---- To free ship or not free ship. That's the question.
votrechien - 5:28 pm on Jul 2, 2011 (gmt 0)
For me it's not a matter of being a Dudley Do-Right. I'm basing my opinion on the way you worded your statement of..."The prices would have to be raised to cover it"...I understand that as meaning the shipping expense will be integrated [hidden] in the manufacturing expense and added to the retail price. When it comes time to produce the invoice for your book-keeper he/she will see only 1 item on the invoice -- a revenue of some dollars -- he/she will enter it into the ledger as revenue, you pay tax on the hidden shipping plus you've lost the tax credit that you would have otherwise had if it was a separate item on the invoice.
If you're charging for shipping, you still must account for it as revenue. Your shipping expense will then be an expense. If you're some how managing to charge for shipping exactly what you're paying, you still must account for one entry as revenue and one as expense even though it may be a complete wash.
Even if you're hiding shipping as a manufacturing expense (and I have no idea how you could as it's a variable cost across all products) it will still be ultimately deducted as a Cost of Goods Sold.
The point being, whatever you get as a receipt for your cost of shipping, be it from the post office or UPS, becomes an expense and tax deduction. The Tax Man does not care 2 cents how you market the price to your customers.
If the customer is paying you for shipping, then you deduct that from your sales total, and claim the rest as your actual income (before deductions). What he's saying is... If the shipping is 'hidden' in the price under the guise of "free shipping", then if you were going to be a Dudley Do-Right about it you should not deduct shipping expenses on your taxes, because technically you were paid for shipping within the price of the items.
You would be a dudley-pay-too-much-tax! Yes, you account for the revenue from the shipping when you sell the item and therefore you will not have a separate 'shipping revenue' line (although having a separate line for shipping would be very atypical IMO). However, your expenses are not affected whether you want to charge free shipping or $1mil for shipping on a box of kleenex.
There seems to be some confusion around this whole expenses and revenues thing when it comes to shipping. When I first started off, it was confusing for me as well. It's definitely something you want to get down pat though...there'd be nothing worse than the IRS discovering you've been accounting for things incorrectly and asking to see your past 5 years of records.
[edited by: votrechien at 5:29 pm (utc) on Jul 2, 2011]