What are Tax Laws and Issues for E-Business and E-Commerce?
Internet Sales are Taxable
Misinformation about laws such as the prohibition of the taxation of Internet access (Internet Tax Freedom Act) and limiting sales tax on interstate sales have lead some to incorrectly believe that Internet sales income is not subject to income tax.
An online business may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your sales may result in capital gains, nondeductible personal losses, or you may have ordinary business income.
Income from Abroad is Taxable*
There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with offshore bank accounts. The IRS’ interest, however, extends beyond offshore bank accounts. The IRS reminds you to report your worldwide income including income from foreign customers on your U.S. tax return. Civil and criminal penalties may apply for not reporting all taxable income, including income from overseas business transactions.
If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents. See Publication 525, Taxable and Nontaxable Income for more information.
Home Office Deduction
If you use a portion of your home for your online business, you may be able to take a home office deduction. In order to deduct expenses related to the business use of your home, you must carry on a “bona fide” business, as well as meet other specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for the business use of your home, you must meet both of the following tests:
1. Your use of the business part of your home must be:
- Regular, and
- For your trade or business,
2. The business part of your home must be one of the following:
- Your principal place of business,
- A place where you meet and deal with customers in the normal course of your trade or business, or
- A separate structure you use in connection with your trade or business.
For more information on home office deductions, see Publication 587, Business Use of Your Home and IRS Tax Tip 2008-53
Consequences for Evading Taxes on Foreign Source Income
Substantial civil and criminal penalties may apply if you do not properly report all taxable income from domestic and foreign sources or properly disclose, in Part III of Schedule B and on Form TD F 90-22.1, your financial interest in foreign financial accounts if you have such accounts, You will still also be required to pay the tax due, with interest, on any unreported income.
Reporting Promoters of Offshore Tax Avoidance Schemes
The IRS encourages you to report promoters of off-shore tax avoidance schemes. Whistleblowers that provide allegations of fraud to the IRS may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.