One of the most important decisions you can make regarding your eBay business is which business structure to create.  This is both a legal and a tax decision, so you should research each type carefully before starting your business.

Most eBay sellers start out as a sole proprietor.  It’s the easiest form of business to organize, and your profits and losses flow through to your personal income tax return.  Other advantages include the ability to deduct losses against other income, very few legal restrictions, and the business is easy to discontinue. 

The disadvantages of a sole proprietor include unlimited liability for the owner, self employment tax on the entire profit, limited ability to raise capital to grow your business, and fewer tax benefits than with an S Corporation or a C Corporation.

There are several other business entities you could operate under, however.  It’s important to review each business entity to determine which one is right for you.  Although the sole proprietor is the easiest form of business to setup, it may not have the liability protection or tax benefits of a corporation or LLC. 

To learn more about the different business entity types available, check out our Business Entity Comparison chart.

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

Tags: ebay business, business type, incorporate ebay business, ebay tax

If you are an eBay seller, you may have heard of the eBay Accounting Assistant. 

eBay Accounting Assistant is a software program available from eBay that allows you to import your eBay and PayPal data from eBay, and export it directly into your QuickBooks company file. This reduces data-entry time, minimizes transcription errors, and helps make sure you don’t forget any eBay or PayPal fees paid on your tax return.

eBay Accounting Assistant has the following features:

• Download eBay and PayPal fees and transactions.

• Specify exactly how you want your eBay and PayPal data entered into QuickBooks.

• Map eBay sales transactions to your existing QuickBooks customers and items.

• Minimize data entry time with automatic matching of eBay sales transactions to existing customers and items in QuickBooks. Over time, eBay Accounting Assistant gets smarter about matching this data and further reduces your time spent doing data entry.

• Use QuickBooks classes to separate your eBay sales transactions from other types of sales (if supported by your QuickBooks product). For example, separate online eBay sales from physical storefront sales.

• Export your eBay and PayPal data to QuickBooks in its complete form so you don’t have to do additional work within QuickBooks.

eBay Accounting Assistant is free to download and use, but you must have a subscription to Seller’s Assistant (Basic or Pro), Selling Manager (Basic or Pro), or eBay Stores. You can try any these subscriptions free of charge for 30 days.

Accounting Assistant works with the following accounting software programs:  QuickBooks Pro, Premier, or Enterprise editions 2004-2006, Simple Start 2005 (R5+) & 2006, and QuickBooks Online. 

You can learn more about and download eBay’s Accounting Assistant here:
http://pages.ebay.com/accountingassistant/

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

Tags: eBay taxes, eBay accounting assistant

Tom Murphy has done a great job again this week organizing the Carnival of eBay Sellers #16.  This week’s carnival includes the following articles on eBay:

Gary Hendrickson presents Top 10 Tips To Guarantee You Will Fail On eBay posted at The Auction Rebel.

Ben presents How to Build Your Slush Fund by Selling on eBay posted at Money Smart Life, saying, “The ten rules I follow to ensure I make money on eBay.”

Thatedeguy presents Auction Ads: eBay affiliate ads all grown up posted at eBay Habit.

Cindy presents How Many Photographs For Your eBay Listing? posted at Easy Auction Photos.

Several of my own articles made into the carnival as well, including:

Deducting home office expenses for your eBay business and What taxes are you responsible for as an eBay seller?

I hope you enjoy this weeks carnival.  Thank you Tom for hosting!

Tags: ebay carnival, ebay tax

by Skip McGrath

Tags: ebay fees, make money with ebay

Recently, a subscriber to the ‘Tax Tips for eBay Sellers’ special report asked:

Q. I’m somewhat confused on the "hobby" vs "business" debate. I made about $5,000 on eBay last year.  I wasn’t really conducting myself in a business like manner - it wasn’t a regular thing, it was just something fun I liked to do. But I knew I was making money at it, as well.  Basically, I just don’t know how I am supposed to file this. Do I report my eBay income as a hobby or a business?

A. If you were just selling on eBay as a hobby, your income is reported on line 21 (Other Income) of Form 1040.  Expenses relating to your hobby income are deducted on Schedule A, as a miscellaneous deduction, subject to the 2-percent floor.

This means if you do not itemize you could lose the ability to deduct any expenses against your hobby income; and even if you do itemize, you can only deduct the amount of expenses that exceed 2 percent of your adjusted gross income.  This is the least favorable tax treatment of your eBay income.

If you were selling collectibles (artwork, stamps, coins, etc.), then you report your gain on the sale on Schedule D, Capital Gain or Loss.  The capital gains rate for collectibles is 28 percent.  Losses are not deductible.

Finally, if you were selling on eBay with the intent to make a profit, and you are a sole proprietor (not incorporated, and not a partnership), then you should report your eBay income on Schedule C, Profit or Loss from Business.

Your net profit is subject to income taxes and self employment taxes when you are a sole proprietor, but you are allowed to deduct reasonable and necessary expenses, such as the cost of inventory, shipping supplies, business use of your car, expenses associated with the business use of your home, and more.

Because you are able to deduct expenses against your eBay income, reporting your income on Schedule C is generally the most advantageous for eBay sellers.

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

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

There are three types of tax that you will be responsible for when you start your eBay business.  They are 1) sales and use tax, 2) payroll tax and 3) income tax. 

Sales and use tax

Just about every state, and many cities and other local authorities, imposes a sales tax on items sold.  Each state has different rules, so it’s important to find out the rules in your state and city.  As an eBay seller, you are responsible for collecting and remitting the proper sales tax to the state you live in.  You are also responsible for preparing and submitting a report detailing the amount of your sales and the sales tax collected. 

You may also be subject to use taxes.  This is taxes on goods you purchased out of state that you did not pay sales taxes on.  The use tax generally applies to items purchased out of state which would have been subject to sales tax if the purchase transaction had taken place in state.  The use tax came about from the concern that purchasers could avoid paying a state’s sales tax by making their purchases outside the state.

Payroll tax

The second type of tax that you are responsible for as an eBay seller is payroll tax.  If you hire employees to help you with your eBay business, you are required to withhold federal income taxes, Social Security and Medicare taxes, and state income taxes.  These taxes must be submitted to the proper tax authorities on a periodic basis (usually quarterly).  In addition you must pay unemployment insurance and workers’ compensation on all employees.

If you operate your business as an S or C Corporation, you will need to setup payroll for yourself, and remit payroll taxes on your own salary.  If you operate as a Sole Proprietorship, you pay self employment tax instead of payroll tax. 

Income tax

The final type of tax you are responsible for as an eBay seller is the income tax.  No matter how your business is structured, you will be required to pay income tax on the business’ net profit. 

Sole Proprietors pay income tax on their personal income tax return (Form 1040). Your business profit is calculated using Schedule C – Profit or Loss From Business, and your profit from your eBay activity is added to your other income to determine your tax liability.

S Corporations file Form 1120S to report the business profit or loss.  A Schedule K-1 is then prepared, which shows each shareholder’s share of the net profit or loss that needs to be declared on their personal tax return.

C Corporations file Form 1120 to both report the business net profit and to calculate the resulting income tax. 

Depending on the state you do business in, you may also be subject to state income taxes on your eBay profits.  The state level taxes are often referred to as franchise taxes.

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

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

If you are operating your eBay business as a sole proprietor, and you’re not using your own name as your business name, you should register a DBA “doing business as” name with your state.  This is also called a fictitious name.

Most banks require that you register a DBA before they will allow you to open a bank account for your business.

More importantly, establishing and registering a business name helps establish that you are a business with the intent to make a profit in the eyes of the IRS.  This is one factor that the IRS looks at when determining if your business is really a business or a hobby for tax purposes.

You do not need to register a DBA if you are incorporated, unless you are operating under a different name than the legal name on your incorporation documents.

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

Tags: ebay business

Most eBay sellers operate from their home.  One of your biggest tax deductions for your eBay business may be your home office, so it’s important to learn what expenses you can deduct.

If your home office qualifies, you may be able to deduct part of your housing expenses on your tax return.  Your home office qualifies if it is your principal place of business, and you use it regularly and exclusively for your eBay business.

To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet clients or customers, or it must be a separate structure not attached to your home.  If you store inventory for your eBay business, that may also qualify you for the home office deduction.

Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this room for other purposes.  For example, if you use part of the room as a laundry room or children’s play room, you may not qualify for the home office deduction (unless you segregate the separate areas and the ‘business area’ is used only for business purposes).

Expenses that can be deducted include mortgage interest, real estate taxes, utilities, insurance, repairs, security, and depreciation.  Only the business use percentage of these expenses can be deducted.  The business use percentage is calculated by dividing the square footage of the office space by the square footage of the home, or by dividing the number of rooms you use for business by the number of rooms in your home.

Direct expenses, such as repairs made solely to the room used for your home office, or telephone lines installed just for business use, can be deducted in full.  Indirect expenses, such as mortgage interest and real estate taxes should be allocated between the home office deduction and your itemized deductions to get the greatest tax benefit.

Caution: Your eBay business must earn a profit to take the home office deduction.  If your home office expenses are larger than your business profits, you must carry the excess expenses forward to future years.

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

Tags: ebay tax, home office deduction, ebay tax deductions