Q&A: Do I have to pay tax on a family heirloom sold on eBay?

Q:  If I sell a family handed down 1700’s grandfather clock on eBay, do I have to pay income tax on it?

A:  Good question!

There are different tax rules for selling on eBay, depending on whether you are conducting a business, selling as a hobby, or selling collectibles.

For purposes of answering this question, I’m assuming that you are not in the business of selling grandfather clocks or other antiques on eBay.  If this is true for you, then you fall into the “selling collectibles” category.

Generally, if you are selling collectibles (artwork, stamps, coins, etc.) on eBay, 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.

For more information, see IRS Publication 550, Sale of Investment Property.

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New Tool: Auto Mileage Log

With gas prices so high, it’s important that you keep track of every mile you drive for your business, so that you  get the most out of the automobile deduction on your tax return.

In order to take the automobile deduction, you should keep track of your business miles.  The best way to do this is to keep a mileage log in your car and record every business related trip you take.

Your mileage log should include the date, the purpose of your trip, your beginning and ending odometer reading, and the total miles for that trip.

I have created a mileage log for you to use, which you can download here:
Download mileage_log.pdf

If you found this tip helpful, please download our free special report => Tax Tips for eBay Sellers

Tags: ebay tax, automobile deduction, mileage log

Do You Need to Make Estimated Tax Payments?

The second quarter estimated tax payment is due in less than two weeks (June 15).  Do you know if you need to make estimated tax payments?

The federal income tax system is a pay-as-you-go tax system.  That means you pay taxes as you earn income throughout the year.  If you are an employee of a company, you pay taxes through withholding from your paycheck.  If you are self employed, you pay taxes by making estimated tax payments.

The general rule is that you must make estimated tax payments if you expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and tax credits, AND if you expect your withholding and tax credits to be less than the smaller of:

* 90% of the tax liability on your current year tax return, or

* 100% of the tax liability on your prior year’s tax return

Example:  If your tax liability for 2006 was $1,500, but you expect to owe $2,000 this year because your business did better than the previous year, then the minimum you would need to pay in to avoid underpayment penalties is the lesser of $1,800 (90% of your current year tax liability) or $1,500 (100% of last year’s tax liability). 

The easiest way to estimate your quarterly estimated tax payments is to estimate your tax liability for the entire year and divide that amount by four.  However, if you don’t receive your income evenly throughout the year, you may use the annualized income installment method.  A worksheet and instructions are available in IRS Publication 505, Tax Withholding and Estimated Tax.

The due dates for estimated tax payments are:

For the period: Jan 1 – March 31
Due date: April 15

For the period: April 1 – May 31
Due date: June 15

For the period: June 1 – August 31
Due date: September 15

For the period: September 1 – December 31
Due date: January 15 the next year

If the 15th falls on a holiday or weekend day, the due date will be the next business day.

You can pay your estimated taxes by using payment vouchers (Form 1040-ES), or by using the Electronic Federal Tax Payment System (https://www.eftps.com/eftps/).  In addition, if you have an overpayment from a previous year, you can apply the overpayment to your next year’s estimated tax. 

Resources:

IRS website – http://www.irs.gov/index.html
IRS Publication 505, Tax Withholding and Estimated Tax – http://www.irs.gov/publications/p505/index.html
Form 1040-ES – http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Free special report => Tax Tips for eBay Sellers

Tags: estimated tax, estimated tax payments, quarterly taxes, quarterly tax payments

San Diego Man Sentenced for Failing to Pay Taxes on eBay Sales

If you haven’t been reporting and paying taxes on your eBay sales, now might be a good time to start.  As you can see by the following article, the IRS is serious about cracking down on taxpayers who make money online but don’t pay taxes on this income.

Home confinement for ex-officer who failed to pay taxes on eBay sales
By: North County Times Wire Services -

SAN DIEGO – A former San Diego police officer who failed to pay taxes on money he made by selling stolen property on eBay was sentenced today to 21 months of home confinement and was ordered to pay $220,000 in restitution.

James Estrella, 48, pleaded guilty a year ago to federal income tax evasion charges. At the time, he was on probation after pleading guilty in state court on Dec. 2, 2004, to four felony counts of receiving stolen property.

U.S. District Judge Roger Benitez said he could have put Estrella in prison, but it was more important for the defendant to pay back what he owed to the Internal Revenue Service.

The judge told the former Marine that his crime was "pretty serious," adding that all working Americans need to pay their taxes, whether they like it or not.

"We’ve got to do it," Benitez said.

He told Estrella it was "hard to believe" that he engaged in the illegal conduct, but gave him credit for cooperating with authorities.

As part of his plea, Estrella admitted that he failed to file income tax returns for the calendar years 2001 though 2003.

Estrella earned income for those years both as a police officer and as a seller of merchandise in auctions on the Internet through eBay, Assistant U.S. Attorney Carlos Arguello said.

The defendant also acknowledged that he knowingly sold stolen property on his eBay site during the years 2001 through 2003, the prosecutor said.

Estrella will be on probation for three years and will not be allowed to leave his home except for work or to attend medical appointments and church- related activities, the judge said.

Benitez said Estrella is prohibited from opening up new bank accounts without the approval of probation officials and must not do business on commercial Internet sites such as eBay and craigslist.

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

Q&A: How Do I Go About Filing Taxes for My eBay Sales?

Q.  How do I go about filing income tax for eBay sales?

I’ve never had a ‘real’ job where I’ve had to do income tax, so I don’t know how to do this… I’m a full-time student but I do sell stuff on eBay occassionaly [about 2 items/week, sometimes more, many times I go weeks/a month w/out selling/listing anything], stuff I usually buy at the mall or buy from websites and then sell it on eBay for a profit.

How would I go about keeping records of my expenses and profits for tax purposes? Do I need to keep an itemized list of expenses, sales and profits or can I just add all the total money received [including final bid price + shipping buyer paid] and subtract the expenses [original price for item, tax I paid on item, shipping I paid on item to have it delivered, ebay fees, shipping I actually spent to send item to buyer]?

I’ve only started selling since last september or so…

A.  If you only sell items on eBay occasionally, then you are most likely a sole proprietor (some eBay sellers will incorporate their business but most eBay sellers are sole proprietors).

Sole proprietors report their eBay income and expenses by completing Schedule C – Profit or Loss from Business and attaching it to their personal income tax return (Form 1040).

You should report your gross income (the sales price before any fees or discounts), then deduct your business expenses to arrive at your net profit.

Business expenses that eBay sellers typically incur include:

* Inventory cost
* eBay listing fees
* Paypal fees
* Shipping costs – postage, packing materials, etc.
* Mileage for trips to the post office, trips to find inventory (most people use the standard mileage but you can use actual expenses instead)
* Home office expense – mortgage interest, real estate taxes, rent, utilities, and repairs/maintenance
* Office supplies
* Computer and software expenses (may need to be depreciated over the life of the item)
* Telephone and internet costs (business use only)
* Advertising
* Continuing education

There are more expenses that you may incur, but these are the most common for eBay sellers.

It’s important to keep good records so that you get all the deductions you are entitled to. And yes, you should keep itemized lists of your income and deductions – the more detailed your records, the better, especially if you are ever audited by the IRS.

You are only taxed on the net profit, but you have to pay self employment taxes on your profit in addition to your ordinary income taxes. The self employment tax is 15.3% and your ordinary income tax rate can range from 10-35%, so these taxes can add up quickly! This is another reason why you should keep good, detailed records.

To keep track of your income and expenses, I would suggest either Excel spreadsheets or an accounting software program such as Quicken Home and Small Business or QuickBooks. eBay also offers an accounting assistant (fee applies) which allows you to download your eBay activity into your QuickBooks software (very cool!).

The IRS is targeting eBay sellers and other small business owners who may be under-reporting income (or not reporting it at all), so good for you for being proactive and learning your responsibilities as a small business owner.

For more information on reporting your eBay income on your tax return, please download our free report, Tax Tips for eBay Sellers.

Tags: ebay tax, income tax, ebay income tax, tax deductions, ebay business