Thursday, May 29, 2008

eBay Selling and Your Tax Return: Part 3, The eBay Business Owner

In Part One we covered The Casual Seller and in Part Two we went over The Hobbyist. In this last post, we'll cover The eBay Business Owner.


To get out of the hobby classification, you must have a profit motive. This elevates your hobby to a business and lets you deduct business expenses -- and losses. Profit motive is demonstrated by...

Running your activity in a businesslike way (have a business plan, keep good books and records, and maintain a separate business bank account and credit card).

Devoting considerable time to your activities on eBay.

Consulting with business experts, such as accountants and successful eBay sellers, on how to improve profitability.

More than 1.3 million people have full-time or part-time businesses on eBay. If you are one of these people, be sure to observe the following tax responsibilities...

Report income and expenses. Like any other sole proprietor, you must file Schedule C to report your income and expenses for the year. (If you form a legal entity for your business, such as a corporation, you must file appropriate tax returns for the business.)

The difference between your gross receipts for the items you sell and your cost of inventory, called the "cost of goods sold," less any returns, is your income from eBay activities.

Being in business also means that you can write off eBay-related expenses. Examples...

Car expenses. You can deduct business use of your personal car for travel to garage sales, flea markets, and other locations where you buy your items or otherwise conduct business, as well as trips to the post office or other shipping companies to mail your items to buyers. Write off your actual costs of business use of your car or take the IRS' standard mileage rate of 50.5¢ per mile in 2007, plus any parking fees and tolls.

Fees paid to eBay and PayPal (an on-line payment company).

Home-office costs, provided you use your space, such as a spare room, regularly and exclusively for your eBay business.

Internet access fees if personal use is minimal.

Sales and management tools. Typically, these tools, which help you automate listing and tracking eBay sales, involve deductible monthly or annual subscription fees. Software costs may be expensed (deducted) or depreciated.

Pay self-employment tax. If eBay activities are profitable, you owe self-employment tax, which covers Social Security and Medicare taxes.

Break: If eBay is a sideline business for you (you are an employee at another company), the Social Security portion of this tax may be covered at your place of work through FICA withholding. The wage base for 2007 is $97,500, so anyone with wages at or above this amount from which FICA has been withheld will not owe the Social Security portion of self-employment tax. However, there's no wage base limit for the Medicare portion of the tax, so profitable eBay businesses will always owe some self-employment tax. See instructions to IRS Schedule SE (which is part of Form 1040) for details.

Collect sales tax. Just because a business is conducted on-line does not automatically exempt transactions from state and local sales tax rules. With more than 8,000 sales tax jurisdictions nationwide, sales taxes are complex. In broad terms, a seller must collect sales tax on items sold to buyers within his/her state, so check with your state revenue department for information about your collection and reporting responsibilities.

Break: eBay business owners should obtain a state sales tax number (also called a resale number) under which to report sales tax collections. You can get the number from your state revenue department. Sellers can then use this number to avoid paying sales tax on items purchased for resale (i.e., their inventory).

That concludes our series on eBay and Your Taxes. Hoped it helped! I know I sell on eBay here and there, and always wondered if what I sold was taxable or not. Now we all know!

~The Good Tax Helper

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