EBay and taxes - eBay vs. the IRS

I was recently quoted in an article about eBay, called ‘Treasury aims to collect $2Bn in extra taxes’ by Eoin Callan.  The article talks about how most eBayers do not voluntarily report their income and what the IRS would like to do about it. 

The IRS realizes they are losing billions in tax dollars each year as long as eBay profits (and other online auctions and even other online businesses) are left unreported.  It should be interesting to see what happens in tax legislation over the next few years regarding eBay.

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Tax deductions for your eBay business: internet and computer costs

Can you deduct your internet and computer costs on your income tax return if you use your computer for both your eBay business and for personal use?

Yes, you can deduct a portion of your computer and internet costs on your tax return.  Your tax deduction is based on the percentage of time you use your computer and internet for your eBay business. Technically, you should keep a log of your internet usage to determine how much is for your eBay business and how much is personal, but that isn’t very practical for most people.

My best advice is to just use common sense and good judgment when determining how much to deduct on your tax return. Try keeping a log for a week or a month to see how much you really use your computer for your eBay business vs. personal use. 

Whatever method you choose, make sure that your tax deduction is reasonable for your eBay business in case you ever get audited.  For example, if you only have one computer, but you have children and a spouse who uses the internet, don’t try to deduct 90 or 100% of your internet charges - the IRS will not believe you and you will lose the deduction.

For more tax deductions that you may be able to deduct for your eBay business, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay tax deductions, ebay tax, income tax on ebay profits

1099 basics for ebay sellers

Many eBay sellers wonder why they don’t receive a Form 1099-MISC from eBay at the end of the year.  EBay is only the facilitator of the auction, therefore they do not provide 1099s to sellers. 

However, just because you don’t receive a 1099 does not mean your eBay sales are not subject to income tax.  You must report all income, whether you receive a 1099 or not.  For more information on reporting income, please see ‘Are you required to report your eBay profits?’.

On the other hand, as an eBay seller, you may be required to file 1099 forms if you hire someone to help in your business.  The general rule is that if you pay more than $600 to someone who is not considered your employee, then you are required to provide them a 1099-MISC form. 

If you use QuickBooks, there is a feature to help you prepare 1099-MISC forms included.  Otherwise, I recommend the website www.filetaxes.com for 1099s.

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay tax, form 1099, independent contractor ebay

How to value personal items sold on eBay for tax purposes

When you sell items on eBay, you need to know the cost basis of the items you sold in order to determine your gain or loss on the sale for tax purposes.  This is pretty straight forward when you purchase items specifically to sell on eBay, but how do you value inventory that you bought for personal use, then later sold on eBay?

Let’s say you want to sell clothes you bought for your kids that they have outgrown, or toys that they no longer play with. Before you sell these items on eBay, you should research similar items to see what they have sold for on eBay or similar auctions.

For tax purposes, the value of your eBay inventory is the average selling price on the similar items you researched. Print out your research, and be sure to enter the average selling price on your inventory spreadsheet, for proof of your cost basis.

The most important thing is to keep good documents. If the IRS audits you and you can’t provide documents showing how much you paid for an item or what your cost basis is in the item, they may claim that your cost basis is $0, which means you will pay tax on 100% of the price you sold it for on eBay instead of just paying tax on the profit.

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay tax, income tax on ebay sales, ebay inventory

Can you deduct your eBay and PayPal fees on your tax return?

As a seller on eBay, you incur many expenses. Two of the most common expenses include your listing fees on eBay and your PayPal fees. 

Can you deduct these fees, and where do they go on your tax return?  Yes, you can deduct both your eBay listing fees and your PayPal fees.

EBay listing fees are an advertising expense, so list these on line 8 - Advertising, on Schedule C of your tax return.

Your PayPal fees are considered bank service charges and should be listed as an Other Expense on line 27 of Schedule C. 

For more information, sign up for our free ecourse, Tax Tips for eBay Sellers.

Tags: ebay tax deductions

Are you required to report your eBay profits on your tax return?

If you sell items on eBay for a profit, then you may owe income taxes on your eBay sales. It doesn’t matter if it’s just a hobby or if you are trying to build a business.

Generally, any income you receive from all sources is subject to income tax unless it is specifically exempt by law (hint: eBay profits are not exempt).

You must file a tax return if your net earnings from self employment are $400 or more.  You are self employed if you carry on a trade or business for profit.  If you sell on eBay, you are generally trying to make a profit.

To report your eBay earnings on your tax return, file Form 1040, and attach Schedule C or C-EZ.  Schedule C is used to calculate your net profit or loss from your business, which is then reported on your Form 1040.

At this point, you may be thinking “I don’t run a business; I just sell on eBay as a hobby”.  Unfortunately, income from hobbies is taxable as well.  Even worse, you can only deduct expenses up to your hobby income, which means losses are not deductible.  For more on this topic, please read ‘Is your eBay activity a hobby or business?‘.

There is a common misconception that if you did not receive a 1099 or W-2, you are not required to report your income.  This is not true.  All income is reportable, regardless of whether you receive a form or not.  EBay is only a facilitator of the auction, therefore you will not receive a 1099 from eBay reporting your sales.

For more great eBay tax tips, please read our free special report, Tax Tips for eBay Sellers.

Tags: ebay taxes, income tax on ebay sales

Is your eBay activity a hobby or a business?

1. Whether you run the activity in a business like manner
2. How much time and effort you put into making a profit
3. Whether you depend on the activity for your livlihood
4. Whether your losses were due to conditions beyond your control
5. Whether you changed your operating methods to improve profitability
6. Whether you or your advisors have the knowledge needed to carry on a successful business
7. Whether you successfully made a profit in similar activities in the past
8. Whether the activity makes a profit in some years, and how much
9. Whether you can expect to make a profit in the future from the activity

• Get an employer identification number (EIN)
• Apply for a business name
• Have a separate checking account to be used for business transactions
• Hire an accountant to keep your books
• Create a business plan
• Keep track of the time you spend each week doing business activities
• Consult other business owners or advisors to help make your business profitable

Tags: income tax on ebay sales, ebay tax, business or hobby

Can you deduct your mileage?

Many ebay sellers do a lot of driving for their business, whether it’s driving to garage sales and thrift shops to search for inventory, or whether it’s frequent trips to the office supply store or post office.

You are allowed to take a deduction for automobile expenses on your income tax return when your car is used for business purposes.  This includes driving to garage sales, thrift shops or other locations searching for inventory.  It also includes trips to the office supply store, post office, your accountant’s office, etc.  As long as the trip is for business purposes, it is deductible. 

You can take your automobile expenses deduction it two ways: you can calculate your actual expenses (pro-rata based on business use of the vehicle), or you can take the standard milage deduction.  To take the standard mileage deduction you will need to keep track of your business miles for the year, then multipy those miles by the IRS mileage rate for the year.

The standard mileage rate for 2006 is 44.5 cents.  The rate increases to 48.5 cents per mile in 2007.

Caution: you can switch from the standard mileage rate method of deducting automobile expenses to the actual expense method.  However, if you use the actual expense method for the first year your car is used for business, you will not be able to switch to the standard mileage rate method for future years, so be cautious about which method you choose in the first year your car is used for business.

Tags: ebay income taxes, automobile expenses

Welcome

Welcome to the Tax Tips for eBay Sellers blog!

I frequently get questions from eBay sellers, like:

• Do I need to pay income taxes on my eBay sales?
• What expenses can I deduct?
• Can I take the home office deduction?
• How do I value my inventory?
• Can I hire my kids?

The purpose of this blog will be to answer those questions and more.

Who am I to answer tax questions about eBay?  I am a CPA and Certified Financial Planner.  I provide financial and tax planning services, and I specialize in working with home based and small business owners.  Although I am definitely not a power seller, I also have eBay experience, which makes me uniquely qualifed to answer tax questions about eBay. 

I hope you enjoy the blog.  Feel free to post comments and questions!

Tags: income tax on ebay sales