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.

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

eBay Selling & Your TaX Return: Part 2, The Hobbyist

In Part One we went over The Casual Seller, someone that sells here and there when they have an extra something to get rid of, don't use anymore, and happened upon.


In Part Two we'll cover The Hobbyist.

THE HOBBYIST

If you sell items on eBay more frequently but your sales aren't profitable (your expenses exceed your revenue), you may be looked upon by the IRS as merely having a hobby, rather than a business. Unless you can prove that you have a profit motive, then income is ordinary income reported as "Other income" on Form 1040, but deductions can only be claimed to the extent of this income. If you make $1,000, your deductions cannot exceed $1,000.

These limited deductions from a hobby are treated as miscellaneous itemized expenses deductible to the extent that they exceed 2% of adjusted gross income (AGI).

Trap: Individuals subject to the alternative minimum tax (AMT) lose any benefit from hobby write-offs because miscellaneous itemized expenses are not deductible for AMT purposes.

In Part Three we will go over The Business Owner...

eBay Selling & Your Tax Return: Part 1, The Casual Seller

With more than 233 million registered users, eBay is the world's largest marketplace. Millions take advantage of this on-line venue to sell anything and everything -- from junk around the house to diamond rings, cars, and forklifts.

Just because sales activities are on-line, doesn't mean they are invisible. You still need to know the tax rules to follow in reporting your eBay sales.

When you sell items on eBay, the tax law may view you as belonging to one of three categories -- casual seller, hobbyist or business owner.

Where you report income and whether you can deduct expenses depends on your category. There's no hard line drawn in the sand based on revenue or number of sales dividing these categories -- many factors come into play. In this three part series, we'll tell you what you need to know...

THE CASUAL SELLER

If you sell an item or two from time to time, such as unused sports equipment sitting in your garage, you are a casual seller. (There's no formal designation in the tax law of "casual seller" -- it's a descriptive term.)

Most sales like this will result in a loss -- the price you receive on eBay will be less than what you paid for the item. You are not required to report the loss on your tax return -- you can't deduct it, because it is viewed as a personal loss, and personal losses are not deductible.

On the other hand, if you sell something at a profit -- say, the antique porcelain vase you inherited from your aunt or the collectible child's game you bought at a garage sale -- you must report the gain on your tax return. (Of course, to determine your gain, you'll have to know your basis in an item. If you don't know what your basis is or can't figure it out, then all of the proceeds are considered profit (gain).

Note: You can minimize taxable gain by adding your selling expenses to your basis. Selling expenses include eBay listing fees (the "insertion fees" paid to eBay to post items for sale) and "final value fees" (a percentage of the item's final selling price that is also paid to eBay). These fees are paid by the seller.

There is no threshold amount of gain or number of sales before you are required to report eBay transactions. All gain must be reported on Schedule D. (You can't take capital losses because these are personal items.)

Gains on the sale of items are capital gains -- long-term if the items have been held for more than a year, or short-term if held for a year or less.

However, unlike most long-term capital gains that are taxed at no more than 15%, gains on the sales of collectibles are taxed at 28% for those in income tax brackets of 28% and above.

Collectibles for this purpose are defined in the instructions for Schedule D as works of art, rugs, antiques, precious metals (such as gold, silver, and platinum bullion), gems, stamps, coins, and certain other tangible property.

This concludes Part One. In Part Two we will be covering The Hobbyist.