If you’re running an online business, you may be concerned about the non-traditional taxation policies that employ in your business. Since it’s a registered business, you’re automatically liable to pay taxes on the income you generate from it, but what about the tax deductibles?
Running an online business isn’t free. There are many expenses that you need to incur to run a business- including web hosting.
This begs the question, is web hosting an expense you can write off in your taxes?
Well, luckily, the answer is yes! If your web server is primarily used by your business, it is definitely a business expense that you have the right to write off.
But this isn’t only limited to web hosting- there are also many other web development expenses that you can potentially write off e.g. web software, applications, domains, or contracts that were purchased to develop your business website.
To help you minimize your business taxes and ensure you write off every deductible expense, let’s discover the world of taxation when it comes to running an online business and the best practices you need to apply.
Table of Contents
- How Do Tax Deductions Work For An Online Business?
- When Can You Write Off Web Hosting Legally
- Is It Safe To Write Off Web Hosting?
- How To Write Off Web Hosting In The Books
- How To Write Off Other Web Development Expenses If You’ve Just Started The Business
How Do Tax Deductions Work For An Online Business?
Tax deductions refer to the expenses your business incurs that reduce the amount of taxable income your company is liable to pay during a tax period. Since taxes are paid on the profit that a business enjoys, expenses showcase a realistic profit after deducting all the business expenses from your income, and ensuring you only pay for the actual profit your business produced in a tax period.
All the web expenses that you incur running an online business will ultimately be subtracted from your gross annual income, resulting in a reduced amount of total profit at the end obliging you to pay a reduced amount of tax.
|Business Expense||Web hosting can be considered a business expense if it is used for business purposes such as hosting a website for your business.|
|Ordinary and Necessary||To be tax deductible, web hosting expenses must be ordinary and necessary expenses for your business. This means that the expense must be common and accepted in your industry, as well as helpful and appropriate for your business.|
|Partial Deduction||If you use your web hosting for both business and personal purposes, you can only deduct the portion of the expense that is related to your business activities.|
|Start-up Costs||If you are starting a new business and have incurred web hosting expenses before your business is up and running, you may be able to deduct those expenses as start-up costs.|
|Record Keeping||To claim a deduction for web hosting expenses, you must keep detailed records of the expenses, including invoices, receipts, and bank statements.|
|Consultation||It is always a good idea to consult with a tax professional to ensure that you are properly claiming deductions for web hosting expenses and complying with all applicable tax laws.|
Tax deductions for online business work in a very similar way to a traditional brick-and-mortar business, however, since online expenses are rather difficult to trace, some business owners find it difficult to identify what their business expenses are and how you can write them off.
Do remember that tax deductions are not the same as tax credits. To contrast between them in simple terms, tax credits simply reduce the total amount of tax you owe while tax deductions are expenses that reduce the profit of a business ultimately helping the business pay less taxes on the reduced amount of profit.
Tax Deductible Expenses For An Online Business
To help you with a better understanding of what counts as a deductible expense for an online business, here’s a list of everything you can write off from your taxes if they are directly and primarily used by your business and you can show proof for it.
Business Expenses: Any expenses that are incurred by your business to start up or operate e.g. website hosting, domain registration, advertisements, software subscriptions, professional services, etc.
Home Office Expenses: If you’re running an online business from your home where you use a portion of your house exclusively for your online business, you can potentially write off that portion of rent, mortgage, and utilities as deductible expenses.
Depreciation: If you have any equipment that classifies as fixed assets primarily used by your online business, you can potentially write off its depreciation.
Marketing: Any marketing expense that is incurred for your online business, including digital marketing expenses, are generally deductible expenses.
Professional services: If you consult any professional services such as website design or SEO audits that cost more than $600, they can often be deducted if they’re related to improving or repairing your online business.
When Can You Write Off Web Hosting Legally
Now that we understand how taxation works for online businesses, how do we treat web hosting fees for an online business?
Simply put, if you’re hosting a website on a server that is primarily used for a business, you can treat your web hosting costs as tax-deductible expenses and write them off.
However, if you’re a reseller, you can not write off web hosting as it’s the cost of your product and not an expense. This cost is directly paid for by your customer and has no obligation to be written off.
The IRS is yet to issue a specialized guidance for web development costs, however, for the sake of authentic taxation and deductible expenses, we currently treat web hosting costs as dues and subscriptions incurred by a business, which are tax deductibles when it comes to running an online business.
The IRS has a software use guideline that resembles this case, where software fees and dues are deductible expenses. This is why accountants treat web hosting costs the same way and write them off.
Is It Safe To Write Off Web Hosting?
If the IRS hasn’t issued a specific guide for treating web hosting as part of a deductible expense, is it really safe to do this? And if so, is there any guarantee that this won’t get you into trouble?
Well, technically, it is mostly safe as long as you’re using the website solely for your business use. However, to ensure everything is done right, I would always recommend consulting an accountant or tax filer.
If you do write off web hosting or any web development expenses, be sure to save up authentic and verifiable documentation against them which proves that these costs are directly related to your business.
In addition to that, try to avoid any personal use of your web server costs so that they can all be directly apportioned to your business.
With the above two practices, you should be safe writing off web hosting as tax deductible even if you were to be audited by the IRS.
How To Write Off Web Hosting In The Books
To claim your tax deductibles when it comes to web hosting expenses, here’s what you need to do.
- Web hosting will relate to Schedule C – Profit or Loss from Business. This will be in your IRS form 1040 which shows business income for the year.
- Under Section C, locate Part II, Expenses. Here, you will fill out the entries to add your deductible expenses.
- Web hosting will go under Other Expenses (27a) while other web development costs could relate to Advertising (8), Office Expenses (18), or Utilities (25).
How To Write Off Other Web Development Expenses If You’ve Just Started The Business
Start up costs are treated a bit differently than normal operating expenses for a running business. If you’ve just started an online business, here is how you can file its start up costs as tax deductible expenses.
If you’ve developed a website yourself or paid someone to do so
If all the web development costs of your new business are startup costs, you can:
- Write off $5,000 of the costs in the first year of the business as deductible
- Amortize the residue startup costs over 15 years
If you’ve bought a developed website from someone
In this case, the website you bought will be considered as a bought software. This treats your website as an asset that will be amortized over 3 years starting from the first month that it is commercially operational.
If you buy an incomplete website
After buying an incomplete website, all of the web development costs that your website will incur can immediately be written off as tax deductible under Section 179. Your startup costs here will be treated as an asset that can be deducted for up to a maximum of $510,000.
In summary, you can definitely write off web hosting as tax deductible as long as you’re using the website solely for your business and you’re not reselling web hosting.
Among web hosting, other web development costs that make up for the creation and maintenance of an online business can also be written off as tax deductible.
To keep yourself safe from any hassles, make sure to always back your expenses with verifiable and authentic documents and receipts that can show the exact amount of the expenditure and the direct relation of it with your business.
Interested in more? Check out The Digital Nomad Tax Guide.