Jul 28, 2025
20 E-Commerce Business Tax Deductions for Online Store Owners
Running an online store isn’t easy. Between platform fees, advertising costs, and tough competition, your margins are already under pressure. Don’t let poor tax planning shrink them further.
Every legitimate business expense you deduct is money that stays in your pocket—not the IRS’s. And many e-commerce sellers miss out on thousands in deductions they’re fully entitled to.
In this guide, we’ll walk through the top tax deductions for online sellers, with real-world examples, receipt-keeping tips, and what the IRS actually looks for in an audit. By the end, you’ll know how to confidently write off more of what you're already spending—and keep more of your profits.
1. Cost of Goods Sold (COGS) and Inventory
Many online sellers mistakenly believe that buying $20,000 of inventory means a $20,000 tax deduction that same year. Unfortunately, that’s not how it works.
The IRS only allows you to deduct the cost of the products you’ve actually sold—not what’s sitting in your garage or warehouse. That $20,000 in candles? You’ll get the deduction only as those candles ship out to customers.
COGS includes more than just the sticker price of your products. It encompasses all direct costs associated with bringing your inventory to a sellable state, such as:
Product costs (what you paid the supplier)
Shipping and import fees to get them to you (aka “landed costs”)
Packaging or assembly labor (if not already included in payroll or product cost)
Because inventory directly affects your taxable income, how you track it matters immensely. The IRS requires consistency, so you must choose an inventory valuation method and stick with it:
FIFO (first in, first out)
LIFO (last in, first out)
Weighted average cost
Mid-year changes to your inventory method require IRS approval, and inconsistent tracking can raise red flags in an audit. Whether you use software or spreadsheets, make sure your inventory system ties back to your COGS calculation.
2. Shipping, Fulfillment, and Packaging
Getting your products into customers’ hands costs money—and the good news is, nearly all of it is tax-deductible.
You can write off every business-related cost tied to shipping and fulfillment, including:
Postage and courier fees
Fuel surcharges from carriers
Third-party logistics (3PL) fees (like ShipBob or Deliverr)
Shipping software subscriptions (like Pirate Ship, ShipStation, or EasyPost)
Packaging materials—boxes, bubble mailers, tape, labels, you name it
These are considered ordinary and necessary business expenses, which means you get to deduct them dollar for dollar.
And yes—you can deduct shipping costs even if your customer pays for them. Whether you charge $5.99 at checkout or offer "free shipping," the deduction is based on what you actually paid the carrier. Not what you billed.
3. Payment Processing and Marketplace Fees
Credit card fees may feel like a cost of doing business—but don’t overlook the upside: they’re fully deductible.
Every fee you pay to Stripe, PayPal, or your sales platforms (like Amazon, Etsy, Walmart, or eBay) is a 100% write-off. That includes:
Payment processing fees (like Stripe’s 2.9% + 30¢ per transaction)
Platform commissions
Currency conversion charges
Chargeback and dispute fees
Example:
If you generate $500,000 in sales and pay roughly 3.5% in processing and platform fees, that's $17,500 you can deduct—just from payment infrastructure alone.
Pro tip: These expenses are automatically tracked in most payment dashboards—download monthly or quarterly reports and save them with your bookkeeping files.
Important 2025 Update:The IRS was planning to lower the reporting threshold for Form 1099-K from $20,000 to $600. However, the Act of 2025 signed into law in July 2025 effectively reinstates the long-standing threshold of $20,000 in aggregate payments AND over 200 transactions for Form 1099-K reporting. This means payment platforms will only issue a 1099-K to you if you meet both of these conditions, providing significant relief for many online sellers and gig workers.
That said, you still need to report all income, even if you don’t receive a 1099-K. So keeping accurate records of your gross revenue and fees is more essential than ever—for compliance and for maximizing your deductions.
4. Advertising
Most marketing and advertising expenses are fully deductible in the year you incur them—as long as they’re directly tied to promoting your business.
This includes:
Meta (Facebook + Instagram) ad spend
Google Shopping or YouTube campaigns
TikTok influencer or creator payments
Affiliate payouts and commissions
SMS marketing platforms (like Postscript or Attentive)
Product samples and giveaways (as long as they’re for marketing—not personal gifts)
Example: If you spend $10,000 on digital ads and those ads help you generate $60,000 in revenue, you’re taxed on $50,000. The full $10,000 is deducted up front—no delays.
What about rebranding? Larger branding investments may need to be capitalized and deducted over time. That includes new logos, custom packaging redesigns, full website overhauls, major rebranding campaigns etc. These are still deductible—but depending on the scope, your accountant may need to spread the cost over several years instead of writing it off all at once.
Keep detailed invoices, campaign screenshots, and platform billing summaries. If you ever get audited, the IRS wants to see how the expense links to your business—so notes like “TikTok ad for Summer launch campaign” or “affiliate commission for April sale” go a long way.
5. Website, SaaS, and App Subscriptions
Your online store runs on software—and the good news is, those monthly and annual tech costs are fully deductible.
This includes:
E-commerce platforms like Shopify, BigCommerce, or WooCommerce
Email tools like Klaviyo, Mailchimp, or ConvertKit
Inventory and order management apps
Shipping software (like ShipStation or Pirate Ship)
Domain registration and website hosting fees
One-time purchases like premium themes, plugins, or checkout add-ons
Whether it’s a $300/year email plan or a $2 plugin from the Shopify app store, if it supports your store’s operations, it counts.
Documentation tip: Keep copies of email receipts, screenshots of subscription dashboards, and annual billing summaries. Tools like Bench, QuickBooks, or even Google Drive folders can help organize everything come tax time.
6. Home Office Deduction
If you run your online store from home, there’s a good chance you qualify for the home office deduction—but many sellers miss it because they’re not sure how it works.
To claim this deduction, the IRS requires two things:
Exclusive use: The space must be used only for business—no personal laptop time, no kids doing homework, no exceptions.
Regular use: You use it consistently, not just once in a while.
Note that home office deduction is not currently available to W-2 employees
Example: a dedicated corner of your bedroom with lights, backdrop, and camera gear for product photos can qualify—as long as you don’t use it for anything else.
Two Ways to Claim:
Simplified method: $5 per square foot, up to 300 square feet (max deduction: $1,500)
Actual expense method: Calculate the business-use percentage of your home and apply that to rent, utilities, internet, insurance, and more. This usually results in a larger deduction—but it takes more tracking.
If you choose the actual expense method, you'll also deduct depreciation on the business-use portion of your home. Even if you skip this now, it still reduces your home’s tax basis and may trigger depreciation recapture (taxed up to 25%) when you sell. So it usually makes sense to claim it—since the IRS treats it as taken either way.
Pro Tips:
Take photos of your workspace
Measure and sketch a simple floor plan
Save your utility bills, rent or mortgage statements, and repair invoices
Heads-up: If you already deduct warehouse or storage space as a business expense, you can’t double-dip and claim that same square footage in your home office deduction.
7. Internet and Phone
Fast internet and a reliable phone plan are non-negotiables for running an online store—and yes, the business portion of those bills is deductible.
Here’s how it works:
If you split usage between business and personal, you can only deduct the business percentage.
The basic formula: Total bill × business-use percentage = deductible amount
Example: If 70% of your $120/month internet plan supports product uploads, ad management, and customer support, you can deduct $1,008 for the year.
What the IRS Wants to See:
Itemized bills or screenshots of your plan details
Notes or logs showing how much you use each service for business
A consistent method for estimating business vs. personal use
Fully Deductible Services: if something is used only for business, you can deduct the full amount:
VoIP systems (like Dialpad, RingCentral)
Dedicated business phone numbers
International calling plans for supplier outreach
Keep documentation now—not just at tax time. A little tracking goes a long way if you’re ever asked to justify the deduction.
8. Warehouse or Storage Rent
If you pay for space to store your products, that’s a fully deductible business expense—whether it’s a full-scale warehouse or a small storage unit.
Here’s what qualifies:
Leased warehouses (e.g., $2,000/month = $24,000 annual write-off)
Self-storage units (even a $150/month locker counts)
Amazon FBA monthly storage fees
These costs are treated as ordinary business expenses and are deducted in the year you pay them.
If you own the property, you don’t get to deduct the full purchase price of a warehouse or commercial building all at once. Instead, you’ll deduct it over time via:
Depreciation
Mortgage interest
Property insurance
Maintenance and repairs
Renting is simpler—you deduct the full amount each year as you pay it.
Multi-State Tax Gocha: If you store inventory in multiple states (e.g., via Amazon FBA or 3PLs), you might create a sales tax nexus in those states—even if you don’t have employees or an office there.
9. Outsourced Labor and Independent Contractors
Hiring freelancers and contractors is a great way to scale without adding full-time headcount—but there are tax rules to follow. If you pay a non-corporate contractor $600 or more in a calendar year, you generally need to send them Form 1099-NEC by January 31 of the following year.
Before You Pay Anyone, Get These Three Things:
A completed W-9 form – Get this before the first payment
Signed service agreement – Outline the scope and payment terms
Proof of payment – Ideally from your business account, not Venmo or personal cards
These help document that they’re a contractor—not an employee. But keep in mind: paperwork doesn’t override reality. The IRS looks at how the work is controlled. If you’re dictating schedules, supplying tools, or managing daily tasks, they might actually count as employees.
Misclassification is expensive. Getting this wrong can lead to back payroll taxes, penalties, and interest. When in doubt, check with a tax pro.
Town can help! We offer AI-powered tax expertise, specifically for startups trying to navigate the complex world of tax, with a dedicated tax advisor who is always available to consult.
10. Employee Wages and Benefits
Payroll isn’t just essential for running your business—it’s also a major tax deduction. Almost every dollar you pay an employee reduces your taxable income. This includes gross wages, employer payroll taxes (like Social Security, Medicare, and unemployment), and many fringe benefits such as health insurance, 401(k) matches, and group life insurance.
For example, hiring a fulfillment assistant at $40,000 per year could generate a total deduction like this:
Salary: $40,000
Employer FICA (7.65%): $3,060
State unemployment insurance: $300
401(k) match (3%): $1,200
Health insurance: $4,800
Total deduction: $49,360
When you can deduct these expenses depends on your accounting method. If you use the cash method, you deduct them when you pay. If you use accrual, you deduct them when they’re incurred—even if you haven’t paid them yet. Either way, payroll is one of the biggest write-offs available for online businesses.
11. Business Insurance
Most business-related insurance premiums are fully deductible as operating expenses. This includes coverage like product liability, cyber insurance, workers’ comp, general liability, business interruption, and shipping insurance.
Some commonly missed deductions include:
Liability insurance required by Amazon FBA
Inventory insurance for products stored in third-party warehouses
Parcel protection or declared value coverage in your shipping carrier bills
If you prepay for insurance, you can only deduct the portion that applies to the current tax year. For example, if you pay $2,400 in July for an 18-month cyber policy, you can deduct $800 this year (for July through December), and the remaining $1,600 next year.
Insurance often feels like a sunk cost—but from a tax perspective, it’s a valuable one.
12. Licenses, Permits, and Sales-Tax Software
Every online business needs to stay compliant with state and local rules—and the good news is, those fees are fully deductible. Whether it’s $75 for a resale permit or $200 for a city business license, these “pay-to-play” costs reduce your taxable income.
Common deductible items include:
State reseller certificates
City or county business licenses
FDA or product-specific registrations
Annual renewals
Sales tax software like Avalara, TaxJar, or Sovos also falls into this category. These tools often cost between $20 and $200 per month and help automate the headache of calculating, collecting, and filing sales tax in multiple states. Their subscription fees are 100% deductible.
Make a habit of saving receipts when you pay these fees, flag whether they’re one-time or recurring, and keep copies with your quarterly or annual returns. Staying organized here helps avoid compliance issues and ensures you don’t miss valuable deductions.
13. Vehicles, Mileage, and Travel
Business driving adds up fast—and if you track it properly, it’s a valuable deduction. In 2025, the IRS standard mileage rate is 70 cents per mile, which covers gas, insurance, maintenance, and depreciation. You don’t need to save gas receipts—just keep a simple mileage log with the date, destination, and business purpose.
Common deductible trips include:
Post office runs
Supplier visits
Local client meetings
Inventory pickups
Travel outside your local area also qualifies:
Airfare to trade shows
Hotel stays for vendor or partner meetings
Rideshares, taxis, and parking fees
50% of business meals while traveling
You can use IRS per-diem rates instead of tracking actual meal costs, which simplifies things if you travel often.
One key rule: don’t mix business with personal. If you tack on vacation days or bring family, you may lose the deduction. Keep conference agendas, receipts, and travel confirmations to prove the trip had a legitimate business purpose.
14. Education and Professional Development
Investing in your own skills doesn’t just grow your business—it can shrink your tax bill too. The IRS allows you to deduct the cost of professional development as long as it maintains or improves your current skills.
Deductible examples include:
Online courses and in-person workshops
Mastermind groups and coaching programs
Trade publications and industry subscriptions
Conferences and networking events related to your business
One important rule: the education must relate to your existing business. You can’t deduct training that prepares you for a completely different career.
So that $1,200 Shopify theme workshop? If it helps you level up your store, it’s fully deductible. But a coding bootcamp to become a software engineer? Probably not.
15. Bank Fees and Business Interest
All those small bank charges your business racks up? They’re deductible. That includes:
Wire transfer fees
Overdraft charges
ACH transfer costs
Business credit card annual fees
You can also deduct interest paid on business loans or lines of credit. For example, if you borrow $50,000 at 10% to stock up for Q4, the $5,000 in interest is fully deductible. At a 22% tax rate, that could save you around $1,100.
Just remember: only the interest is deductible, not the loan principal. Keep clear records from your lender showing the breakdown between principal and interest payments.
16. Business Meals
The temporary pandemic-era 100% deduction for meals is over. Since 2023, most business meals are back to the standard 50% deduction, and starting in 2026, things tighten even more.
You can still deduct 50% of meals if they’re ordinary and necessary to your business—like:
Lunch with suppliers to discuss pricing
Strategy meetings with your team
Meals during working sessions or inventory counts
Meals during business travel
For example, if you spend $2,000 a year on business meals, the 50% deduction could save you around $150–$300 depending on your tax bracket.
Important update for 2026: Office snacks and meals will no longer be deductible unless they’re included in your employees’ taxable wages. So unless you run that Friday pizza through payroll, it likely won’t count.
Also worth noting: entertainment expenses are not deductible—even if there’s a business discussion involved. That includes concert tickets, sporting events, or rounds of golf.
To protect your meal deductions, track the basics:
Date
Location
Attendees
Business purpose
Write notes like “Lunch to review new supplier terms” instead of just “Business meal.”
17. Charitable Contributions
Not all donations are tax-deductible—only gifts to qualified organizations count. That means your generous support for a friend’s GoFundMe or a raffle fundraiser may feel good, but it likely won’t reduce your tax bill.
To be deductible, your donation must go to a:
Registered 501(c)(3) nonprofits
Certain governmental entities
Organizations recognized by the IRS
Always keep documentation showing:
The organization’s name
Their EIN (Employer Identification Number)
The date and exact amount donated
Whether it’s cash or product donations, these details are your backup if the IRS asks for proof.
New for 2026: A 1% floor was introduced on corporate charitable deductions—so a corporation must give more than 1% of its taxable income before any portion becomes deductible.
18. Professional Services
Fees you pay to accountants, attorneys, and consultants are fully deductible business expenses—as long as the work is directly related to your business. This includes things like:
Tax preparation
Legal services
Business consulting
Trademark applications
Contract reviews
Once your business is up and running, these expenses are deducted in full in the year you pay them. If you're still in startup mode, the rules are a little different. You can deduct up to:
$5,000 of startup costs (like legal setup or accounting system setup)
$5,000 of organizational costs (like filing fees or forming an LLC or S Corp)
Any amount above that must be amortized over 15 years.
Example: If you spend $8,000 before your first sale—$3,000 for legal formation, $2,000 for a trademark, and $3,000 for accounting setup—you can deduct $5,000 right away, and the remaining $3,000 gets spread over 15 years (just $200 per year).
Once you're actively operating, all future professional services are simply deductible when incurred—no need to spread them out.
19. Equipment, Photography Gear, and Depreciation
Big-ticket business equipment can deliver big tax savings. Thanks to Section 179, you can deduct up to $2.5 million of qualifying equipment placed in service during 2025. This applies to things like:
Cameras and studio lights
Warehouse computers or barcode scanners
Label printers and photo backdrops
Office furniture and business-use laptops
Example: If you buy a $12,000 camera system for product photography, you can deduct the entire cost in the year you start using it—no need to spread it out over time.
If you exceed the Section 179 limit (which is rare for small sellers), bonus depreciation kicks in. And thanks to the 2025 law, bonus depreciation is now permanently set at 100%. That means nearly all business equipment can be written off in full the year it’s placed in service
Repairs and improvements follow different rules:
Repairs that keep equipment working are fully deductible immediately
Improvements that extend the asset’s life or add new features must be depreciated over time
Important note: Depreciation isn’t optional. Even if you don’t claim it, the IRS assumes you did when you sell the asset—this affects your cost basis and may trigger depreciation recapture, which is taxed as ordinary income (typically up to 25%).
So don’t skip it. Claiming depreciation now lowers your taxable income today, without creating any extra tax later that you wouldn’t already face.
20. State and Local Tax (SALT) Work-Around for Pass-Throughs
Pass-through entities like S corporations, partnerships, and certain LLCs are subject to the $10,000 SALT deduction cap on individual returns. But there’s a valuable workaround: many states now allow entities to pay state income tax at the business level, turning it into a federally deductible business expense.
Here’s how it works: if your California pass-through distributes $200,000 in profit and owes 8% in state tax ($16,000), without the election, only $10,000 of that is deductible on your federal return. With the entity-level election, the full $16,000 becomes deductible—lowering your federal taxable income and potentially saving you about $1,920 in federal tax (at a 32% rate).
This is a powerful deduction, but it’s not automatic. Each state has its own rules and timelines. Most require:
Annual election by March 15
Quarterly estimated payments
Additional state tax filings
If you operate in multiple states, the complexity increases—and so do the potential savings.
Town’s tax advisors specialize in multi-state compliance and pass-through planning. Whether you're electing entity-level tax in one state or juggling five, Town can help make sure you're doing it right—and saving as much as possible.
How and When to Claim These Deductions
Getting the tax savings you’re entitled to starts with two things: categorizing expenses correctly and filing on time. Most deductions are reported on your year-end tax return, but to avoid penalties, you’ll also need to make quarterly estimated tax payments throughout the year.
Where to report:
Sole proprietors: Report expenses on Schedule C, lines 8-27
S-Corps/partnerships: Report on Form 1120-S or 1065 under "Other Deductions"
Key tax deadlines:
January 31: Issue 1099-NECs to contractors
March 15: File S-Corp/partnership returns (Form 1120-S/1065)
April 15: File personal returns with Schedule C
Missing deadlines triggers penalties. File an extension with Form 7004 if needed. And if you discover missed deductions after filing, you can always submit an amended return.
Keep More Profits with Town
Smart tax planning helps you claim every deduction you’ve earned—and that means keeping more of your hard-earned profit.
The 20 tax deductions in this guide are real opportunities to boost your bottom line, not by working more, but by managing your taxes more strategically. And the best part? You don’t have to figure it out alone.
Town’s AI-powered tax platform gives online sellers year-round access to real CPAs who understand e-commerce—from marketplace fees and inventory accounting to multi-state compliance and SALT workarounds.
Skip the DIY stress. Get expert, proactive tax guidance tailored to your store.
Get started with Town today and find out how much more you could be saving.
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Disclaimer: This content is for educational purposes only and does not constitute personalized tax advice. Tax laws are complex and subject to change. Individual circumstances can vary significantly, and strategies that work for one taxpayer may not be suitable for another.
