The $44k Amazon Tax Error and Why You Need an Amazon CPA
Jerry’s Story
Jerry is an Amazon seller that sells about $3 million per year on Amazon. I started working with him in 2022 and he’s still a very happy client today. Why? Because I got him a huge chunk of his money back from the IRS and state - $44k to be exact. That’s a lot of money that can be put back into inventory or invested in advertising to make even more money. With all the recent Amazon changes, what seller couldn’t use more cash on hand?
But how did it happen that Jerry was owed $44k? Well, he overpaid his taxes by a lot. It wasn’t his fault, but rather an oversight by a CPA who honestly didn’t know any better. He always worked with his local CPA as many Amazon sellers start out doing. Like many local CPAs that may be well known and trusted, his CPA didn’t know exactly how to interpret all the data he was provided to prepare the return. Nor did Jerry know how to tell if the return was prepared correctly when he reviewed it.
When I took Jerry on as a client, he was looking for someone who specialized in Amazon, particularly because he didn’t feel comfortable that his CPA knew what he was doing. Boy was he right. I always review the prior year tax return before I begin work on a new tax return. I took one look at Jerry’s tax return and knew there was a big problem. I noticed that the top line revenue matched the total of the 1099-K, then I glanced at the taxes and licenses line of the tax form and saw very little tax being deducted. After double checking, I realized that the local CPA didn’t know that sales tax collected by Amazon was included on the 1099-K. The 1099-K shows total charges to customers, including sales tax. Amazon also remits this sales tax for sellers. So to properly account for this, you must also deduct sales tax collected on the taxes and licenses line of the tax form.
This one error that neither the CPA nor Jerry noticed, resulted in a $125k profit overstatement. After amending the tax return and correcting a few other errors, the actual result was a $3k net loss. The original error resulted in a $44k IRS and state tax overstatement. The originally reported “profit” was combined with Jerry and his wife’s high W-2 income, resulting in a big unexpected tax bill. Imagine having to lay out big money on taxes when you actually had a loss?
This story is not meant to bash on local CPAs. I’m sure his CPA was well respected and trusted by others. The point of this story is to illustrate how you can benefit from a specialist when having your tax return prepared by an Amazon CPA. This goes for any industry. I wouldn’t even venture to do the tax return of a restaurant because I don’t know anything about that industry. Generalist CPAs are less likely to keep more money in your pocket, but read on to find out how a specialist in Amazon can.
If you’d like a 2nd look at your past tax returns, book a new client intro call now. Plus, eComEngine newsletter subscribers get a free tax planning session when becoming a new Seller CPA client.
How we keep more money in your pocket when we file
We’ll report the correct amount of sales and sales tax collected and show the details of the returns, allowances, and fees. This ensures proper reporting, not over reporting, and avoids a CP2000 inquiry from the IRS due to a 1099-K mismatch.
We’ll properly report your cost of goods sold (COGS) on an accrual basis and help you determine your reportable COGS through analysis of beginning inventory, purchases, and ending inventory to avoid over deducting. Over deducting can result in a Schedule C loss, which can increase your audit risk.
We’ll maximize your deductions such as the safe harbor election for small taxpayers, the business mileage deduction, and the business use of home deduction to include inventory storage space and home office space using the actual expenses method. The actual expenses method can unlock additional deductions for home owners who claim the standard deduction.
We’ll help you navigate whether it would be more beneficial to claim the Section 179 deduction, the business mileage deduction or deduct vehicle expenses under the actual expenses method.
We’ll help you analyze inventory shrinkage to capture a tax benefit for money that was spent on inventory but never sold due to loss, theft, damage, or other reasons beyond your control.
Did you receive a lot less cash than what was reported on your tax documents because of Amazon reserved balances? We can help you determine if reporting on a cash basis during the current year can save you big bucks on income tax.
How we make filing taxes easier
We know exactly what reports to ask you for and we provide specific instructions on how to pull those reports from Amazon Seller Central.
Have a complicated situation like switching your SSN to an EIN in the middle of the tax year so you get 2 1099-Ks from Amazon? We know how to handle that.
Have you sold in multiple countries and have a 1099-K from Mexico, Canada or other countries? We handle the currency conversion and aggregate the data from your summary reports to make sure you are reporting in the correct currency.
Unsure how the 1099-K ties to other reports that you see in Seller Central? We can explain all that.
Receive a detailed password-protected Loom video that walks you through each line of your tax return. You’ll know exactly what we are filing before signing and have a chance to ask questions, request corrections, or simply feel comfortable with what we prepared.
We provide a 100% digital process. Upload your documents through a secure web portal. Receive copies of your tax returns securely. Sign from anywhere with the convenience of DocuSign.
How we plan to save you even more
Every tax return we prepare comes with an optional tax planning session. We’ll analyze your return against over 40 possible tax strategies to save you money in the current year. We can go beyond maximizing deductions for the prior year, and take a proactive approach to saving you money now. The best part is it’s risk free. If we don’t think we can save you more than the fee you would pay for tax planning, we won’t even suggest a tax planning session.
Let us help you today. Book a new client intro call now or get more information about our income tax services for Amazon sellers. Not a resident of the U.S.? No problem, we prepare non-resident Amazon seller income tax returns too.