Does shipping count as an expense?

Navigating the Seas of Shipping: Is it Truly an Expense? And Does it Matter?

For any business, especially those dealing with physical goods, the question of whether shipping counts as an expense isn’t just academic; it’s a financial keystone. The short answer is a resounding yes, shipping costs are absolutely a legitimate business expense. However, the way you categorize and handle these costs can significantly impact your bottom line and, ultimately, your tax obligations.

Let’s delve into why shipping costs fall squarely into the expense category and explore how to best manage them for optimal financial health.

Why Shipping Earns its Expense Stripes:

From a fundamental accounting perspective, an expense is a cost incurred to generate revenue. Shipping costs directly contribute to delivering your product to the customer, thereby facilitating a sale and revenue generation. Without shipping, your products might remain unsold, impacting your potential earnings. Therefore, shipping aligns perfectly with the definition of a business expense.

The COGS Connection: Where Shipping Really Shines (or Suffers):

The real power – and potential headache – of shipping costs lies in their close relationship with the Cost of Goods Sold (COGS). COGS encompasses all direct costs associated with producing or acquiring the goods you sell. This includes not just the raw materials or wholesale price, but also the cost of getting those goods ready for sale. This is where shipping often comes into play.

Here’s how shipping impacts COGS and why it’s crucial to understand:

• Included in COGS = Lower Gross Profit: When shipping costs are incorporated into your COGS, they directly increase the cost associated with each item sold. This higher COGS then reduces your Gross Profit (Revenue – COGS).
• Gross Profit’s Ripple Effect: A lower gross profit might seem like a negative, but it ultimately leads to a lower taxable income. Businesses pay taxes on their profit, so reducing the profit through legitimate expenses like shipping can result in lower tax liabilities.

Different Types of Shipping, Different Considerations:

It’s important to distinguish between different types of shipping costs. Here are a few common scenarios:

• Inbound Shipping (Getting Goods to You): This refers to the cost of transporting raw materials or finished products to your business for production or resale. This almost always belongs within COGS.
• Outbound Shipping (Getting Goods to Customers): This is the cost of shipping products from your business to your customers. This can be included in COGS or treated as a separate operating expense. The key is consistency. Choose one method and stick with it for accurate tracking and reporting.
• Dropshipping: If you utilize dropshipping, the shipping cost is typically factored into the price charged by your dropshipping supplier. This cost is therefore automatically included in your COGS.

Best Practices for Managing Shipping Expenses:

• Consistent Tracking: Maintain meticulous records of all shipping expenses, including dates, amounts, destinations, and whether they are inbound or outbound.
• Choose Your Accounting Method Wisely: Decide whether to include outbound shipping in COGS or as a separate operating expense. Consistency is paramount for accurate financial reporting.
• Explore Shipping Strategies: Negotiate rates with carriers, optimize packaging to reduce dimensional weight, and offer multiple shipping options to find the most cost-effective solutions.
• Consult a Tax Professional: For complex situations or if you are unsure about the best way to handle shipping costs within your accounting system, consult with a qualified tax professional.

In Conclusion:

Shipping costs are undeniably a legitimate and important business expense. By understanding their impact on COGS and diligently managing these costs, businesses can optimize their financial performance, reduce their tax burden, and ultimately navigate the competitive marketplace with greater confidence. So, embrace the seas of shipping, understand their currents, and steer your business towards smoother financial waters.