Photography business: Can we deduct the cost of printing for clients even if it's bundled into their order with a third-party?

[MarkWilliamsIsOnFire]

My wife and I own a photography business. This tax season (2021) is year three of the business, and it turned a good profit. This is the first year my wife used an online print service (called Pic-Time), and I'm wondering if I can deduct the printing cost they charge us. It's a little unclear given how it's all set up. Let me explain:

A client views their online gallery at Pic-Time, and decides they want to order prints of some of the images. They place a print order, let's say it's for $1000 worth of prints (made-up numbers here). Pic-Time takes the client's money, prints the images, and mails them to the client. Pic-Time then deposits $600 in my wife's designated PayPal account for the sale, and Pic-Time keeps $400 for themselves.

My question is: Can we deduct the $400 difference as a business expense? I'm guessing we can, but it feels a little different to me than when she used to take images to a printer and print them herself and pay that $400 out of her pocket.

Thanks for the help!

-Mark

[ColeenD3 · Accepted solution]

You would only be able to deduct the $400 if you claimed it as income in the first place. Pic-time is skipping a step and just giving you the $600 that is truly your income. If you claimed the $1,000 as income and then took an expense for the $400, you would get the $600 you are now getting.

[MarkWilliamsIsOnFire]

Perfect - thanks, Coleen! That makes perfect sense.

[MarkWilliamsIsOnFire]

Coleen, I just realized this brings up a tangentially-related question for me: We use Square to accept credit card payments from clients. Are we able to deduct the Square seller fees? I guess the answer would be the same as the original example? We're only reporting as income whatever Square actually deposits in our business bank account, so I'm guessing we can't deduct the difference.

[JulieS]

Yes, this question is similar to your first question and the answer is the same, it is only a deduction if the amount is included in your sales.

That being said, it is the best practice to report your gross income and then deduct your fees paid to Square as a business expenses. 

If you received a 1099-K or 1099-MISC from Square, it will include the gross amount of income before the fees come out. To avoid an audit, you want your gross income to match or exceed your 1099 amounts.