the sale of your business. You can think of this as the new owner buying the inventory from you during the sale.

You should value your inventory at your cost, or how much you paid for it without including advertising, packaging, or shipping costs. You’ll then add the total value of your unsold inventory to the total valuation after the market multiple is applied.

Quality Inventory

While you should get compensated for your purchased inventory, your buyer will harshly scrutinize the quality of your inventory. Buyers are reluctant to pay full price for inventory that isn’t moving, and they have the right to ask for a deduction for SKUs that they know they won’t be able to sell.

For this reason, it’s extremely important that you have two things in order in the months leading up to a sale: an optimized catalog of products and high-quality accrual accounting.

One of the most productive things you can do leading up to the sale of your business is to be ruthless in simplifying your product line. Take a hard look at your SKUs and throw out anything that’s not moving as it should be, anything with an extremely small margin, or anything that once was trendy that’s now gone out of style (more on how to spot underperforming SKUs can be found in this post). Presenting a potential buyer with a knockout list of products will increase the buyer’s confidence in the sale, as well as set you up for a better inventory repayment.

Aside from an excellent product catalog, an important element for valuing your inventory is solid accrual accounting. Having organized, investor-grade books will allow you to more easily assert the value of your inventory and back up your valuation claims with P&L data. If your business is in need of an accounting clean-up, contact us for a free discovery call today.

What to Expect from Your Buyer

After the valuation process, your buyer will present you with a Letter of Intent (LOI). This letter will outline the market multiple the buyer is willing to pay for the business, as well as a factor that includes the value of your inventory and working capital. This inventory factor provides accountability for you as the seller to continue to purchase high quality inventory in the months before the business is turned over to the new owner.

What if I detect a large difference between my FBA inventory count and balance sheet?

When you perform an inventory count, which is a common audit practice to verify the existence of inventory. You would use the actual inventory counted to adjust what is on the balance sheet. 

How do I make my Amazon FBA business more profitable?

Lever 1: Increasing Sales Growth

One of the most obvious levers to pull to increase your Amazon business profitability is to increase sales. This can mean:

Increasing prices – Prices change on Amazon constantly. If you aren’t keeping a close eye on your SKUS (either manually or by using software), you may find yourself leaving money on the table.

Selling more of your existing products – Which of your SKUS are most profitable? For a quick sales boost, consider stocking more of them or putting resources such as advertising and Amazon’s A+ Content program behind them.

Adding new products to your mix – Every Amazon seller knows that a bestselling SKU doesn’t last forever. Trends change, the market gets saturated, or Amazon itself comes in and offers buyers a more tempting deal. Savvy sellers are always on the lookout for new products.

For many sellers on Amazon, sales are already great. In a letter to shareholders, Jeff Bezos revealed that in 2018 Amazon’s 3rd party sellers made up a bigger share of sales than Amazon itself. That’s all well and good in the big picture, but are all those individual Amazon sellers profitable?

As Seller Accountant Co-Founder Tyler Jefcoat always says, “Sales is vanity. Profit is sanity.” So that takes us to:

Lever 2: Decreasing Cost of Goods Sold (COGS)

COGS are the direct costs associated with your sales. These include:

Purchase or manufacture price of your product

Freight costs to get the product to you

Tariffs and duties

Miscellaneous fulfillment expenses, such as Amazon commissions

Hot take: COGS are more important than sales.

You read that right. If you just look at your sales figures and then toss the rest of your financial reports in the circular file, you are missing out on a true picture of your Amazon business’s financial health.

The SKU that looks like a real winner when it comes to sales figures may also be the SKU that is pulling your profits down into the red when it comes to the cost of purchasing or importing it.

The good news is that you can likely pull the COGS lever today to increase profitability. Read more on how to calculate COGS in your Amazon business.

From there, kill or sell off products that don’t have enough margin and negotiate pricing on your profitable products. Once you’ve completed that step, cut the fat off your logistics. For example, can you negotiate with your freight hauler?

Decrease COGS, increase profit.

Lever 3: Increasing Advertising Efficiency

It’s very hard to be wrong when saying, “You are probably over- or underspending on advertising.” Like COGS, your ad spend is a delicate balance between paying just enough to attract eyes and clicks to your product, and paying so much that you eat into your ROI.

That’s why you should always look at your advertising expenses in context with COGS. What do I mean?

COGS and Advertising Example

You have found a product that costs you a grand total of $5 to purchase, have shipped, and prep for Amazon. But you can sell that product on Amazon for $50. You are in luck! You still have $45 of margin and have room to use some of that margin to buy advertising.

But on the other hand, say you figure out your COGS on one of your other best selling products and find that while it may sell for $50, it costs you $40 in COGS just to procure and ready the item to sell. In this case, advertising can quickly cut into your margin. If you’re not careful, you may even find yourself underwater on COGS and advertising without realizing it.

Pro tip: If your COGS + advertising on a given SKU is more than 40% of the sale price, take a hard look at whether that SKU is performing up to your store’s standards.

Taking a hard look at the ROI of your current advertising in relationship to your COGS will help you pull this profitability lever.

Level 4: Decreasing Overheard

Once you have a handle on sales, COGS and advertising, the number you are left with is your Seller’s Discretionary Income (SDE). This is the number you use not only to pay yourself, but pay employees and contractors, rent warehouse space, purchase seller tools, and even keep the office supplied in coffee and printer paper.

The final lever you can pull for profitability is decreasing your overhead. Every business is different, but here are a few examples of ways e-commerce businesses can save money:

Shipping – Have you negotiated with your carriers? Some carriers can reduce fees or otherwise give you a break on shipping costs as your volume grows.

Contractors – Are your contractors doubling up on any work? Are you using all of their allotted hours? Could this work be outsourced in a more cost-effective way?

Seller Tools – It’s easy to pay $9.99 here or there for a SaaS product only to realize that those little expenses have added up. Audit your 3rd party apps and seller tools to determine if your needs have changed, and then adjust accordingly.

I want to sell my amazon FBA business. How do I track my seller’s discretionary earnings (SDE)?

But the most important factor is Seller’s Discretionary Earnings (SDE). Sometimes referred to as Adjusted Cash Flow (or Adjusted EBITDA), SDE is a profitability measurement that shows the amount of cash the business generates that can either be distributed to the owner or reinvested in the business. More important than net profit, SDE is your business’s core profitability number.

If you are planning to sell your Amazon business:

It is vital to know and understand your SDE because buyers will require you to show these numbers.

If you’re not looking to exit any time soon:

Knowing your SDE will allow you to see a true picture of your business’s financials, cut the fluff, and run a lean and mean operation that maximizes your profitability.

Understanding Seller’s Discretionary Earnings (SDE)

The standard e-commerce term for adjusted profit, SDE allows you to view your profitability through a buyer’s lens. It attempts to normalize the performance of different businesses (since no two are alike), so that the buyer can make better decisions about how much a business is worth.

Take these two $1-million sellers who run their businesses very differently. Guy A is a solopreneur who does all of the work and prefers to use a manual spreadsheet over SaaS products to track his business. Gal B has a day job and therefore has hired a manager to run her Amazon shop. She likes to go to Amazon conferences for networking and she uses lots of SaaS tools and contractors.

Their operating expenses will look very different, but how profitable is the actual core of the business? If I were to buy Guy A’s business and don’t plan to be a one-man shop, I will likely make less profit than his books are showing because I’m going to need some additional help. If I were to buy Gal B’s business, I likely won’t need to spend nearly as much money and could likely make more money because this will be my full-time job.

If I buy one of these businesses, I’ll want to know my chances at profitability. That’s where calculating SDE comes in.

How is SDE calculated?

There are two ways to calculate SDE:

Net Income plus any expenses that are considered “add backs” (expenses the new owner likely won’t have to spend this money on on an ongoing basis); or

Gross Profit minus any expenses that will be required to continue running the company to maintain its existing SDE. The most significant expenses that will carry over to the new owner are advertising and non-owner salaries or contractor wages.

What are examples of Add Backs?

Knowing what counts as an add back can be a gray area, but to figure them out, think of yourself as a buyer and then ask the following question about each expense: “In order to operate this business, will I have to continue paying this money?”

As a general rule, if it’s unknown whether a buyer would continue to have to pay this expense after they take over your business, you should count it against your SDE. In most cases the buyer will ask, “If you didn’t need that expense, why did you spend that money?” If you were testing new ideas or playing with new product blends, there’s a good chance that the new guy or gal will have to do the same.

What is my SDE multiplier?

Brokers and investors will value your company based on a multiple of your agreed-upon SDE. For retail arbitrage and wholesale sellers, the multiple is pretty low (1-2X). For brand owners, the multiple tends to be 2-4X depending on margins, growth speed, earnings consistency, and intellectual property matters.

Bigger deals also tend to get higher multiples. You are a much riskier target if you are a small company generating $250,000 per year in sales versus a company generating $10 million per year in sales. The $10 million guy probably has a much more stable company and has had to solve more problems in order to get to that size. The larger guy is more likely to get a 4X offer, while the small guy is more likely to land closer to 2X.

How much will a buyer pay for my business?

To sum it up, the basic formula for valuing an e-commerce business is:

Value = (SDE X Multiple) + Good Inventory

A quick note on good inventory:

Let’s talk about inventory that you already own when you sell. The good news is that your business is worth more if you have inventory ordered and ready to go – that way, the buyer can hit the ground running when he purchases you. The bad news is that you only get credit for sellable inventory. If you have inventory that is close to expiring or obsolete or isn’t moving, a buyer won’t pay more for that inventory.

The most important thing is to clear out bad inventory and have your inventory management system set up so that as much of your inventory as possible is “good inventory”.

How do I improve my SDE?

First, if you feel like you have expenses that don’t need to be in your business because you might lose the add-back argument, wipe them out. It is a lot easier to tell an investor, “Hey, I realized that I didn’t need that SaaS product back in June, I killed it and my sales are still the same. Therefore, I want to add back the months of that expense up to June.”

By comparison, if you are still using and relying on a tool, it will be harder to convince a buyer that they won’t need that tool if they buy your business.

Next, make sure that your books are clean enough that you clearly see which expenses are critical versus discretionary. (Wink wink – Seller Accountant can help.) Also make sure you understand which expenses are variable expenses versus fixed expenses.

Why is there a discrepancy between my quick books online account and amazon seller central account?

Why the discrepancy?

While you might think the Business Report in Seller Central is a good place to check on real-time data, there are two primary reasons why this difference occurs:

The Business Report does not account for orders cancelled by customers before the item is shipped. While your accrual accounting would not count the sale at all until an order ships, the business report considers a sale valid as soon as the order is placed, inflating sales numbers.

The timing of the order is reflected differently between Seller Central and QBO. Amazon’s software drops the sales data at the time of the order, while accrual accounting waits until the shipment occurs to include it in a settlement report. In other words, if an item is ordered on March 31st but doesn’t ship until April 4th, Amazon records the sale in March and your accountant won’t see it in the books until April.

Unified Transaction Report

What you can do to avoid this confusion is to instead look at your Unified Transaction Report. This report always ties to your actual deposit and reflects sales that were shipped (and therefore completed and settled) in a particular month.

I’ve been selling through FBA since May of this year. I filed an LLC in April of this year and have not filed taxes at all yet. I had assumed it would be something I would have to deal with next April, but now I’m not sure. Do I need to file quarterly? How do I know if I do, and how do I know when they are due?

Depends on revenue level

How can I find a buyer for my amazon FBA business/How do I sell my FBA business?

You have a number of options: Ask other FBA sellers you know who might be looking to buy, or advertise with online marketplaces and classified sites, such as Flippa.com, bizbuysell.com, or businessforsale.com. Even when you’re using an online marketplace to sell your business, it’s smart to use a broker.

How to Value an Amazon FBA Business

In order to arrive at an accurate valuation of an Amazon FBA business, you need look at the business’ financial picture, consider other attributes that contribute to its valuation and then determine the appropriate multiple. For most Amazon FBA businesses, the Seller’s Discretionary Earnings (SDE) method is used almost exclusively to determine earnings or “net income.” However, for businesses in the $50 million range or more, the Earnings Before Interest, Taxation, Depreciation and Amortization (EBITDA) formula is almost always used.

FBA businesses are valued in the same way as most online businesses, using a multiple of seller discretionary earnings (“SDE” or sometimes also called “seller discretionary cash flow”).

SDE is the profit left to the business owner once all costs of goods sold and critical (i.e., non-discretionary) operating expenses have been deducted from gross revenue. Any owner compensation can be added back to the profit number too, since this is a discretionary expense that a new owner could elect to reduce or eliminate. Adding owner compensation back into revenue helps uncover the true earnings power of the business.

Do I have to pay merch by amazon tax?

(Alan was not able to answer this in the video, so here is his response written out after the video)

The bad news: you’ll be expected to pay taxes on that income you’ve been making each month in Merch.

The good news: you can negate some of the burden with some easy steps come tax time. See some of my tips, recommendations and strategy below so you can keep as much of your money as possible (this is all standard tax practice).

Important: In 2018, the new tax reform was set in place so you’ll want to treat Merch as a business (even if you didn’t register it as a business, your tax professional can keep this separate from your 9-5 gig). So treat Merch like it’s your business.

Tax deductions are expenses that are basically like expenses that are needed to make your income. Did you buy one of your own shirts? Did you buy a font or graphic license? Do you work in your home or apartment? Those are tax deductions and can reduce the taxable income which will reduce the taxes you’ll be responsible for!

Here are some business expenses that you can discuss with your accountant come tax time. Make sure you have records of these expenses (receipts, invoices, copies of checks, credit card statements, etc). You’ll need to prove that you paid it and it was for your “business”. Check out these things to keep records of:

Internet Service I claim about 50% of my monthly internet service because I need internet to operate my Merch business.

Software I pay 19.99 per month for Adobe Programs.

Fonts I’ve purchased fonts for specific t-shirt designs.

Graphics I started purchasing graphics that would otherwise take me too long to do myself and hired graphic designers.

Work Space I do most of my designs and listings at home and the work space I have designated to do this is a deduction… ask your tax pro. You’ll need to know the dimensions of your work area.

Advertising If you do Facebook ads, Reddit ads, Amazon Marketing Services or other advertising, that is a great tax write off!

Subscriptions If you’re paying a monthly fee for an online site that helps you research your niche, this is a deduction.

Computer / Tablet These are tools that you need in order to do your jobs which earn income, either all or a percentage are deductible… possibly your phone too (partial). Applies to purchases made within your tax year.

Purchasing Shirts You need to check the quality of your designs and ensure that they are printing to your liking… this is a deduction.

Domain / Hosting If you have a website, the expenses related to it are deductibles. If you hired someone to do web work for you (over $600 in the calendar year), make sure to have them fill out a 1099-MISC form.

Mileage If you needed to drive anywhere, to come up with design ideas perhaps, or other business related travel, the mileage is a tax deduction.

Other Tools A trackpad, new keyboard, mouse, new monitor, computer hardware upgrades, etc are all deductions if you use them for your work. There are lots of things you might have purchased to help along the way… just make sure you keep track of everything.

In some instances, you may have more deductions than income, which is good because instead of paying in, you may be getting a tax return. In addition to the list above, think about any expenses that were relative to Merch. Check the following resources to find things that you may have forgotten:

Amazon Orders Log into Amazon and check your order history… did you buy something you forgot about that is business related?

PayPal Check your PayPal account to see if there were any business related purchases.

Credit Card Statements Same… any business related expenses?

Bank Accounts Again, anything in your account that was used for business?

Email – Perhaps you emailed yourself a reminder? I do this all the time… Check any retail emails or notes form yourself.

You’re entitled to these deductions, but they need to be legitimate expenses. Consider how you’d respond to each deduction as if you were being questioned by a tax professional or an IRS auditor. As long as you’re diligent in your records, you should have smooth sailing. Also, ask your tax consultant or tax prep what other things can be considered tax deductions.

I don’t have enough cash flow to buy new inventory. When should I take a loan and how should I manage that cash flow? Can you pls advise me?

I think this is a very common issue we see ECOM owners run into as they scale and that is that they are not aware of their burn rate- or otherwise known as the number of remaining periods they have before they run out of operating cash to keep their business running. Fundamentally I would take a step back and look at the margins very carefully before taking out any loan. 

Does your margins support you taking a loan out and outpace the interest rate, does the demand for your product outpace the loan principal rate. When you have a better understanding of these metrics, you can make a smart comprehensive risk assessment for how you want to proceed. You never want to take on debt that you don’t have a gameplan to pay back. 

I think this is the moral of the story, but debt can be a very powerful tool to gain financial leverage when used correctly, but I would definitely perform a financial assessment of your situation before taking it on.

What are quarterly estimated taxes and when do I have to pay them?

Quarterly estimated taxes are what you have to pay when you are not making enough tax withholding. So think about when you’re a 9-5 or a W2 employee that works at a company. 

As part of your paycheck your employer automatically takes out a portion of your paycheck as a withholding for your tax obligation. Will as a business owner, you are responsible for your own withholdings. 

So the government expects you to withhold taxes periodically, in this case on a quarterly basis.

When are quarterly estimated taxes due?

Taxable Period Quarterly Estimated Tax Due Date

January 1-March 31 April 15

April 1-May 31 June 15

June 1-September 30 October 15

October 1-December 31 January 15 of the following year

So the question you probably have is what are the consequences of not paying your quarterly taxes?

The IRS usually adds a penalty of 1/2 percent per month to a tax bill that’s not paid when due. This amounts to 6 percent per year. This penalty is added to the 3 percent interest charge, so the total penalty would be 9 percent or more if you don’t pay all your tax due on April 15.

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YOUTUBERS

I am an influencer/youtuber, make money from Youtube ad sense, affiliate marketing, sponsorships. What taxes do I have to file?

Great question, Subject to Federal and State taxes…..for all your income, but there are a lot of deductions available that you can take….for your video production equipment, clothes, and software that you use for your channel.

When youtube pays me adsense, Does YouTube Take Out Taxes for You?

Yes, actually beginning June 2021, Google will start withholding US taxes on earnings you generate from viewers in the US. So you should start entering your tax info, if not they will do an automatic 24% of your total earnings worldwide instead.

Can you deduct purchases like camera equipment, video editors, lighting for my youtube channel? What else can I deduct?

Yes you can, anything related to your youtube channel can be deducted, that also includes, your cell phone and internet cost, Home office, deductions, Business supplies, VA Costs, Travel expenses if you run a travel channel, Website hosting, domain name purchase and renewal, insurance for your computer, tax and accounting software, and SEo products. You can also deduct bank and shipping fees, if you run a merch store.

How Much Do You Need to Earn to Pay YouTube Taxes?

Legally $400 you would need to start declaring that income to the IRS….Google is legally required to provide you with a 1099 form, when you have made 600 dollars or more. SO when you hit that mark, the IRS will also have a record for your earnings.

Do You Need to Set Aside Money Besides YouTube Taxes?

Yes. You want to not only have an emergency fund, but several months of operating expenses, and equipment budget, and also money to replace broken cameras or computers you need to make your content. Operational cash and anything to keep your LLC functional.

Top Tax Deductions You Can Take For Youtubers

Section 179 Deduction for large equipments…cell phones (Business email and data), internet, Business Meals and Travel, Transactions Fees, Props to for your video, Retirement Plans to really help your retirement, health insurance deduction….upward of 10,000///interest payment, business credit card,,Business meals..you need to be conducting business…customer service.

SAAS Software Companies

How do you calculate your MRR?

Average revenue per account x total accounts that month = MRR

Average Revenue Per Account (ARPA) is the crucial metric when calculating MRR. You arrive at that figure by taking the average of how much all of your customers are paying and dividing it by the total number of customers that month.

To determine your MRR, you multiply that figure by your total number of customers. So, if you have 100 customers paying an average of $50 per month, your MRR would be $5,000.

How should I structure my accounts for my SAAS company? / What financial statements should I prepare for SAAS?

First of all you want to setup your chart of accounts, so you can quickly give all your expenes an different revenue class a specific category they belong in. Then you want to get yourself a good accounting system that can track based on Cost Centers or tracking categories. It is called Class Tracking in Quickbook or categories in Xero. 

Your tracking categories should be CoS, S&M, R&D, and G&A. Whenever you have a transaction then you’ll tag it with a GL *and* a tracking category. This will enable you to later generate an income statement showing the expenses associated with only S&M or another cost group(s). You will then have metrics covered on the cost side. 

For metrics on the MRR movements side (bookings, total MRR, churn), you should supplement your accounting system with a true subscription billing system and consider also adding a devoted reporting system geared for SaaS metrics.

You want to make sure you have a deep understanding of your metrics and your MMR as those will be determining factors when being evaluated by a 3rd party firm for valuation purposes and to get you the exit you are desiring

5 Key SaaS Metrics Every Software Startup Should Track

Customer Acquisition Cost (CAC) What Is It? The average amount a business invests to acquire a customer. …

Monthly Recurring Revenue (MRR) What Is It? …

Customer Retention Rate. What Is It? …

Churn Rate. What Is It? …

Lead-to-Customer Conversion Rate. What Is It?

I’m looking to exit my SAAS company. What financial statements do I have to prepare for my SAAS company?

If you are looking to exit you definitely need the 4 more critical GAAP FInancial Statements out there: a Balance sheet, income statement, Statement of Cash Flow, and Statement of Sharehold’s equity.

Balance Sheets

A balance sheet provides detailed information about a company’s assets, liabilities and shareholders’ equity.

Assets are things that a company owns that have value. This typically means they can either be sold or used by the company to make products or provide services that can be sold. Assets include physical property, such as plants, trucks, equipment and inventory. It also includes things that can’t be touched but nevertheless exist and have value, such as trademarks and patents. And cash itself is an asset. So are investments a company

Income Statements

An income statement is a report that shows how much revenue a company earned over a specific time period (usually for a year or some portion of a year). An income statement also shows the costs and expenses associated with earning that revenue. The literal “bottom line” of the statement usually shows the company’s net earnings or losses. This tells you how much the company earned or lost over the period.

Income statements also report earnings per share (or “EPS”). This calculation tells you how much money shareholders would receive if the company decided to distribute all of the net earnings for the period. (Companies almost never distribute all of their earnings. Usually they reinvest them in the business.)makes.

Liabilities are amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a bank to launch a new product, rent for use of a building, money owed to suppliers for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government. Liabilities also include obligations to provide goods or services to customers in the future.

Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be left if a company sold all of its assets and paid off all of its liabilities. This leftover money belongs to the shareholders, or the owners, of the company.

Cash Flow Statements

Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.

A cash flow statement shows changes over time rather than absolute dollar amounts at a point in time. It uses and reorders the information from a company’s balance sheet and income statement.

The bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.

How do you advise to do revenue recognition for subscription based SAAS companies?

For subscription based business to handle revenue recognition could be a simple or a vastly complicated topic depending on how you structure your company. At the simplest level it could just be you For example, a $120,000 annual subscription fee might simply be recognized as $10,000 per month during the subscription period. It is about the delivery of the service before you can recognize the revenue. 

However it gets more complicated when there is bundling involved. Meaning you bundle professional services like support and help services within the software, If a customer license (via perpetual or subscription license) includes any software modification or customization, revenue recognition will be impacted.

Let’s say a customer has signed an annual contract of $12000 at $1000 per month. Can the $12000 be recognized as revenue immediately? 

Not really. From a SaaS accounting perspective, the revenue can be recognized only when the said product/service is delivered to the customer. So in this example, $1000 revenue can be recognized every month in return for the product/service delivered, until the end of the contract.

For a SAAS business it is almost always correct to immediately go into an accrual accounting method as that’s when it will be expected from 3rd parties.

Accrual accounting suits subscription businesses because accrual revenue, if recognized correctly, actually tracks the MRR.

Key Challenges of SaaS Revenue Recognition

For annual plans, revenue recognition is straightforward. But the complexity gradually increases with subscription scenarios, when:

The customer cancels the subscription mid-way

They upgrade from a monthly plan to an annual plan in the middle of the year

They downgrade from a higher plan ($12000) to a lower plan ($6000)

Customer is unable to pay for the services rendered

It gets more complex with these features that are often bundled in SaaS:

Set-up fees

Support fees

Consultation services

Customization

Any software you recommend for SAAS startup for accounting/bookkeeping?

Quickbooks Online The best accounting software for software-as-a-service (SaaS) companies offer:

Scalability: Most SaaS companies are growth-minded, meaning you need accounting software that can keep up with your business as it expands.

Automation: SaaS is a fast-paced industry. Nobody wants to spend all their time doing accounting, so you need a solution that is as high-tech as the service you provide. Automation allows you to focus less on your books and more on your business.

Multi-business Support: SaaS encompasses a wide range of business types. Your software needs to provide a solution that can account for that.

Freshbooks and Xero are two other great options.

Deferred revenue vs accrued revenue for saas

Deferred revenue in accrual accounting is rooted in the matching principle. When you invoice a company for a one-year subscription, you have not earned that revenue yet. You earn it over the term of the subscription. … Deferred revenue is a payment from a customer for future goods or services

Deferred revenue, also known as unearned revenue, refers to advance payments a company receives for products or services that are to be delivered or performed in the future. Accrued expenses refer to expenses that are recognized on the books before they have actually been paid.

As an example, SaaS (software-as-a-service) businesses that sell pre-paid subscriptions with services rendered over time will defer revenue over the life of the contract and use accrual accounting to demonstrate how the company is doing over the longer term. This approach helps highlight how much sales are contributing to long-term growth and profitability.

Accrued Revenue is when you deliver a service..but haven’t gotten paid for it yet.

How to manage deferred revenue for subscriptions?

You need to make a deferred revenue journal entry. When you receive the money, you will debit it to your cash account because the amount of cash your business has increased. And, you will credit your deferred revenue account because the amount of deferred revenue is increasing.

Why is it essential to do accrual accounting for SAAS?

It fits the business model better..Revenue recognition purposes

The accrual method is preferable for SaaS companies specifically, since it smooths out revenue and expenses, allowing for simpler tracking and observing trends. Additionally, for SaaS companies, the accrual method will track along with MRR, providing easy metrics when speaking with stakeholders, investors, and others.

When do you need to hire a CFO for my SAAS startup?

There are a couple conditions where you definitely want an in-house CFO.

  1. Complexity of your revenue model
  2. Metrics- tons to track to ensure the success of your business
  3. Plan to fundraise or exit the company.

Besides those points, you would need to have a full team that the CFO can utilie to help with all these task:

Management of accounts payable and receivable

Bookkeeping

Management of payroll and expense reimbursement

Reconciliations

Monthly closing of the books

Financial reporting and analysis

Board meeting prep

Cash flow and forecasting

Taxes

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