PayPal and Ebay Must Report to the IRS
July 30, 2008
Buried deep in the housing act that was just passed is a provision that requires credit card processors – including companies like eBay and PayPal – to report annual gross receipts of it’s merchants to the IRS.
Credit card processors will be required to file Form 1099 for each merchant that has at least $10,000 in gross sales and 200 transactions.
Companies have until 2011 to comply with this new law.
The purpose of this new law is to raise revenue for the housing recovery package and to close the tax gap that exists. The IRS estimates that it loses billions of dollars in tax revenue from small businesses who under-report (or don’t report) income.
While I’m worried that this new law will cause the cost of business for small and online business owners to go up (in the form of higher eBay fees, higher PayPal fees, etc.), I also think that all small business owners should pay their fair share of taxes (I pay my taxes, why shouldn’t all small business owners?).
So here are some tips to help online business owners comply with the new tax law, without paying too much to Uncle Sam:
- Treat your business like a business. Register a business name, hire an accountant, keep good records. The more you can do to treat your business like a business, the less likely the IRS will reclassify your business as a hobby.
- Keep separate accounts and records – have separate eBay, PayPal and checking accounts for your personal and business activities.
- Report your income! Even if you don’t receive a 1099 from eBay, PayPal or the other companies that will be required to file one, you should still report all of your profits from your online business.
- Learn what’s deductible and what’s not deductible – you’d be surprised how many people do not deduct business expenses because they don’t know they can.
- Don’t be afraid of the home office deduction, and other deductions that have been labeled as a red flag. Being a small business owner is a red flag, but that doesn’t mean you should go out of business, or worse, not report your income!
To read more about the new IRS rules, and how they affect online business owners, please visit Online Sellers Face New IRS Rules in today’s WSJ.
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Home Office Tax Tips
February 9, 2008
Home Office Tax Tips
If you have a home based business, eBay, or online business, one of your biggest tax deductions may be your home office. Here are some tax tips to help you get the most out of your home office.
Qualifying for the home office tax deduction:
Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for 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 with clients or customers, or it must be a separate structure not attached to your home.
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.
Continue Reading Home Office Tax Tips
Why you should deduct your home office
January 15, 2008
I frequently hear from small and home based business owners that they don’t take the home office deduction because they are afraid of being audited.
The home office deduction has been labeled as a red flag for years, but I think this deduction has too many benefits to just ignore it.
Robert Flach of The Flach Report agrees with me. In his post "Three Cheers for the Home Office Deduction" Robert tells us why the home office deduction is great:
1. It moves part of a deduction that would have been claimed on
Schedule A (real estate taxes and mortgage interest) to Schedule C and
as a result reduces your Adjusted Gross Income (AGI). While
a home office cannot generally be used to create a loss on Schedule C,
you can generate a net loss to the extent of the business use
percentage of real estate taxes and qualified mortgage interest. A home
office deduction in general will reduce your AGI, and reducing your AGI
can increase a whole laundry list of deductions and credits. See my
WANDERING TAX PRO post on “The Most Important Number on Your Tax Return”.
2. It reduces not only your federal and state income tax but also your self-employment tax. The home office deduction could provide 40% to 50% in total tax savings!3. And, perhaps most important, it establishes your home as a place of
business for the purpose of deducting business mileage. You have no
“commuting”. Every time you leave your home to drive to another business location (a client, the office supply store, your business bank) you have deductible round-trip business mileage.
You no longer have to be afraid of claiming a home office
deduction. I do not believe that it raises the same “red flag” with the
IRS that it did in the 1980s and most of the 1990s. And you no longer have to pay tax on the business use percentage of the gain when you sell your residence.
All you have to do is “recapture” the depreciation claimed after May 6,
1997. Prior to 1997, if you had a $100,000 net gain on the sale of your
residence and you used 10% of the building as a deductible home office
you would have to pay tax on $10,000 plus the total amount of
depreciation claimed on the home office over the years.
Deducting home office expenses for your eBay business
March 4, 2007
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.
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