Top Tax Deductions Every Shopify Seller Should Know

You are undoubtedly interested in the latest and most advantageous tax deductions as a Shopify business owner. Paying out of pocket at year's end can be avoided entirely or, at the very least, be drastically reduced. Here's how!

Understanding Taxable Income and Business Operations

Tax time does not need to be a confusing time for business owners. While it may be good to seek the help of a tax professional to ensure accuracy, this does not mean you need to be left in the dark.

What Qualifies as Taxable Income?

First, you must understand what constitutes taxable income.

• Revenue from Shopify and other e-commerce platforms is a good place to start. As an e-commerce seller, you must be aware of your income streams on all your platforms. While we directly address Shopify business owners, this includes e-commerce platforms like Amazon, Etsy, Faire, and more.

• Income from dropshipping, digital products, and trade shows all must be considered.

• Business operations that generate income, no matter their type, must be considered for income tax reporting. This includes but is not limited to interest earned in business bank accounts (although not directly related to operations), goods or services sales, and wholesale or bulk orders (some of which are exempt for sales tax purposes but not for income tax purposes).

Tracking Business Income and Good Records

As a result, it is highly important to track your business income. But how can you do this as a Shopify seller?

• Using software subscriptions for detailed records is yet again a good place to start. Since you are already using Shopify, you are likely aware of this remarkable need. Adding a robust accounting system, such as QuickBooks Online and QuickBooks Online Payroll, will help solve your record-keeping woes.

• Monitoring cash flow and business finances effectively is the next step. It is not enough to have good software in place. You will also want to monitor the records on an ongoing basis. Performing account reconciliations and analyzing financial reports while looking for inconsistencies in reporting are some standard practices in the accounting world.

Essential Tax Write-Offs for Shopify Sellers

Now that you have started tracking your income, you should become equally familiar with write-offs and deductions.

Home Office Deduction and Related Expenses

The home office deduction is a great way to save money during tax time. You will want to know that this deduction can be taken for Schedule C filers, S corporation filers, or partnerships. However, the way each taxpayer takes advantage of this deduction is different.

• In sum, Schedule C filers will deduct the amount directly on their Schedule C return. S corporations and partnerships cannot take a home office deduction. Instead, the S corporation or partnership would set up an accountable plan and reimburse the owner for his home office expenses, which the owner would set up much like the Schedule C filer. This transaction is not taxed to the owner and can be deducted by the S corporation or partnership.

• Eligibility for the deduction is based on the square footage of business use. You can use a portion of a bedroom, an entire room converted into an office, a sectioned-off portion of a garage, or a finished basement workspace. It cannot be a space that doubles as a guest room, family room, or personal hobby area.

• The home office must be your principal place of business, where you meet or deal with patients, clients, or customers in the normal course of business, or a separate structure on your property used for business.

• Deducting home office expenses like mortgage interest is a great way to save money with the home office deduction.

• Internet bills, utility costs, property taxes, and more can all be deducted proportionally based on the workspace's square footage.

Other Deductible Business Expenses

While the home office deduction is a common deduction, it is not the only deduction to consider for your online store.

• Cost of goods sold, office supplies, packaging materials, and marketing tools should all be recorded as expenses, as these will reduce taxable income dollar for dollar.

• Shipping costs, business meals, vehicle expenses, and mileage rate deductions should also be considered, but they are often overlooked. This is especially true for vehicle expenses such as gas and mileage. No matter the business type—Schedule C (sole proprietor), S corporation, or partnership—tracking business vehicle use can lead to valuable tax deductions. Simply put, track your business miles, choose your deduction method (Standard mileage rate or actual expense method), and apply by entity type (Directly on the Schedule C for Schedule C filers or the accountable plan method as previously discussed for S corporations and partnerships).

• Education expenses are deductible if they are ordinary and necessary for your trade or business. Some examples are online courses on advanced marketing strategies for your current Shopify store, training on tax software you already use in your accounting practice, and webinars and industry certifications that build on your existing role.

• Furthermore, the IRS allows a business to set up a qualified educational assistance program for employees. A business can use up to $5,250 per employee to cover college expenses. The company can deduct this payment, which is not taxable to the employee.

• Startup costs for new businesses, such as market research, legal fees, state incorporation fees, and travel costs, are also deductible expenses.

Shopify Taxes and Sales Tax Obligations

Since we are on the topic of taxes, it also makes sense to discuss sales tax.

Sales Tax Nexus and Collection Rules

Sales tax nexus and collection rules can be scary topics for online business owners, but they should not be.

• Understanding physical and sales tax nexus is a good place to start. If you have a physical presence in a state, you have physical nexus and need to register with that state. You are also likely liable to the local taxing jurisdiction. Many states have helpful rate lookup tools you can use to determine your local tax filing requirements. On the other hand, each state has its own set of rules for when you need to register your business to collect sales tax in that state. This information is readily available online. A good rule of thumb is that if you have made more than 200 sales in a state or sold more than $100,000.00 worth of sales in the state, it is a good time to research the state's specific rules to determine if you have developed economic nexus.

• Obtaining a sales tax permit is typically very simple. Often, you will first register your business with the state, and they will provide you with a sales tax permit. However, you usually want to set up an online account with their online sales tax filing system shortly afterward. This will allow you to file and pay online and correspond with the state through their portal.

• Using Shopify tax settings for sales tax collection is another essential component to collecting the right amount of sales tax. It is important to set this up correctly, as you will only want to collect sales tax in the jurisdiction for which you have nexus, whether physical or economic.

• Concerning sales tax deductions, you should be on the lookout for deductions and exemptions related to wholesale sales, out-of-state sales, sales to tax exempt organizations, returned merchandise, bad debts (in some states), trade-ins (for specific industries), and sales tax holidays.

Reporting and Paying E-commerce Taxes

After recording your income and expenses and setting up your business for your sales tax obligations, it is time to file.

• Filing accurate tax forms like Form 1040, Schedule C, 1120-S, and Form 1065 is essential to staying compliant. However, while a primary goal is accurate filing, another main goal should be limiting your tax liability where you are able.

• Reporting sales tax obligations to local tax authorities varies in difficulty from state to state. Nevertheless, reports, such as the total sales by location and the United States sales tax report, are beneficial for making accurate sales tax payments.

• Keeping up with the latest tax laws and tax rates is another key aspect of maximizing tax breaks. For instance, the new One Big Beautiful Bill, signed July 4, 2025, extends significant tax breaks and creates new savings opportunities for individuals and businesses. It raises the SALT deduction cap to $40,000, boosts the standard deduction for seniors, expands pass-through business deductions, and even makes certain tips and overtime tax-free while introducing new “Trump Accounts” for college savings. Overall, it helps many taxpayers lower their taxable income, keep more of their earnings, and plan smarter for future expenses.

Tax Strategies and Planning for Small Business Owners

While we have already discussed deductions, let’s revisit the topic, this time from a slightly

different strategic angle.

Pro Tips for Reducing Your Tax Bill

Here are some helpful tips to help online sellers strategically approach taxes.

• Consulting a tax accountant or tax advisor is surely at the top of the list. If you need help in this area, please let us know. We are glad to help!

• Minimizing your tax liability with retirement plans or business loans can also be helpful. Contributions that a business owner or their business makes to a qualified retirement plan (like a SEP IRA, SIMPLE IRA, or 401(k)) are generally tax-deductible. On the other hand, a loan is not treated as income for a business. Furthermore, the interest paid on the loan is deducted as an expense for the business.

• Exploring tax cuts and other tax-deductible opportunities, such as inventory write-downs and write-offs, inventory shrinkage and spoilage, donating unwanted or unusable inventory, the energy saver's credit, the research and development credit, and asset depreciation techniques, can all help reduce your tax liability.

Choosing the Right Business Structure

Choosing the proper business structure is another point to consider.

• Sole proprietorships, S corporations, and partnerships have benefits and drawbacks.

• A sole proprietorship can deduct all of its losses against other income. This can be good if someone is in a high tax bracket. It can be bad if this reduces their earned income to 0, as credits such as the Earned Income Credit and the Additional Child Tax Credit are maximized through low amounts of earned income. The sole proprietor is also subject to the employer and employee's Social Security and Medicare taxes also known as self-employment tax. This can lead to a significant tax liability in the current year. However, paying large amounts now may lead to a big payout at retirement.

• An S Corporation owner can only deduct losses on their personal tax return to the extent of their basis. As a separate legal entity, the owner's assets are guarded. S Corporation owners are subject to payroll taxes and must pay themselves a reasonable salary, and anything above this amount can be taken out as a distribution from the business. These distributions are tax-free to the extent of their basis and taxed at capital gains rates if they reduce their basis below 0. While there are excellent tax savings strategies for S corporation owners now, they also need to be aware that the Social Security benefits they will receive in retirement are directly connected to the amounts they pay in taxes during their working years.

• An S Corporation must distribute profits, losses, and distributions proportionately based on ownership percentages. On the other hand, partnerships have more flexibility in allocating these amounts. Furthermore, partners in a partnership can only deduct losses based on their basis in a partnership.

• Understanding the tax implications of your entity choice as they relate to your business purposes and long-term goals is crucial to wise tax planning.

Maximizing Savings During Tax Season

A few essential tax considerations exist to maximize your tax savings during tax season.

• As previously stated, leveraging professional services from a tax expert can assist you in maximizing your tax deductions, using essential credits, and reducing your tax liability.

• Staying compliant with social security and sales tax rate obligations now through studious record keeping and compliance will help prevent unwanted IRS and local notices with high penalty amounts.

• As a Shopify store owner, you are well on your way to maximizing your tax savings through point-of-sale systems for accurate tax reporting.

Hopefully, you can use some or all of the tax tips provided in this article. If some of it still seems somewhat confusing and you would like assistance, please don’t hesitate to call us. We are here to help!