eBay Tax Tips

If you've been looking for an easy way to keep track of your eBay sales and fees, then you've found it!

Easy Auctions Tracker is the Ultimate Excel spreadsheet solution for eBay sellers and Trading Assistants. This spreadsheet doesn't calculate your fees, it actually COLLECTS your transaction information from your eBay account for you!

Easy Auctions Tracker is fully automated and has been Tested & Certified by eBay as a compatible application. By using this spreadsheet, you will be able to quickly collect and record your transactions (sold items and unsold items) without the need to manually enter the information.

With the simple click of a button, Easy Auctions Tracker is able to collect all the information for a entire month's worth of sales from eBay's servers for you. No need to know the item numbers of the sold items, just select the month & year then click the "Get All Items" button.

As an accountant and tax professional who works with eBay sellers, I can say that this spreadsheet will make your bookkeeping and thus your tax preparer's job much easier! Which will mean less time and lower fees for you.

I was excited to find this worksheet and recommend it for eBay sellers who want to track their sales and associated fees in a spreadsheet, but don't want to spend hours entering the information manually.

You can check out the worksheet at EasyAuctionsTracker.com.

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?).

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Q: IRS rules say that a business must show a profit 2 or 3 years out of 5 years. My tax preparer says that if you are actively trying to build a business, that does not apply...that I can still take all my deductions and show a loss. What is your opinion on this?

A: Actually, the rule is that if your business is profitable for 3 out of the last 5 years, then the IRS will presume that the business is carried on for profit, and is not a hobby. That means if you aren't profitable for 3 out of 5 years, the IRS MAY reclassify your business as a hobby, but that doesn't mean that they will automatically determine that it's a hobby.

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Q: I started selling items from around my home that I don't want anymore on eBay. I am selling BELOW what I paid for these items. I'm not trying to make a profit, I'm just trying to get rid of items no longer wanted. Is this considered a business? Do I have to report my eBay sales to the IRS?

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.

Note: if you sell both personal items and items that you bought specifically to resell, then you should report the personal items sold as well, but use the sales price as the cost so you don't show a loss for these items. Or, you could setup a separate eBay account and use one for personal use, the other for business use - that's probably the best solution.

If you do affiliate marketing, internet marketing, or work as an independent contractor, then instead of a W-2, you will receive a Form 1099-MISC reporting your earnings.

However the company is not required to file this report unless you receive $600 or more in income. Also, currently eBay does not give out 1099 forms, so if your income is strictly from eBay, you won't receive a Form 1099.

The good news is that as an internet marketer or an independent contractor you get to deduct expenses against this income, assuming the expenses are necessary to run your business.

Report your income from your 1099 and any associated expenses on either Schedule C-EZ or Schedule C. This schedule is then attached to your Form 1040.

For more information about 1099s, please visit my newest Squidoo lens, Reporting 1099 Income.

Q: Do I collect sales tax on all my sales or just those I sell in my home state? And does this tax money get claimed as income and then expensed as a deduction?

A: This is a great question and one that I get often!

Currently, online business owners and eBay sellers are not required to collect sales taxes on items that are sold and shipped to customers in another state. If the state the eBay seller or business is located in has a state or local sales tax, then you are supposed to collect sales tax on items sold and delivered to the same state, but you do not have to collect sales taxes on sales to customers located in another state.

Sales tax collected is not income, and sales tax remitted to the state is not an expense. So for tax purposes, you should not claim the sales tax you collect as income, and likewise, you should not deduct sales taxes remitted to the state as a deduction.

This is the sixth year that free tax filing options have been available for qualifying individuals at the IRS website.

There are 19 companies that offer free tax filing (you can see the list here), and each has their own set of rules regarding who qualifies for free filing.

Most programs offer free filing for taxpayers who earn less than $54,000, however many of the companies also require you to be over age 50.

Turbo Tax and H&R Block's Tax Cut are two of the companies participating in this program.

For more information, please visit the IRS website and click on Use Free File to Prepare Your Taxes.

The IRS just announced that the standard mileage rate will be 50.5 cents per mile in 2008. This is up from 48.5 cents per mile in 2007.

If you're not keeping track of your mileage, you need to start now! These rates are higher than we've ever seen, so you should be keeping track of every business mile driven.

You can use a spiral notebook to keep track of miles or you can purchase a mileage log from any office supply store.

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

I'm a full-time student and I sell stuff on eBay occasionally. How would I go about keeping records of my expenses and profits for tax purposes?

A. If you sell on eBay for a profit, but only sell 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:

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Did you know that you could hire your children to work in your business? And that you could save taxes by doing so?

A reader recently asked how hiring their children in their business could help save on income taxes in her home based business (this is a great strategy for eBay sellers). Here's an example:

In 2006, you could pay your child up to $5,150 (the standard deduction amount) without either of you incurring a tax liability. Suppose you're in the 28 percent tax bracket and you pay your 15-year-old son (Junior) $5,000 over the course of a year to perform office-related tasks.

You get a business deduction for the wages paid to Junior, saving you $1,400 (28% of $5,000).

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Would you like to reduce the taxes you pay on your small business income?

Would you like to keep your children busy, and learning valuable business skills at the same time?

Would you like to build your family's wealth?

What if you could reduce your taxes, build wealth, and teach your children about business - all at the same time?

You can! Hiring your children in your business is a legitimate business strategy, and it has many benefits as well!

Announcing "How to Hire Your Kids in Your Business: A Step by Step Guide"

Click here for more information...

I spoke about tax tips for small business owners at a seminar this past weekend, and one of the questions I got was 'what are the top missed business deductions?'

This is a great question, so here goes...

1. Automobile expenses - if you use your car for business, you can deduct a portion of your car expenses. You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (48.5 cents per mile in 2007).

2. Startup expenses - business expenses incurred before you actually start the business used to have to be depreciated over 5 years. Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business. Startup expenses over $5,000 still have to be depreciated (over 15 years). Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.

3. Education expenses - you can deduct the cost of classes, seminars and other education costs if they are related to your current business.

4. Travel - when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses. If part of your trip is for personal reasons, you may need to prorate part of the expenses. Also, if you bring your family along, only your own expenses are deductible.

5. Home office expense - many people choose not to take this deduction because it is considered a red flag. If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn't not go into business because someone says you're more likely to get audited as a small business owner, would you?). Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm. You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.

The IRS recently released guidance on how to report miscellaneous income. The following fact sheet will help you understand miscellaneous income better and how to report it...

While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don't realize that they must also report most other income, such as:

* cash earned from side jobs,
* barter exchanges of goods or services,
* awards, prizes, contest winnings and
* gambling proceeds.

This fact sheet, the 18th in the Tax Gap series, will help taxpayers better understand miscellaneous income and what they are required to report as taxable on their Form 1040.

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There are three types of tax that you could 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, 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.

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Many eBay sellers use dropshippers to sell/deliver products. A reader recently asked if she was required to collect sales taxes on items shipped to the same state her dropshipper is located in, if she does not live and operate her business in that same state.

For example, lets say your dropshipper is located in Texas, but you live and operate your business in Florida. A customer in Texas purchases an item and it is delivered to Texas from the dropshipper in Texas. Do you need to collect Texas sales tax on this transaction?

This is a gray area, and I wouldn't be surprised to see it change in the future. But for now, you pay sales tax on items that you ship to the state where your primary business is located. So if you live and operate your business in Florida, you only pay sales tax when you ship items to customers in Florida.

Your dropshipper in Texas may try to charge you sales tax for orders that are placed in/shipped to Texas because their warehouse is located in Texas (and therefore they are subject to Texas sales tax laws). To avoid this, you should get a resellers certificate and supply it to your dropshipper.

However, every state has different sales tax laws, so for additional information you should contact your state's department of revenue.

If you sell items on eBay for a profit, then you may owe income taxes on those profits. It doesn't matter if you sell on eBay as a hobby or if you are trying to build a profitable eBay business.

Generally, any income you receive from all sources is subject to income tax unless it is specifically exempt by law (hint: profits from an eBay business 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, and you therefore have a business.

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.

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Many eBay sellers ask me, "what expenses can I deduct against my eBay income?"

Because eBay sellers pay income tax and self employment tax on their eBay profits, it's important to get all the tax deductions you are entitled to.

Here are the top 20 income tax deductions for eBay businesses:

1. Inventory or product purchased for resale
2. eBay fees
3. PayPal fees
4. Postage and delivery
5. Supplies
6. Bad debts (for those non-paying bidders)
7. Advertising
8. Mileage (trips to the office supply store, post office, etc.)
9. Telephone (cell phone, second line, fax)
10. Bank charges

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There are several tax issues that you should keep your eye on if you do business on the net:

The first one, and the one that is getting the most attention, is IRS's effort to force brokers (companies such as eBay and Amazon) to report personal data on their customers.  In this proposal, customers who earned more than $5,000 in a year would be reported to the IRS. 

This is a concern because some of the smaller brokers may not have the technology in place to keep personal information, including Social Security Numbers, safe. 

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I've written several articles on what I call the "ecommerce tax" lately. But the ecommerce tax is just one tax issue floating around that could affect eBay sellers and online business owners.

There are actually several tax issues that you should keep your eye on if you do business on the net:

The first one, and the one that is getting the most attention, is Congress's push to get the IRS to force brokers (companies such as eBay and Amazon) to report personal data on their customers. In this proposal, customers who earned more than $5,000 in a year would be reported to the IRS.

Second, state and local taxing authorities are pushing for the ability to impose sales taxes on sales made online. Currently, online business owners and eBay sellers are not required to collect sales taxes on items that are sold and shipped to customers in another state.

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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 their eBay or other online income.

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.

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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 Do I report my eBay activity as a hobby or business? or see IRS Publication 550, Sale of Investment Property.

EBay sellers who are sole proprietors are not necessarily required to get a tax identification number, but it may be a good idea to have one.

A tax identification number or an EIN (employer identification number) is a nine-digit number that is assigned by the IRS to businesses to be used when filing tax returns, hiring employees, and for setting up qualified retirement plans. Many banks require an EIN to apply for a loan or to setup a business bank account as well.

You can get your EIN by completing IRS Form SS-4, Application for Employer Identification Number, which is available at the IRS website (www.irs.gov). You should also check with your state to see if you are required to get a state ID number.

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

Someone recently asked me what they could do now to make tax time easier for this upcoming tax season.

The best thing you can do is to think about taxes before then year ends. Most people wait until the tax filing deadline before they ask how they can reduce their income taxes. Unfortunately, once 2007 ends, there's very little you can do to minimize your taxes for 2007.

To start your tax planning, you should review your income, deductions and withholdings before the year ends. Which means you need to get your bookkeeping caught up! You should use a software program, such as QuickBooks, Quicken Home and Business, or spreadsheets to keep track of your income and expenses for your business.

Once you're bookkeeping is caught up... do you expect your home business to have a profit or a loss this year?

If you have a profit, here are some tax planning tips to help minimize your home business taxes this year:

1. Defer your income. If you have a home based business and it looks like you'll have a good profit this year, consider invoicing your clients in January instead of December, to defer the income to next year. Or, just wait until the end of December to send invoices. Any money you receive in January will go on your 2008 tax return, not 2007.

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As an eBay seller and a CPA, I get a lot of questions about eBay and taxes. Questions include: am I required to report my eBay income, do I need a tax ID number, how to make estimated tax payments, and many more...

I have been answering questions about eBay and taxes on my blog, my Squidoo page, 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 now offer the following products and services to help other eBay sellers with their financial and tax planning needs:

Your Top Online Biz Tax Questions Answered - This exclusive audio and report will...

* Answer your top tax questions about your online business
* Help you pay less in taxes (and keep more of your profits)
* Allow you to file your tax return in confidence, whether you prepare your own or hire a tax professional
* Help you make sure you get all the deductions and credits you are entitled to, and
* Give you peace of mind at tax time (instead of worry and stress)

New Business Consulting - This is a one-hour consultation to address your most pressing financial questions about starting your eBay business. Topics discussed will include business entities, estimated tax payments, tax ID numbers, filing sales and income tax returns, common business deductions for eBay sellers and more.

Tax Preparation - Year round tax preparation is available to eBay sellers who operate as a sole proprietor or an S Corporation. As a CPA, an eBay seller, and a home based business owner, I understand the unique tax needs of eBay sellers.

Tax Planning - Tax planning is an important part of any small business, as good tax strategies can minimize your tax liability, thus allowing you to keep more of your profits. Tax planning includes estimating your quarterly tax payments, making sure you get all the deductions you are entitled to, and exploring tax saving strategies such as hiring your children in your business.

For more information about the services above, please email me at kristine@beacon-advisor.com.

Attention eBay Sellers, Coaches, WAHMs, and Online Business Owners...

* Are you paying too much in income taxes?
* Do you worry that you're not getting all the deductions and credits allowed?
* Are you worried about "red flags" on your tax return?
* Does the thought of making an error on your tax return, and paying hefty penalties as a result, keep you up at night?
* Do you want to learn how to pay fewer taxes and keep more of your profits?

In order to maximize your online business profits, you need to minimize the tax you pay on those profits.

As a CPA and Certified Financial Planner®, I work with many small and online business owners. As an online business owner myself, I understand the needs of other online business owners and am uniquely qualified to help!

Because taxes are so confusing, especially if you own a small or online business, I wanted to create a resource that would...

* Answer your top tax questions about your online business
* Help you pay less in taxes (and keep more of your profits)
* Allow you to file your tax return in confidence, whether you prepare your own or hire a tax professional
* Help you make sure you get all the deductions and credits you are entitled to, and
* Give you peace of mind at tax time (instead of worry and stress)

Announcing 'Your Top Online Biz Tax Questions Answered'

Whether you prepare your own taxes or hire a professional, you need to have a basic understanding of taxes so that you'll know if you are getting all the tax write-offs you are entitled to, or if you're accountant is doing a good job for you.

This exclusive audio and report gives you the basic tax knowledge you need to make sure you're paying the least amount of taxes (legally) and to keep more of your profits.

Click here to learn how the 'Your Top Online Biz Tax Questions Answered' program can help you minimize your taxes and keep more of your profits.

Got tax questions? Give me 60 minutes and I'll answer your top tax questions - for Free!

Attention bloggers, coaches, eBay sellers, affiliate marketers, and other online business owners%u2026

* Do you worry that you're paying too much in income taxes?
* Do you worry that you're not getting all of the deductions you're entitled to?
* Do you want to learn how to pay fewer taxes and keep more of your profits?

Announcing the Free teleseminar, 'Your Top Tax Questions Answered'!

Join me on Thursday December 18th at 1:00 CST for this exclusive teleclass, to answer your top tax questions!

Click here for more information and to sign up today!

*** This teleclass has already taken place. You can grab the recording for the Tax Q&A Teleclass for free by clicking here. ***