How to Minimize Tax & VAT for Your E-Commerce

Every business has the responsibility to file and pay its taxes.

Doing so provides an opportunity to fulfill your legal duties, consider the best practices for reducing taxable income, and save money by minimizing your income taxes.

You need to carefully understand how much you owe to avoid overpaying on your taxes, as it can take a while to get refunded.

What Is Tax & VAT?

Taxes are the compulsory financial charge imposed on a taxpayer by a governmental organization to fund government spending and other public expenditures.

Value-added tax (VAT) is commonly referred to as a goods and services tax.

This type of tax is placed on the price of a good or service at each stage of its production, distribution, and final sale.

Here, consumers pay a tax on any goods and services they purchase based on the product's value.

How Does Your eCommerce Get Taxed?

The amount of tax you have to pay is derived from the profit your business generates.

Taxable Income

Taxable income is the income your business is taxed on.

It's calculated by subtracting your tax-deductible expenses from your total business profit.

Simply put, it's the money your business earns after accounting for allowable costs.

Lower taxable income means lower tax liability.

Profit, your business's adjusted gross income (AGI), is your total revenue minus all your business expenses.

The higher your profit, the higher your taxable income and, consequently, the more tax you'll owe.

This is where tax-deductible expenses come in.

By spending money on legitimate business needs, you reduce your taxable income, which translates to tax savings.

Tax Strategies for E-Commerce Business Owners

E-commerce business owners are often self-employed, meaning they pay self-employment taxes and income tax.

The business structure (sole proprietor, LLC, etc.) affects how taxes are filed and what retirement savings plans an e-business owner can contribute to.

E-commerce business owners can offset federal income taxes by contributing to eligible retirement accounts, such as a Health Savings Account (HSA) or Medical Savings Account (MSA).

These contributions are typically tax-deductible, reducing your taxable income and lowering your self-employment tax bill.

What Is the Difference Between Costs and Expenditures? 

To understand how to minimize the amount of tax you have to pay, you will first need to understand the differences between your business costs and expenses.

All your business costs refer to the cost of production and operation, whereas all business expenses refer to fixed monthly expenses such as rent and utilities.

Regardless of how much you produce, your fixed monthly expenses will remain the same, unlike your operational costs.

This difference is relevant to how your business gets taxed.

All production and operating costs are deductible on your business tax return, lowering your overall income tax bill.

Another important factor to consider is the depreciation expense for each year, which is tax-deductible and known as a ‘non-cash expense' as there is no check or receipt.

Despite the fact that there is no check, businesses can use it to reduce their income for tax purposes.

For example, suppose you buy a laptop for your business.

In that case, you can deduct the depreciation in its value each year, which is usually measured to be around 10-20% each year.

What Is a Deductible Expense?

For tax purposes, a deductible is an expense that a business or a taxpayer can deduct from their gross income when filing their tax return.

Deductible expenses reduce the income earned and, therefore, reduce the amount of tax that is owed.

Examples of deductible expenses include advertising, transportation, travel, insurance, administration and management fees, delivery, maintenance, and repair work.

Depending on the expense, you can either deduct a percentage or the full amount of the cost from your tax bill.

On the other hand, non-deductible expenses have no impact on your tax bill. 

These expenses do not add to the normal operations of your business and cannot be used to reduce your tax payable amount.

Non-deductible expenses are often referred to as ‘natural' or ‘persona' expenses, which do not contribute to the business's operations.

Such expenses include food, clothing, rent, and gasoline.

It is often quite easy to identify which expenses are tax-deductible and which expenses are not.

How Do Deductible Expenses Save Businesses Money on Tax?

Understanding the available tax deductions for your eCommerce business is crucial to minimizing your overall tax payable amount.

If your business bears any of the following costs, you can claim a deduction when filing a tax return!

Working From Home

Most e-commerce businesses are run purely online and have no physical office.

If you work from home to manage your business, you may be able to claim a deduction for using part of your home as a workplace.

You can claim the specific costs for transitioning part of your home or any other building to an office.

You can also claim a business proportion of the total costs of using your home as a workplace.

Moreover, if your eCommerce is registered as a limited company, you could even charge it rent.

Lastly, you could also charge your business a fixed rate deduction either weekly, monthly, or annually. 

Office Sharing

Suppose you do have a physical office space and are sharing it with another business.

In that case, the cost associated with operating the space may be deducted as part of office costs.

This is quite similar to claiming the costs associated with a traditional physical office space which include utilities, office supplies, rent, and equipment.

Mobile & Internet

Another cost you claim is any phone bills associated with the running of your eCommerce business.

These costs include using a mobile phone to provide customer care service or liaise with suppliers or other business stakeholders.

You can claim the cost of making such phone bills when you file your tax return.

Moreover, suppose your eCommerce is registered as a limited company.

In that case, the company can also pay for the cost of a mobile phone or company landline. 

Additionally, as all eCommerce and Dropshipping businesses are run online, you will need a strong internet connection.

A stable internet connection is crucial to running your business, which means your business internet bill is tax-deductible.

Keep in mind that if you work from home and use the same internet provider for your personal use and your business use, you will need to carefully calculate and deduct the proportion of your internet bill usage associated with running your eCommerce business. 

Website Development

Another crucial part of running your eCommerce business is your website and your platform to develop it.

Therefore, the costs of setting up your website, registering a domain, and paying for any external IT assistance to ensure it runs smoothly are all tax-deductible.

This is limited to websites, as any other application used to manage, track, and operate your business is tax-deductible.

These include any apps used to upgrade your website, manage its traction, process sales transactions, or track competitors.

Additionally, you can claim the cost of any hardware or software relating to the website's functionality as tax-deductible.

Hiring Independent Contractors

All costs associated with hiring independent contractors or freelancers to assist with running your eCommerce business are tax-deductible.

You may hire a contractor to design your website, produce content for your website or market your products.

Regardless of the purpose of hiring a freelancer, as long as it is directly associated with the running of the business, these costs are tax-deductible.

However, make sure that you do not include any of your employees as freelancers or independent contractors, as it is illegal to claim tax deductions on regular employees.

Delivery, Transport & Travel Costs

Most of the costs incurred from delivering goods to the end consumer are tax-deductible.

This includes not only the shipping cost but also all costs associated with packaging, envelopes, stamps, postage, and delivery charges.

Moreover, using your own car to deliver packages, attend client/supplier meetings, or carry out any other business activity necessary to operate your business is also tax-deductible.

Firstly, you may be able to claim a mileage allowance for business miles to cover petrol costs and any other costs to run your motor vehicle.

Secondly, you could also claim a business proportion of your vehicle costs if you operate your eCommerce business as a sole trader or a partnership.

Insurance & Bank Fees

Suppose you have paid for any non-health-related insurance for your eCommerce business, such as business or public liability insurance.

In that case, you will qualify for a tax deduction.

Moreover, all interest paid when you use a credit card to pay for business expenses or obtain a business loan is tax-deductible. 

Professional & Legal Services

For whatever reason, if you have paid for any accountancy, tax, or legal fees to help manage your business finances and ensure your business is compliant with all legal requirements, such costs are also tax-deductible.

Final Words

If you want to minimize the tax imposed on your eCommerce business, you should carefully consider these costs and how you can increase them to save more on your taxes and increase your profitability.

Moreover, you should never mix your business and personal expenses as this can severely impact your business and get you into deep trouble. 

If you want to lower your tax bill, Air-Corporate's qualified tax professional can help you reduce your tax burden and achieve your e-commerce business goals in Hong Kong.