Now that we’ve had so much fun talking about sales tax over the past couple of weeks, let’s really rip it up and talk about federal taxes for a minute. If you are successful and making money, you’re going to have taxes and Uncle Sam expects you to keep decent records to back up your deductions. With thousands of items up at Amazon at any given time, it could potentially be a nightmare. Before I tell you how I do it (which, by the way, is not by any means the only way), let’s look at what the IRS wants to know and what you want to know about your business:
- How much your inventory cost when you bought it
- How much your supplies cost to run the business
- Any services, bank fees, software, miles on your car, utilities, rent, etc., it takes to keep your business in operation
- For how much you sold your inventory
- How much inventory is left up at Amazon at the end of your fiscal year (usually Dec. 31)
- How much money do I have left after expenses and taxes?
- Am I making money on my inventory or losing it?
- Which items are most/least profitable?
Now you could do this the hard way or the slightly less hard way and it really depends on your personal need for detail. I’m a big picture girl and I hate bookkeeping so you can guess where I’m going with this.
First, you need some kind of bookkeeping system for Uncle Sam. I recommend Outright.com or Quickbooksbecause I’m most familiar with them but there are many packages out there. If you are accustomed to usingPeachtree in another business, for example, then use Peachtree. Outright.com is very simple and aimed squarely at online sellers. This may be your best bet if you are new seller and don’t run other businesses. You can read a past blog post about it HERE. I use Quickbooks Online because I’ve used QB for nearly 20 years and I run two other service businesses on it already. Whatever system you use, the purpose is to keep track of your business expenses and deductions and to produce reports for you that show you if you are losing or making money. You can tie it to your business bank account, PayPal, Amazon Payments – whatever you use to sell. This will help you keep track of your deductions and expenses.
If you are incorporated, you owe taxes on whatever is left after your business pays its expenses. If you are a sole proprietor you pay taxes on your income at a higher rate and pay your expenses out of what’s left. It is the number one reason for incorporating. Corporations have lots more expenses they can write off than sole proprietors. I mention this here because obviously it will affect your bookkeeping if you are incorporated or not. If you are using a lot of tax strategies, you may wish to use a more comprehensive program like Quickbooks which will help you better keep track of them.
I rely heavily on Amazon to provide me with inventory reports for Uncle Sam and sales tax reports for the individual states where I collect them. At the end of each year on December 31 or January 1 I download these reports which help me show my CPA how much inventory is at Amazon. In addition, Amazon’s financial reports tell my CPA my gross and expenses from Amazon. I strongly suggest you put a reminder in your calendar RIGHT NOW to run these reports on December 31. Go to “Reports” and “Fulfillment” in Seller Central and print off:
- Received Inventory – tells you exactly what you sent to Amazon during the past year
- Amazon Fulfilled Inventory – Snapshot of exactly what is in the warehouse that day. Tells your CPA what inventory will roll over into 2013, basically. This can only be run on December 31 (or January 1 if you wish. That’s close enough for the IRS) as it is a real-time report, NOT historical. Amazon does not have a historical report that shows you what inventory you had in the warehouse when, so whether you pull the other reports or not, be sure to pull this one.
- Monthly Inventory History – This report can be run for the whole year and will show you what you sold each month.
- All Statements – You’ll find this one under “Reports”, “Payments” rather than “Fulfillment.” You can print off your statements for your CPA of all your payments for the year if you’ve not been doing it as you went along. There’s a summary view and then you can drill down into the detail. This report shows you Amazon’s fees, your gross, your net, basically.
Throughout the year I look at what items are selling and my profit or loss through the financial transaction reports.
My Receipts/Inventory Costs
One thing Amazon’s reports won’t tell me is how much my inventory is actually worth at the end of the year – i.e. the sum of what I paid out-of-pocket for the inventory that is still up there at the end of the year. There are several approaches to this problem:
- Keep records of every single item of inventory you have and what it cost in an excel spreadsheet. Compare it to your report of the thousands of items up at Amazon at the end of the year. Calculate the actual value of your inventory. Shoot yourself out of desperation.
- This is my current solution except I don’t keep track of the costs as I go. I do it all at the end and I feel desperate every year when I have to go through this but I can do it in a few hellish hours. I have a couple of drinks afterwards. Basically, I take the Amazon Fulfilled Inventory report and import it into Excel. Then I go through my receipts and/or Scan Power and key in the cost for each item in a new column. I have Excel add it up for me and give the number to my CPA.
- Because so many of my items are books and I can tell from my MSKU where and when I bought them, it is pretty easy to price them without looking up each individual item. What I do is go to my receipt where I marked how many books I bought (200 books for $100, that kind of thing). I average it out (each book = 50 cents on average in this example) and put that number in for all the books that correlate to that book sale. While some books may have actually been $1 and others 25 cents, the price range is so small, the average is close enough.
- I keep all my receipts sorted by year and month so it is easy to find the one I need when the time comes.
- OR, Keep your spreadsheet up-to-date as you go. In other words, as you buy and sell stuff, add/remove it from the spreadsheet so at the end of the year all you have to do is add up what’s not sold yet in your spreadsheet. This requires discipline and an ongoing devotion to bookkeeping. Pay to palm off this tedious chore on a virtual assistant or bookkeeper or you will want to shoot yourself on a monthly basis.
- Use inventory management software to do it for you. There are stand-alone programs and those that integrate with major accounting packages. What is most important is that they integrate with Amazon.com because Amazon is the most up-to-date program with your actual sales. This approach is particularly relevant to multi-channel sellers. Some of the software out there is very slick and can help you manage inventory across multiple platforms easily.
- I spoke with Stitch and tried their free trial. They have a free 15-day trial and integrate with Amazon. After that it is $25 a month. This means you can pull in your current inventory automatically into Stitch. The downside for a small fry like me is that I still have to enter all the costs manually and I have thousands of items. All the other details (MSKU, etc.) are pulled in for me by the program, but not the out-of-pocket cost. Since I’m not multi-channel, I’m not going to pursue the program, but it is worth a look for you if you do sell the same item across platforms.
- There are others. Key in “FBA inventory management software” into Google and see what works with your bookkeeping software. Many will work with QuickBooks and other programs if you want to take that approach.
If you know of something better for FBA sellers, please let me know! I’d be thrilled to try it out and share. Most programs that I researched so far will require you to still enter your out-of-pocket cost for the items as you go. There is really no way around this yet which is why I do the spreadsheet thing. It’s free. You can download the real-time report from Amazon and create a column for cost.
I’m hoping that the guys at Scan Power are reading this and will create reports for us from Scan Power’s Repricer that will allow us to see how much we spent per item (see below). If I could synch my inventory with Scan Power Repricer on 12/31 and the spreadsheet included a column with how much I paid for that item, I’d be deliriously happy. I’m currently putting in that information as I go with Scan Power to help me with repricing and would love to have this extra functionality. And I’d pay extra to have it. If you feel the same, email the guys at Scan Power: email@example.com and maybe they can add it to their to-do list. I know they are busy creating new features for us all the time.
I use Scan Power. If you use Listtee or some other program, you most likely have the same capabilities – you’ll want to check. Scan Power allows me to record my actual cost at the time that I list an item. If you’ve not noticed this feature, see the picture. This is a big help when I am repricing and also if I ever want to see exactly how much I made on an item. I can pull it up on Scan Power or Scan Power Repricer by its MSKU and see what I originally paid. Amazon’s financial report will show me how much it actually sold for and my cut after expenses. This helps me answer the question of whether or not an item was profitable or not. Obviously it is when I originally price the item or I wouldn’t send it in, but sometimes I have to cut my prices in order to make the sale and then the item isn’t profitable or as profitable. I’ve been doing this long enough that I can often tell just by looking at the transaction report. But, if I’m not sure, now I can use Scan Power to help me determine my profit or loss on a particular item.
When you price your item in Scan Power, you can put in your actual cost (1) as well as your desired “floor” (2) and “ceiling” (3) for the item. This will help you a lot when repricing. Right now I only put in my cost as most of my repricing is done manually.
What’s in my Office
Basically, from a bookkeeping perspective, my receipts are in my file drawer plus copies of all my tax forms. My receipts for each year are in a compact 13-month plastic expand-a-file pouch with a fold-over flap that I get from the Container Store. It is the perfect size and easy to store in my file drawer. I always use three slots for November/December since I have so many receipts.
I have a file folder for each state where I pay sales tax which includes my sales tax certificates and instructions from the state. Everything else is in my computer, in the cloud, or available somewhere online. I pay all my state and most of my federal taxes online.
My business bank account, my AMEX, credit card payments (for my book) and PayPal all feed into QB. Amazon deposits into my bank account. I make sure expenses are going into the right categories (many of them are monthly repeats and automatically are categorized) and reconcile every month or so. That’s it.
I use Carbonite.com to store all my data securely off-site. Carbonite is GREAT! It works behind the scenes in real time. I don’t have to remember to do a back-up and it is very easy to recover files should anything happen. I’ve replaced my laptop several times during the years I’ve used Carbonite and it is very easy to download my data files to the new laptop. I have a terabyte drive on my desk which stores a lot of my pictures and big files that I don’t access every day like years’ worth of business files and taxes. Carbonite backs that up, too. It is wonderful and provides great peace of mind. My CPA also has copies of all my tax forms as does Quickbooks Online so I feel secure going paperless.
I am sometimes asked after I write blogs recommending products/services if I am an affiliate. Occasionally I am and I’m very clear when that is the case. In today’s case, these are my opinions and I am not paid for them. I would love to hear from you about your solution to bookkeeping for your Amazon business.