On December 31, 2020, the total sales achieved by US Ecommerce businesses reached an astounding $759.47 billion. This 2021, key forecasts have projected that total sales will grow outward to $933.30 billion. Trends such as these paint a picture of rapid growth and expansion for the Ecommerce sector, but that comes with its developments as well.
For Ecommerce sellers and Online Businesses, one key part of their day-to-day operations is staying on top of their tax situation. This includes complying with certain tax requirements, state laws, and also collecting their due taxes via their digital platforms.
We’ll be discussing how availing a Tax Planning Consultation session can help you to stay on top of your taxes. But first, we’ll start with the taxation issues online businesses can face.
Common Taxation Issues for E-Commerce
There are a set of persistent problems that arise when it comes to the taxation of Ecommerce Businesses. Gone are the days of tax officials trying to keep up with the growing digital market, especially with the new laws in place specifically for that purpose. With the sale of goods over these digital marketplaces becoming more commonplace, it’s important to know what problems online businesses might face going forward.
The Nexus and State Jurisdiction
Firstly, there’s the constant changing of regulations on a state-by-state basis. Especially for bulk online sellers who stock inventory in another state, they might be inclined to pay sales tax there due to the presence of a Physical Nexus.
The term refers to whether or not a business has a significant physical presence within a state. This determines whether or not businesses will be obligated to collect and remit sales tax according to state jurisdiction. This may take the form of a physical location, affiliations with other businesses, owning a warehouse within the state, and even just simply keeping inventory there. The problem with this is that this rule has different interpretations depending on the state you find yourself operating in.
There is also the concept of an Economic Nexus, which looks at economic activities instead. States have their own rules regarding the number of sales or transactions necessary to be eligible for taxation. Some also allow local districts, counties, and cities to collect local option sales tax. Make sure to read up on the tax regulations within a state.
Complying with Sales Tax
Should a business find that they are under the jurisdiction of a state with sales tax, they must now begin the process of being compliant with tax regulations. First of all, one should make sure to check the specific tax rates that your state has. There is a great amount of variation to this, so it is important to do your research in every state and jurisdiction you are operating out of. Just one example of this is a proposed ordinance that was made in 2020 at the city of Chicago where plans to add a 5-cent tax on online sales of bottled water and alcoholic beverages.
After you have done your research, check for further details on how and when to file your taxes to the state agency. Some states still accept bank checks, but others have now moved on to digital payment services. Along with that, it is important to understand the potential penalties that your business can face should a mistake or a delay happen. Should there be a concern, it would be a good move to look for a tax lawyer or tax consultant who can guide you through the necessary processes and options for payment.
Certain states have made this process a bit easier with the formation of the Streamlined Sales and Use Tax Agreement. Through the cooperation of 44 states, this program makes it easier for local and online businesses by simplifying certain aspects of Sales Taxation. If you are operating in one of the 44 member states, make sure to check what this board can do for you.
Free 30-Min Strategy Session
By the end of this Strategy Session, you will have a clear understanding of the next steps you can take for your business to take advantage of the tax deductions you are missing out on.
The Benefits of Tax Planning
Although business owners can do all these requirements by themselves, it is still advised to set some time for Tax Planning. This practice, when done effectively and strategically, can allow a business to pay the lowest amount of tax possible. The money regained from tax deductions and credits can be used to further your business opportunities. However, you can approach Tax Planning with a variety of different strategies.
Tax Credit is a specific amount of money that you can deduct from the amount of taxes you owe. Now, this is different from deductions which flat-out subtract from the amount of taxable income. These may differ according to the location, size, and even industry of the business. Usually, these are given as incentives for a specific action or maybe even as an aid to struggling industries during times of crisis.
These can be categorized into non-refundable and refundable tax credits. The former is a set amount that can be deducted from your taxes until it becomes $0, with any excess amount lost and not paid out to the taxpayer. The latter is the most useful as they allow taxpayers to have a refund of their money when their tax liability goes below $0. The stimulus packages signed during the COVID-19 Pandemic are good examples of this, as they also functioned as a refundable tax credit for 2020.
Proper Timing of Expenses
When it comes to your expenses in your business, they can also be leveraged to benefit your tax planning. This involves measures such as reducing income, increasing expenses, and even purposely creating expenditures to move all associated taxes to another timeframe. What’s important is that this expense can be traced back to a good or service that you provide for it to become an official expense.
Restructuring your Business
Another option for businesses that are considered as Limited Liability Companies or LLCs is to initiate a structure change. For LLCs, there is some wiggle room for owners as they can either be taxed on the grounds of a sole proprietorship or as part of a corporation. Another potential action is to apply as an S corporation or S-Corp. These were made specifically for smaller businesses so that they could receive advantages when it comes to taxes. Even an LLC may opt to go for this status but this involves meeting strict requirements. Some of these include having less than 100 shareholders and making sure that all of these shareholders are US residents.
Surprisingly, a reliable method of reducing taxes could also be by simply saving money for future healthcare needs. Money can be routed towards a Health Savings Account which is available to those with the proper healthcare plans. Not only does this amount grow without being subject to taxation, but withdrawing funds from this account is also tax-free should the medical expenses be found to qualify for such an exemption.
Employed Family Members
Solo Business owners, both traditional and online, can make use of the IRS guidelines on family employees to save on their tax liabilities. This allows owners to shield their incomes from taxation, as well as allow them to not pay social security and Medicare taxes. The IRS has issued a variety of different guidelines regarding specific family members, so it would be best to check out the official site of the IRS or make contact with a tax professional.
Tax Planning Consultations: Do I need them?
Looking into this, some business owners may be inclined to do this all on their own. Although there are a multitude of guidelines and stipulations that you can make use of when it comes to Tax Planning, a great move for the long-term would be to employ a tax professional. These are consultants and advisors who have experience not only in tax planning but also in the various laws governing this. They also have in-depth knowledge of tax compliance, helping you to stay on top of your situation with their aid.
Some services that they can render to clients involve the filing of tax returns, assessing the current taxation situation, minimizing tax liability, and even representing the client when it comes to paying taxes. Most of all, these professionals can host Tax Planning Consultations to optimize your strategy and aid you in implementing key strategies in this aspect.
Scheduling a Tax Planning Consultation is easy with the multitude of CPA Firms and Tax Consultants available over the internet. However, research is key to finding the best CPA Consultancy Firm to aid you in this endeavor. One thing you should be looking for is what the firm’s tax background is, giving you an idea of the kind of businesses that they have experience dealing with. Not only that, it is a good idea to ask whether or not they have the infrastructure needed to manage not only tax compliance but also the process of filing and submitting the needed requirements.
For those already looking for a CPA Firm to help not only in tax planning but in other aspects such as bookkeeping and accounting, feel free to check in with FreeCashFlow.io. The CEO, Alan Chen, offers a free 30-minute Strategy Session meant to grow your business and reduce the amount of tax liability you have through deductions and other strategies available to you.