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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• The IRS and eBay: Tax Season Is Here
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Many of us are on a budget, and struggled with the decision to purchase a product, even if it was something we really needed to grow our business.

Well, don’t forget that ordinary and necessary business expenses – including courses that you take, or course materials that you purchase for your business – are tax deductible.  Keep in mind, it does need to be business related, but if it helps you learn your business, or if it helps you market your business, then it is probably a deductible expense.

Which means that the $400 product you’ve got your eye on may only cost you $250-350 after taxes, depending on what tax bracket you are in.

Let me give you an example: let’s say you are in the 15% tax bracket and you operate your business as a sole proprietor.  Your total tax percentage is approximately 35% (15% Federal tax + 15.3% self employment tax + 5% state income tax).

When you purchase an item for your business that is tax deductible, you’ll get approximately 35% back in tax deductions, meaning a $400 product will cost you only $260 after taxes.

So if you’re got your eye on a marketing course, or the latest and greatest product that is being launched, and you’re only objection is the price, don’t forget about the tax benefits of being a small business owner.  You may be able to afford that new info-product that’s being launched today after all

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With the economy slowing, gas prices rising, and unemployment rising, more and more people are turning to eBay to earn extra cash.

The IRS has always had an eye on eBay and even tried to force them to report details of it’s top sellers last year. While eBay resisted, the IRS is still trying to find ways to track people who sell online – especially since they suspect that over half do not report the income earned!

from DenverPost.com on 6/7/08

Selling Stuff on eBay? IRS Wants It’s Cut

Basement clutter and attic knickknacks have always been the cornerstone of eBay — after all, one man’s trash is indeed another’s treasure — but tough economic times seem to bring them out faster and in abundance.

The Internet has turned into the fastest and easiest method of turning unwanted items into a quick — sometimes desperately needed — few bucks or more.

But experts and government officials warn that although the treasure is for the selling and the extra dough is for the getting, it’s not all for the keeping.

“You’re supposed to report any profit from those sales,” said IRS spokeswoman Jean Carl. “It’s a voluntary system for taxpayers to report it, and people are trusted to do that.”

And it’s not just eBay. Users of online marketplaces or auction services such as Craigslist.com and uBid.com are liable as well.All this comes as a surprise to many casual sellers who are doing little more than clearing out some space in their homes.

“I had no idea that if I wanted to sell on eBay that I have to pay the IRS,” said Ann Tran, a Golden resident who is contemplating eBay for some extra bucks.

Click here to continue reading…

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I can’t wait til tax season is over so I can create more Squidoo lenses!

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A: Selling personal items at a loss is not a business activity, so you don’t have to worry about keeping track of or reporting this activity on your tax return.

The IRS will not allow you to claim a loss for personal items sold on eBay.  However, the minute you purchase something with the intent of selling on ebay for a profit, you’ve got a business, and then you DO need to start keeping track of and reporting your activity.

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

I have been answering questions about eBay and taxes on my blog and on several eBay membership forums for a while now, but as the questions keep coming, I realize that eBay sellers need more help than I can provide on a blog/forum.

As a result, I am now offering the following services to help other eBay sellers with their financial and tax planning needs:

New Business Consulting

Tax Preparation

Tax Planning

Whether your eBay activity is a hobby or a full-time business, you need the best tax and financial advice available.  For more information about the services above, please email me at kristine@beacon-advisor.com.

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

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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