As a small business owner, navigating tax categories can be overwhelming and confusing. It's always best to consult with a tax advisor to ensure that you are accurately categorizing your expenses and maximizing your deductions. With that being said, let's dive into some common questions that Etsy sellers have when it comes to tax categories.
Materials for Manufacturing: COGS Purchases, COGS Materials and Supplies, or Operations Expenses Supplies?
First, let's clarify what each of these categories mean. COGS stands for Cost of Goods Sold and includes the direct costs associated with producing your product. This can include materials, labor, and other costs directly related to the production of your goods. Operations Expenses, on the other hand, include general business expenses such as rent, utilities, and office supplies.
When it comes to materials that are purchased for manufacturing your products, it's important to accurately categorize them as they can have an impact on your profits. In this case, buying sheets that get printed on and cut into stickers would fall under COGS Materials and Supplies. These are raw materials that are directly used in the production of your product. This category is specifically for materials that are consumed during the manufacturing process.
Sticker Cutter Machines: Expenses vs. Assets?
Next, let's talk about your sticker cutter machines. These can be a bit tricky to categorize as they are a mix of both an expense and an asset. As you mentioned, they can last over a year but may not last for two years. In this case, it's best to consult with a tax advisor to determine the best course of action for your specific situation. They may suggest categorizing them as a depreciable asset and taking advantage of the Section 179 deduction, which allows you to depreciate the cost of the asset in the first year. Alternatively, you may be able to categorize them as an Operations Expense - Supplies or a COGS - Other Cost. Again, it's best to seek professional advice to ensure that you are accurately categorizing these expenses.
Shipping Envelopes: COGS Materials and Supplies or Operations Expenses - Office Expense?
Since your main business is shipping physical products, it's appropriate to categorize your shipping envelopes as COGS Materials and Supplies. These are directly related to the production and sale of your goods. It's important to note that if you are using these envelopes for non-business purposes, such as personal shipping, you should only include the business portion in your COGS category. The remaining portion should be categorized as an Operations Expense - Office Expense.
Utilities: COGS - Other Costs or Operations Expenses - Utilities?
If your electricity bill goes up when your shop gets busy, it's understandable to want to include this expense in your COGS category. However, it's important to note that only direct costs associated with the production of your product should be included in COGS. Non-proportional increases in utilities may be better categorized as Operations Expenses - Utilities. Again, it's best to consult with a tax advisor to determine the appropriate categorization for your specific situation.
Phone Bill and Internet: COGS - Other Costs, Operations - Utilities, Operations - Office Expense, or Home Office Expense?
For expenses related to your phone and internet usage, it's important to determine what portion of these expenses are used for business purposes. If you are using your personal phone and internet for business activities, you can only deduct the business portion. This can be categorized as COGS - Other Costs or Operations Expenses - Utilities. If you have a dedicated phone and internet line for your business, these expenses can be fully deducted as an Operations Expense - Office Expense. Additionally, if you are using your home office for business purposes, you may be able to claim a percentage of your phone and internet expenses as part of your Home Office Expense deduction. Again, it's best to seek professional advice to ensure that you are accurately categorizing these expenses.
Costco Storage Bins: Assets or Expenses?
For items that you purchase for your business that have a useful life of more than one year, it's appropriate to categorize them as assets. In this case, the $8 Costco storage bins would be considered assets and can be depreciated over their useful life. However, if you are using these bins for non-business purposes, you should only include the business portion in your asset category. The remaining portion should be categorized as an Operations Expense - Office Expense.
Mom Pay: Expenses or Mileage Deductions?
Finally, let's talk about the payments you make to your mom for helping with your business. It's great that she enjoys helping you and that it brings her joy. However, the IRS considers these payments as a business expense and they should be reported as such.
Additionally, if you are claiming these payments as a business expense, your mom will need to report the income on her tax return. It's important to note that if you are paying her more than the fair market value of her services, this may be considered a gift and can have tax implications for both of you. It's best to consult with a tax advisor to determine the best course of action for this situation.