As an Amazon seller, keeping your documents and records in order is crucial – especially when considering tax season! Messy record keeping can lead to missed deductions, unnecessary tax bills, and penalties down the road if you ever get audited.
Follow these 7 steps to make sure your Amazon tax records are audit-proof:
1. Set Up Accounting Software or Spreadsheets
The first key step in managing Amazon seller tax documents is establishing a system to track your income and expenses. For most Amazon sellers, basic spreadsheet software like Excel works fine, especially when just starting out. However, there are more robust accounting platforms designed specifically for ecommerce businesses that integrate directly with Amazon. Popular options include QuickBooks Online and Xero. Consult with a specialist Amazon accountant if you need expert advice.
With the right accounting software or spreadsheets, you can seamlessly import your Amazon settlement reports. This automatically populates your sales and fees. You can also sync bank and credit card accounts to import transactions. Having all this financial data automatically compiled in one place saves massive time come tax season.
2. Save All Receipts and Invoices
Any business expense related to your Amazon selling needs to be properly documented with receipts, invoices, or other proof of purchase. This includes everything from the products you buy for resale, to shipping supplies, to mileage for sourcing trips, to advertising and promotion expenses. Even tiny costs can add up to major deductions!
Be sure to request detailed receipts any time you make a purchase for your business. If a receipt is lost or you forgot to collect one, follow up with the vendor to get a replacement copy. For paper receipts, apps like Shoeboxed enable you to quickly digitize and upload them to the cloud for safe keeping.
Proper Amazon seller tax documentation provides justification for all the expense deductions you claim on your tax return. It also serves as an audit defense file if the IRS ever flags your return.
3. Reconcile Bank and Credit Card Accounts Frequently
To make tax time smoother, you need to frequently reconcile your various financial accounts, including business bank accounts and credit cards. This simply means matching up the transactions from your statements against the expenses recorded in your accounting system.
Reconciling ensures all Amazon purchases, fees, refunds, and other transactions are accurately accounted for in your books without any errors or omissions. It’s generally easiest to reconcile accounts on a monthly basis. This prevents transactions from piling up, which can become overwhelming and lead to missed deductions.
4. Keep Diligent Inventory Records
For Amazon sellers, inventory accounting can seem tricky but is crucial for maximizing deductions. You need detailed records of your purchase costs, freight, storage fees, and other expenses tied to goods for resale. This provides justification for deducting Cost of Goods Sold.
Ideally, track inventory volumes, costs, and COGS at the unique ASIN/ISBN level. This allows assigning the specific cost basis to units sold, disposed, or still on hand at year end. Apps like InventoryLab help automate inventory accounting across multiple sales channels.
5. Clearly Categorize Expenses
As transactions start accumulating in your accounting system, be sure to take time categorizing each one – for example as advertising, shipping, office supplies, etc. Clear categorization serves two key purposes:
- It allows quickly summing up expenses by type to fill out your Schedule tax form categories.
- It builds a clear audit trail showing what each expense was for, making your deductions bullet-proof if questioned by the IRS.
Accounting software will have preset categories to make this easy. With manual spreadsheets, be sure to set up separate columns for categorizing transactions. This will greatly improve how you manage your Amazon seller tax documents.
6. Track Home Office Deductions
Many Amazon sellers operate at least partly from a home office. If so, a portion of your household expenses like rent, utilities, internet, etc. become deductible as business expenses.
To claim the home office deduction, first calculate the percentage of your home used for business activities. For example, if your office is 200 square feet and your home is 1000 square feet total, your business use percentage is 20%.
Save your utility bills, cable/internet bills, rent or mortgage statement, and anything else related to maintaining your home. When tax time comes, apply that business use percentage to the amounts paid for each to determine your deduction. Home office expenses are calculated a little differently than other business expenses, so make sure you consult with a tax professional for help with this deduction.
7. Review Records Monthly
While recording and categorizing expenses takes diligence upfront, you also need to set aside time monthly to actually review everything. This ensures all transactions are captured properly between your accounting system, bank, and credit card statements.
Monthly reviews help you spot any discrepancies or missing expenses while they’re still recent. That makes it much simpler to identify the issue and make corrections. Waiting until tax season to review things can open the door to major headaches!
Following these record-keeping best practices takes some extra work upfront. But investing that time pays off massively when tax season rolls around. You’ll breeze through the season knowing your books are clean and ready if you are ever audited. Let us know if you need any help implementing these financial organization systems for your Amazon FBA business!
