The Internal Revenue Service has specific guidelines for what a trade or business is. For starters, profit must be your goal. This doesn’t mean that you have to be consistently profitable. It does mean that profit is your intention, and your activities are carried out to that end. Check the IRS’s website or meet with an accredited tax adviser to make sure you meet all criteria for being a business in the eyes of the IRS.
Although tax rules for the 2018 fiscal year have changed considerably, you may be able to deduct shipping charges depending upon the specific status of your business enterprise.
Ordinary and Necessary
Whether or not a business expense is deductible depends on whether it’s an ordinary and necessary expense for that business. The IRS defines an ordinary expense as one that is common and accepted in your trade or business. It also defines necessary expenses as those that are helpful and appropriate for your trade or business. Note that to the IRS, necessary does not mean it’s absolutely indispensable. Most shipping, handling and postage costs meet these criteria. They are ordinary and necessary expenses for most businesses that incur them.
Shipping, Handling and Travel Expenses
Businesses that offer free shipping can offset those costs by deducting them. Handling is also deductible. Handling includes boxes, packing materials, labels and the labor involved in preparing items for shipping. Shipping-related travel expenses, such as the cost of sending samples or display materials to a trade show, also are deductible. So are baggage charges for business trips.
Cost of Goods Sold
If you're a sole proprietor, you can claim shipping and handling expenses by itemizing your deductions on IRS Form 1040. You also have to fill out a Schedule C. If you're a manufacturer or wholesaler, you would deduct shipping and handling costs by figuring the cost of goods sold, or COGS.
COGS is the total cost of doing business for the year, which would include shipping and handling. COGS is reported as a business expense for tax purposes. It lowers taxable income. To determine COGS, calculate the value of any inventory that's left over from the previous year, add purchases made during the current year, then subtract inventory that’s left at the end of the current year.
Since the COGS calculation includes shipping and handling, if you use this method you cannot also take shipping and handling as a deduction.
E-commerce and Personal Items
Shipping and handling costs for your eBay or Etsy store are handled the same way as they would be for any business. In fact, commissions paid out of online sales are a deductible business expense too. However, if you occasionally sell personal belongings on Craigslist or eBay, you don’t fall under the IRS’s definition of being in business. So shipping costs for those sales are not deductible. If you ship your holiday packages from work, even though you may use the boxes, packing material and labels that were bought with business income, this is not a deductible business expense.