Why Tax Deductions Matter
Every dollar you deduct is a dollar you don't pay taxes on. At a 24% tax rate, a $1,000 deduction saves you $240 in taxes. Missing deductions means overpaying thousands annually.
The IRS rule is simple: If an expense is ordinary and necessary for your business, it's deductible. Most sellers leave money on the table by not claiming legitimate deductions.
This guide covers deductions specifically relevant to Amazon FBA/FBM, Shopify, and multi-channel sellers. Always consult your accountant on edge cases.
The Two Categories of Deductions
Category 1: COGS (Cost of Goods Sold)
Deducted on Schedule C, reduces gross profit. These are above-the-line deductions.
Category 2: Business Expenses
Deducted on Schedule C below gross profit. These are below-the-line deductions.
Why it matters: COGS must be substantiated with invoices. Business expenses need receipts but more flexibility on documentation.
COGS Deductions (Above the Line)
1. Product Cost (Supplier Invoice)
The base cost you pay your supplier for physical goods.
Example:
Buy 1,000 USB cables @ $2.00/unit from supplier = $2,000
COGS: $2,000 ✓ DEDUCTIBLE
2. International Freight & Shipping
Ocean/air freight to get products from supplier to your warehouse.
Example:
Ocean freight for shipment: $3,000
COGS: $3,000 ✓ DEDUCTIBLE
3. Customs Duties & Tariffs
Import duties paid to US Customs on foreign products.
Example:
Tariffs paid on electronics shipment: $500
COGS: $500 ✓ DEDUCTIBLE
4. Brokerage & Customs Fees
Customs broker fees, port handling, documentation.
Example:
Customs broker fee: $200
COGS: $200 ✓ DEDUCTIBLE
5. Product Packaging (Immediate Resale)
Packaging specifically for selling (boxes, mailers, labels for product).
Example:
FNSKU labels, product boxes: $500
COGS: $500 ✓ DEDUCTIBLE
6. Quality Control & Inspection
Third-party inspection before shipment to Amazon/customers.
Example:
Third-party QC inspection: $300
COGS: $300 ✓ DEDUCTIBLE
⚠️ NOT COGS (These are business expenses instead)
- Amazon referral fees
- FBA fulfillment fees
- Advertising/marketing
- Software and tools
- Office supplies
- Your salary
Business Expense Deductions (Below the Line)
Platform Fees
- Amazon Referral Fees: Percentage Amazon takes per sale ✓ Deductible
- Amazon FBA Fulfillment Fees: Charge for packing/shipping ✓ Deductible
- Shopify subscription: Monthly fee ✓ Deductible
- eBay/Etsy fees: All platform fees ✓ Deductible
- Payment processing: 2.9% + $0.30 Stripe/Square ✓ Deductible
Advertising & Marketing
- Amazon Ads (PPC): Sponsored product campaigns ✓ Deductible
- Google Ads: Shopping ads, search ads ✓ Deductible
- Facebook/Instagram Ads: All social media advertising ✓ Deductible
- Influencer payments: Sponsorship fees ✓ Deductible
- Email marketing: Mailchimp, Klaviyo subscriptions ✓ Deductible
Tip: Track daily to avoid missing portions of ad spend.
Software & Subscriptions
- Accounting: QuickBooks, Xero, Wave ✓ Deductible
- Inventory management: Stitch Labs, Inventory Lab ✓ Deductible
- Keyword research: Helium 10, Jungle Scout ✓ Deductible
- Email: Gmail business or other ✓ Deductible
- Project management: Asana, Monday.com ✓ Deductible
- Subscription management: Zapier, Make ✓ Deductible
Rule: Monthly subscriptions under $2,500 expensed immediately. Over $2,500 may need to be capitalized and depreciated.
Office Supplies & Equipment
- Under $2,500: Expensed immediately
- $2,500+: Depreciated over useful life
Examples:
- Computer: $1,200 ✓ Section 179 (expense immediately)
- Printer: $300 ✓ Expensed immediately
- Office furniture: $500 ✓ Expensed immediately
- Printer ink, paper: ✓ Fully deductible
Professional Services
- Accounting/bookkeeping: Tax prep, monthly bookkeeping ✓ Deductible
- Legal: Business formation, contracts, disputes ✓ Deductible
- Virtual assistant: Monthly retainer ✓ Deductible (or 1099)
- Consulting: Business coaching, strategy ✓ Deductible
Shipping & Delivery
- FBA inbound shipping: Shipping to Amazon warehouse ✓ Deductible (Part of COGS if included in product cost)
- Sample shipments: Samples to yourself or for testing ✓ Deductible
- Returns shipping: Paying for customer return shipping ✓ Deductible
Insurance
- Business liability: General liability ✓ Deductible
- Product liability: Protects against claims ✓ Deductible
- Business property: Office equipment coverage ✓ Deductible
Travel & Vehicle (If Business-Related)
- Mileage: 67 cents/mile (2025 IRS rate) ✓ Deductible
- Flights to trade shows: To attend seller events ✓ Deductible
- Hotel: For business travel ✓ Deductible
- Meals: 50% of meal costs during business travel ✓ Deductible
IRS Rule: Commute to home office is not deductible. Travel from home office to Amazon warehouse is deductible.
Office Rent/Workspace
- Co-working space: Monthly fee ✓ Deductible
- Storage unit: For inventory ✓ Deductible
- 3PL warehouse: Fulfillment center storage ✓ Deductible
Home Office Deduction
Method 1: Simplified Home Office (Easiest)
IRS allows $5 per square foot (max 300 sq ft = $1,500/year)
- Example: 200 sq ft office × $5 = $1,000/year deduction
- No record-keeping required
- Year-to-year the deduction can vary
Pro: Simple, no depreciation recapture on sale
Con: Lower deduction than actual expenses
Method 2: Actual Expense (Better if Significant)
Deduct % of actual home expenses based on office square footage
- Calculate: Office sq ft / Total home sq ft = %
- Example: 200 sq ft office / 2,000 sq ft home = 10%
- Deduct 10% of: mortgage interest, property taxes, utilities, insurance, repairs, depreciation
Actual Expense Example
Home Expenses (Annual):
Mortgage interest: $12,000
Property taxes: $3,000
Utilities: $2,400
Insurance: $1,200
Repairs: $800
Depreciation: $8,000
Total: $27,400 × 10% office use = $2,740 deduction
Home Office Qualifications
- Space must be used regularly and exclusively for business (not guest bedroom that's sometimes office)
- Must be your principal place of business (working 40+ hours/week)
- Can't claim if you have a separate commercial office
Important: Depreciation Recapture
If you claim actual home office depreciation and later sell your home, you must recapture that depreciation at 25% tax rate. Consider this before claiming.
Strategy: Use simplified method (no recapture risk) or track carefully with accountant.
Deductions You CANNOT Claim
| Expense | Status | Why Not |
|---|---|---|
| Personal vehicle expenses (commute) | ✗ NOT Deductible | Commute to anywhere is personal |
| Personal meals (not business-related) | ✗ NOT Deductible | Personal living expense |
| Owner's salary (sole prop/LLC) | ✗ NOT Deductible | Owner draw, not expense |
| Loan principal repayment | ✗ NOT Deductible | Only interest is deductible |
| Personal loans to yourself | ✗ NOT Deductible | Personal transaction |
| Gifts over $25/person/year | ✗ NOT Deductible | IRS limits gift deductions |
| Entertainment (post-2017) | ✗ NOT Deductible | Tax cuts eliminated this deduction |
| Fines & penalties | ✗ NOT Deductible | Against public policy |
Tax Deduction Checklist
COGS Deductions
- ☐ Product supplier costs
- ☐ International freight
- ☐ Customs duties & tariffs
- ☐ Brokerage fees
- ☐ Product packaging
- ☐ QC/inspection
Platform & Marketing
- ☐ Amazon referral fees
- ☐ FBA fulfillment fees
- ☐ Amazon Ads spend
- ☐ Shopify/eBay/Etsy fees
- ☐ Google/Facebook ads
- ☐ Email marketing tools
Tools & Software
- ☐ QuickBooks/Xero
- ☐ Inventory management software
- ☐ Keyword research tools
- ☐ Accounting software
- ☐ Project management tools
Professional Services
- ☐ Accounting & bookkeeping
- ☐ Tax preparation
- ☐ Legal fees
- ☐ Virtual assistant
- ☐ Consulting
Other
- ☐ Office rent/co-working
- ☐ Business insurance
- ☐ Office supplies
- ☐ Equipment (under $2,500)
- ☐ Business travel/mileage
- ☐ Home office (if applicable)
Real Tax Savings Example
Seller missing deductions:
Revenue: $500,000
COGS: $200,000
Claimed Expenses: $150,000
Taxable Income: $150,000
Taxes owed (24%): $36,000
Same seller WITH all deductions claimed:
Revenue: $500,000
COGS: $200,000
Claimed Expenses: $220,000 (+$70K missed deductions)
Taxable Income: $80,000
Taxes owed (24%): $19,200
Tax savings: $36,000 - $19,200 = $16,800
Documentation Tips to Avoid Audit
- Keep receipts: For all expenses over $100, keep original receipts for 7 years
- Use business account: Pay business expenses from business checking (not personal)
- Track mileage: Log business miles in notebook or app daily (IRS expects this)
- Document home office: Take photos of office, measure square footage, keep utility bills
- Categorize properly: Don't throw everything in "miscellaneous" - use proper categories
- Be reasonable: $50,000 ads on $100,000 revenue is aggressive (50% looks cherry-picked)
Summary: Tax Deduction Strategy
✓ Claim all COGS: Product costs, freight, tariffs, packaging
✓ Deduct all fees: Amazon, platform, payment processing
✓ Track ads: Every dollar of advertising spend
✓ Use software costs: All subscriptions for business tools
✓ Professional services: Accounting, legal, consulting
✓ Consider home office: Can save $1,000-$3,000/year
✓ Document everything: Receipts, invoices, logs for 7 years