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We’re just into the new year, and that means it’s time to reevaluate strategies for your eCommerce business if it’s going to survive and grow. As a business owner, that also means making changes to how you spend and make money to optimize your business for tax purposes — and thanks to the massive set of changes that went into effect for the tax year 2018, that might mean updating your strategy when it comes to eCommerce taxes.
So what are the most important tax changes eCommerce owners should be paying attention to?
The corporate income tax rate is lower
First, the corporate income tax rate has been significantly lowered. Previous corporate tax rates would have had you paying 15, 25, 34 or 35 percent on your income, depending on how much money your business made.
The new tax is a much simpler flat rate of 21 percent, no matter how much money your corporation makes — and that rate is set to live on past the expiration of other tax reform changes (2025).
This change will apply to your eCommerce company if it’s a corporation, or if it’s an LLC being taxed as a corporation.
If you made between $0 and $50,000 of income, you could hypothetically pay more taxes (21 percent, as opposed to 15 percent), but very few corporations fell into this category. Instead, you’re likely to see a tax break.
No more corporate AMT
If your corporation makes a lot of money, you might also be pleased to know that the corporate alternative minimum tax (AMT) is now gone. This existed as a way to ensure that corporations paid a minimum amount of tax, preventing them from circumventing taxes in an exploitative way. However, you won’t have to worry about the AMT at all anymore, so it need not factor into your tax projections.
Big deductions for pass-through businesses
This change is a bit more complicated. It applies only to business owners of pass-through entities like partnerships or S-corporations; now, if you meet certain qualifications, you might be able to deduct up to 20 percent of the personal income you take from your qualified business income, significantly reducing your total tax burden.
So how can you tell if you qualify?
First, you need to make below a certain income threshold; the deduction requires you to have taxable income of less than $315,000 (for business owners who are married, filing jointly) or less than $157,500 (for business owners filing independently). If you have more taxable income than those limits, you might still qualify for a partial deduction.
You may be disqualified from the deduction if you’re a service-based business (like an accountant, doctor or attorney), but that shouldn’t be the case for eCommerce owners. If you own a non-service-based business, your deduction amount will depend on a more complicated calculation, based on your W-2 wages, qualified property cost and business income.
Some deductions are gone
You should also be aware that some deductions have vanished entirely:
You may no longer deduct “entertainment expenses” your business incurs, such as taking clients out to eat or providing restaurant meals for employees on a sales trip. While some businesses might take a hit here, others may actually end up reducing overall unnecessary costs.
Under the old rules, you could deduct just about any interest you paid on a business loan. Now, businesses are only allowed to write off interest-related expenses up to 30 percent of its adjusted taxable income. There are also a few other caveats to keep in mind, but that’s the bottom line for eCommerce operations.
Net operating loss (NOL) deduction
If your business had a net operating loss (NOL), historically, you would have been able to deduct those losses to reduce taxes paid in the past two years or on future gains for the next 20 years. Now, NOLs are limited to 80 percent, and can only be carried forward (they can’t be applied to past years).
Domestic production deduction
Your eCommerce business is unlikely to have benefited from the domestic production deduction, but on the off chance it did, you should know that this deduction has disappeared as well.
eCommerce taxes — Take advantage of tax changes in the new year
So what can your eCommerce business do this year to take advantage of these tax changes?
Be prudent with your business expenses
First, be careful about what business expenses you accrue. In the past, business-related tax deductions were somewhat plentiful; you could deduct almost anything you bought for your business. Now, things are more complicated, and write-offs aren’t as easy to come by.
Avoid taking a strategic loss
Some businesses aim to get a loss on paper so they can take advantage of the net operating loss (NOL) rule, or at least prevent having to pay a high corporate tax rate. But now that the tax rate is lower and NOLs aren’t as powerful, it doesn’t make as much sense to try it.
Consider taking advantage of pass-through benefits
If your eCommerce business is a pass-through entity, you can take major advantage of the new 20-percent deduction — just make sure you know the technicalities and limitations before proceeding.
There are dozens of other changes that went into place with the latest set of tax reform rules, including changes to 529 college savings plans and moving expenses, but many of these apply more to personal taxes than eCommerce taxes, and there are too many to cover comprehensively here. While using this guide can be a good primer to the latest tax changes that affect your eCommerce business, it’s better to talk in-depth with a tax professional to learn more details about how your business might be affected.