Running a seven-figure e-commerce business means you’re probably leaving thousands of dollars on the table every tax season. The difference between sellers who scale profitably and those who plateau often comes down to how well they capture deductions that are hiding in plain sight.
This guide covers the full range of write-offs available to online sellers, from the obvious ones like cost of goods sold to the commonly missed expenses like transaction fees and home office deductions, plus the strategies and structures that maximize your savings.
What are e-commerce tax deductions
E-commerce tax deductions are legitimate business expenses that reduce your taxable income. The IRS considers an expense deductible if it’s “ordinary and necessary,” meaning it’s common in your industry and helpful for running your business. For online sellers, qualifying expenses include cost of goods sold, shipping and fulfillment, marketing, software subscriptions, and home office costs.
Tax deductions work differently than tax credits. While credits directly reduce the amount of tax you owe dollar-for-dollar, deductions lower your taxable income before your tax bill is calculated. So if you’re in the 24% tax bracket and claim $10,000 in deductions, you save $2,400 in taxes.
Online sellers have a particularly wide range of deduction opportunities because of how e-commerce businesses operate. Your business model likely involves inventory management, digital marketing spend, platform fees, and possibly a home-based operation. Each of these areas creates write-off opportunities that can meaningfully lower your tax burden when properly documented.
Why tax deductions matter for seven-figure online sellers
At seven-figure revenue levels, small missed deductions add up fast. A seller doing $2 million in annual revenue who overlooks just 2% of legitimate deductions leaves roughly $40,000 on the table. That’s money that could fund a new product line, expand into a new marketplace, or simply stay in your pocket.
- Cash flow preservation: Every dollar you keep through smart tax planning is a dollar available for reinvestment, hiring, or building financial reserves
- Compound growth: Annual savings from consistent tax planning accumulate over time, creating capital you can deploy strategically
- Competitive positioning: Sellers who manage taxes well have more resources to invest in growth than competitors who overpay
The real shift happens when you start viewing tax planning as a business growth lever rather than just a compliance exercise. Money saved on taxes is functionally the same as money earned through sales, except it requires no additional inventory, marketing spend, or customer acquisition cost.
Essential tax deductions every e-commerce business can claim
The deductions below represent the core write-offs that seven-figure sellers commonly overlook or underutilize. Getting these right often makes the difference between a good tax outcome and a great one.
Cost of goods sold and inventory write-offs
Cost of Goods Sold, or COGS, represents the direct costs of products you sell. This includes your purchase price from suppliers, shipping costs to get inventory to your warehouse, and any manufacturing or preparation costs. For most e-commerce businesses, COGS is the single largest deduction available.
One timing detail matters here: inventory costs are deducted when the product sells, not when you purchase it. If you buy $50,000 in inventory in December but only sell $30,000 of it by year-end, you can only deduct the $30,000 that actually moved.
You can also write off inventory that becomes damaged, obsolete, or unsellable. The key is documentation. Photograph damaged goods, keep records of what happened, and note when you dispose of or donate the items. Without this paper trail, the deduction becomes difficult to defend in an audit.
Marketing and advertising expenses
All paid advertising qualifies as a deduction. This covers social media ads on Facebook, Instagram, and TikTok, along with Google Ads, Amazon PPC campaigns, and influencer partnerships. If you’re spending money to attract customers, you’re creating a deductible expense.
The costs of creating brand assets also qualify. Photography, video production, graphic design, and copywriting are all deductible when used for business purposes. Even the cost of hiring a freelancer to write product descriptions counts.
Payment processing and transaction fees
The small per-transaction fees from payment processors add up to a significant annual expense. Platform fees from Stripe, PayPal, and Square are fully deductible, as are credit card processing fees and marketplace seller fees from Amazon, Shopify, and Etsy.
Many sellers forget to download their monthly statements from these processors. Those reports show total accumulated fees, which often surprise people when they see the annual total. A seller processing $1 million in transactions might pay $25,000 or more in fees, all of which is deductible.
Shipping, packaging, and fulfillment costs
Every expense involved in getting your product to the customer qualifies as a deduction:
- Postage and carrier fees from USPS, FedEx, and UPS
- Packaging materials like boxes, tape, bubble wrap, and custom mailers
- Fulfillment center fees, including Amazon FBA storage and pick-and-pack charges
- Warehouse rent and storage unit fees
- Return shipping costs, including prepaid return labels
Software subscriptions and business tools
The digital tools required to run your online store are deductible. This includes your e-commerce platform subscription, whether that’s Shopify, BigCommerce, or WooCommerce hosting. Inventory management systems, accounting software like QuickBooks or Xero, and email marketing tools like Klaviyo all qualify.
Even smaller subscriptions count. Project management tools, design software, communication platforms, and analytics services are all legitimate write-offs when used for business purposes.
Home office deduction for online sellers
If you use part of your home regularly and exclusively for business, you can deduct a portion of your housing costs. Two calculation methods exist:
| Method | How it works | Maximum deduction |
|---|---|---|
| Simplified | $5 per square foot of office space | $1,500 (300 sq ft limit) |
| Actual expense | Percentage of rent, utilities, insurance based on office square footage | No cap |
For e-commerce sellers specifically, space used for storing inventory can also qualify, even if it’s not a traditional office. A spare bedroom that functions as your shipping station or inventory storage area creates legitimate deductions under the same rules.
Professional services and contractor fees
Fees paid for professional help are deductible. This includes payments to accountants, bookkeepers, attorneys, virtual assistants, freelance designers, and business consultants. If you hire someone to help run your business, that cost is a write-off.
Website development and hosting
All costs associated with your online presence qualify. Domain registration, website hosting, developer fees, premium themes, plugins, and ongoing maintenance contracts are all deductible business expenses.
Business travel and trade show expenses
When you travel for business purposes, related expenses become deductible. This includes airfare, lodging, 50% of meals, local transportation, and registration fees for trade shows, supplier visits, or industry conferences.
For local business driving, the standard mileage rate for 2025 is 67 cents per mile. Trips to pick up supplies, drop off packages at the post office, or meet with vendors all count toward this deduction.
Additional deductible expenses
Several other categories often get overlooked:
- Business insurance premiums: General liability, product liability, cyber insurance, and business interruption coverage
- Office supplies and equipment: Computers, monitors, printers, furniture, and consumable supplies like paper and ink
- Education and training: Online courses, certifications, conferences, and books directly related to your e-commerce operations
- Internet and phone: The business-use percentage of shared services, or the full cost of dedicated business lines
How to claim e-commerce tax deductions
Proper documentation prevents audit issues and ensures you capture every legitimate deduction. The process involves five key steps.
1. Separate personal and business finances
Using dedicated business bank accounts and credit cards creates a clean record of income and expenses. This separation simplifies bookkeeping throughout the year and demonstrates professionalism to the IRS if questions arise later.
2. Maintain detailed records and receipts
The IRS requires documentation to substantiate deductions. A digital backup system, whether cloud storage or accounting software with receipt capture, protects you from lost paper receipts that fade or get misplaced over time.
3. Categorize expenses using proper accounting methods
You’ll choose either cash or accrual accounting and use it consistently. Cash basis records expenses when money leaves your account, while accrual basis records them when the expense is incurred. Either works, but switching between them creates complications.
Consistent categorization throughout the year matters more than most sellers realize. When expenses are properly categorized as they occur, tax preparation becomes straightforward rather than a scramble to reconstruct the year’s activity.
4. Complete the correct tax forms
Your business structure determines which forms you file. Sole proprietors typically use Schedule C attached to Form 1040, while S corporations file Form 1120-S. Partnerships use Form 1065. Using the wrong forms or filing under the wrong structure creates problems that are easier to prevent than fix.
5. Review deductions quarterly
Quarterly financial reviews catch missed deductions while there’s still time to gather documentation. This practice also allows for strategic year-end decisions, like accelerating equipment purchases into a high-income year to reduce taxable income.
Common tax deduction mistakes e-commerce sellers make
Avoiding these errors protects your deductions and prevents costly IRS scrutiny.
Overlooking small recurring expenses
Monthly software subscriptions, transaction fees, and minor supply purchases slip through the cracks without systematic tracking. A $50 monthly subscription doesn’t feel significant, but twelve of them add up to $600 in missed deductions. Multiply that across all your small recurring expenses, and the total becomes meaningful.
Estimating instead of documenting
Guessing at expense amounts on your tax return creates risk. In an audit, any deduction without proper documentation, whether a receipt, bank statement, or invoice, will be disallowed. The IRS doesn’t accept estimates.
Claiming home office deductions incorrectly
Common errors include claiming a deduction for space that isn’t used exclusively for business, like a dining room table where you also eat meals, or making incorrect calculations of the deductible square footage. The “exclusive use” requirement is strict.
Failing to track inventory properly
Poor inventory records lead to inaccurate COGS calculations. This can result in overstating your profit and overpaying taxes, or understating profit and triggering audit flags. Neither outcome is good.
Missing transaction and platform fees
Sellers often forget that every payment processor and marketplace charges fees that are fully deductible. Without downloading monthly statements and aggregating the totals, this significant expense category gets missed entirely.
Strategies to maximize e-commerce tax deductions
Proactive planning captures deductions that reactive tax filing misses.
- Time major purchases strategically: If your income is high for the year, consider accelerating necessary equipment or inventory purchases into the current tax year to increase deductions
- Automate expense tracking: Integrating accounting software with bank accounts and e-commerce platforms reduces manual data entry and catches expenses that might otherwise slip through
- Contribute to retirement accounts: SEP-IRAs, Solo 401(k)s, and SIMPLE IRAs reduce taxable income while building personal wealth. Contribution limits for self-employed individuals are often higher than people expect
- Stay current on IRS changes: Deduction limits and eligibility requirements change annually. What worked last year might not be optimal this year
Choosing the best business structure for e-commerce tax savings
Your entity type determines which deductions you can claim and how your income is taxed. The right choice depends on your revenue level, growth plans, and personal financial situation.
Sole proprietorship
This is the simplest structure to set up and maintain. All business income and losses flow through to your personal tax return, and all profits are subject to self-employment tax, which covers Social Security and Medicare contributions.
Limited liability company
An LLC provides liability protection for personal assets while offering flexibility in how you’re taxed. By default, a single-member LLC is taxed like a sole proprietorship, but you can elect to be taxed as an S corporation or C corporation if that structure becomes more advantageous.
S corporation election
An S corporation allows you to split your income between salary and distributions. The salary portion is subject to self-employment tax, but distributions are not. For sellers with significant profit, this structure can reduce overall tax burden meaningfully.
C corporation
A C corporation is a separate tax-paying entity, which can lead to double taxation when profits are distributed to owners. However, this structure can benefit businesses that plan to retain and reinvest significant earnings rather than distribute them.
When e-commerce sellers benefit from hiring a tax professional
Several situations signal that professional help would be valuable: crossing major revenue thresholds, managing sales tax obligations in multiple states, handling complex inventory accounting, or considering a change in business structure. The fees paid to tax professionals are themselves deductible.
Talk to an expert about building a tax strategy that supports your growth goals.
FAQs about e-commerce tax deductions
Can I deduct Amazon FBA fees and Shopify subscription costs?
Yes. All marketplace seller fees, fulfillment fees like FBA, and e-commerce platform subscriptions are fully deductible as ordinary business expenses.
What percentage of my home office can I deduct?
You can deduct the portion used regularly and exclusively for business. Calculate this by dividing your office square footage by your home’s total square footage, or use the simplified method at $5 per square foot up to 300 square feet.
Are product returns and refunds tax deductible?
Returns reduce your gross sales rather than creating a separate deduction. You can recover the cost of goods sold for returned items through proper inventory accounting when those items go back into stock.
How do I write off obsolete or damaged inventory?
Document the inventory with photos and records of what happened, then write off the cost basis as a loss in the year you dispose of or donate the items.
Do I need to pay quarterly estimated taxes?
If you expect to owe $1,000 or more when filing your annual return, the IRS requires quarterly estimated payments to avoid underpayment penalties. These payments are due in April, June, September, and January.
