As an Amazon Seller, how to get ready for taxes when your bookkeeping is in a mess?
Tax Return Tips – here is how to avoid overwhelm if you do not feel you are as organized as you would like to be.
I have received numerous messages from worried sellers. They haven’t kept up with their accounting and now they are concerned about how to gather everything for taxes. No judgment here, if that is your situation, then get through last year’s accounting and plan to do better next year!
I hope others will chime in on this, but here are my general thoughts about how to get ready for taxes when you have a mess.
My take is this:
First, please don’t panic. Although the situation is not ideal, and it can be different next year, there is still time. Just please start pulling things together now. Make yourself work on it an hour each day and it will probably come together faster than you think. (Or just plan one day of hell and do it all at once, rip that bandaid off! Sweatpants, check, wine, check, soothing music, check, now get it done!)
Second, the WORST case (beyond not filing at all) is simply taking the 1099 with zero expenses and paying taxes on that. I am not suggesting you do this, but think about it this way. As far as the IRS is concerned, you have earned income as reported by Amazon via the 1099. It is up to you to whittle that down with legitimate expenses.
If you don’t provide any expenses, they are not coming after you. You’ll just pay materially more than you should, and that’s the worst thing that can happen. I have yet to hear of an IRS audit where the IRS was coming after a taxpayer for not including legitimate expenses or for paying too much tax!
If others here have expertise in this as well, I would love your comments please!
Here is what the IRS WILL come after you for; and it all has to do with evading tax and nothing to do with failure to report legitimate expenses.
If you start from that attitude, things should fall into place more easily.
Here is what I suggest:
1. Income –
Start with your 1099. Then, start whittling that down with two straightforward and material expenses. (#2 and #3).
3. COGS –
This is the amount of inventory you sold during last year at your cost. You can get this from InventoryLab or ScanPower Reports if you use either software (and I suggest you reconcile to your actual inventory on hand at December 31st per Amazon even if you do.)
If you do not use either software (which is perfectly acceptable despite what people assume), in this post I explain How to calculate COGS manually.
Beginning Inventory (from previous year’s return)
Plus purchases (from your bank and credit card accounts)
Less Ending Inventory (from Amazon)
4. Other expenses not captured in 2 and 3 –
These come from your checking and credit cards. I suggest going through the account statements and identifying which expenditures are non-inventory expenditures (you already identified the inventory expenditures in step 3). Add those up and categorize them. (Shipping supplies, dues and subscriptions, etc.). Keep careful records of how you accumulated these expenses. Ideally you would have the statement with transactions and then a corresponding receipt for each transaction. However, that is probably not realistic if you are already struggling with an effective accounting system. Here is one IRS guide to business expenses.
5. Mileage –
Mileage is a non-cash entry on your tax return. It is not an expense. I know a seller who had over $1 million in sales last year and he didn’t bother with tracking mileage and did not take a mileage deduction. He does a good bit of OA and didn’t feel the remaining mileage from RA was worth the trouble. There is nothing wrong with excluding a mileage deduction if that is your choice. I also know for some that mileage is one of the biggest tax deductions on their return. If you didn’t track it last year, start this year.
Other tips –
* If you are in doubt about an expenditure, just leave it out. There is nothing wrong with taking legitimate deductions, I am in support of that. However, if there is something you’ve purchased for your business and there is a blur between personal and business use and you aren’t sure how to include that in your tax return, either ask your CPA or think carefully before you include it.
Remember there is not a one-for-one expense to tax dollar ratio. Your expenditures are reductions to your 1099 and you pay tax on the difference. Sometimes including or excluding an item doesn’t even have an impact on your taxable income tax range.
* What to do with inventory that is not exactly inventory yet – For example, things that are still in bags in the garage that have not been recorded as anything. Or when you are starting out and your inventory includes your own belongings that you are selling off, does that get recorded differently?
For your own belongings, I suggest a minimal amount – be conservative with the value. It’s better to underestimate than over. That inventory around your home is included in your beginning inventory. If you calculate your inventory from your bank and credit card transactions then you don’t need to worry about where it physically is. It’s paid for and that’s all that matters. It can be at home, in transit, or at Amazon.
In an ideal world, you will have a solid accounting system that includes a balance sheet and income statement that you update and reconcile monthly. You will have a CPA on your team who files your taxes for you and consults with you regularly about legitimate business expenses, growth strategies, entity structure, etc. However, I know that is not the reality for everyone which is the purpose of this post.
Accounting, money, taxes – it can be such an emotionally charged topic. People really dread it, and honestly, it’s not fun to slog through all of the details, but if we think about it from the “what’s the worst that can happen” place, it’s easier to put the it in its proper perspective.
That technique is actually a highly recommended therapeutic approach to life’s difficulties. When faced with something difficult, I always ask myself “What’s the worst that can happen.” When I make peace with that, the challenge becomes much less difficult in my mind. The mind can really play tricks on us!
Anna Hill is the founder of Accounting We Will Go, a firm that provides accounting and bookkeeping services along with training for Amazon sellers.