I Sold it on eBay. Do I Have to Pay Taxes?
By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com
With the coming of internet auctions, it seems that everyone is interested in selling something on eBay or some other auction site. For many it starts small, the equivalent of having a garage sale. You are selling personal items that you no longer need or want. In these cases, you are most likely selling them for less than their cost so reporting this on your taxes is not an issue. Besides, you are not operating a business. Your objective is only to pick up a few bucks from the sale of some stuff you have around the house.
After a while, you become dissatisfied just selling excess items from around the house and decide this is a way to make some real money. So you start purchasing items for resale, list them online and wait for the money to come in. Congratulations! You are now the proud owner of a home-based online auction business. Everything changes. The IRS has recently published a report "Tax Responsibilities for Online Sellers." Although the law in this regard has not changed, the publication of this document is an indication that the IRS is aware of online selling activities and will be devoting resources to ensure that operators of these businesses pay their fair share of taxes. Operation of an online business, auction or otherwise, is subject to the same rules and regulations as any other business.
Business or Hobby?
The first important question to ask is "Do I have a business or is it just a hobby?" The distinction is important, as losses are not allowed for hobby activity, but may be taken for a business. Although there are a number of factors that determine if you are conducting a business two factors are overriding - do you carry on the activity in a business-like manner and do you reasonably expect to realize a profit from this activity?
In carrying on the activity in a business-like manner you should devote sufficient time to the business, take actions in order to improve profitability, and have the knowledge needed to successfully carry on a business. In expecting to realize a profit, the IRS will look to see if this activity has been profitable in the past or if adverse circumstances occurred to prevent you from making a profit.
Reporting Your Business on Schedule C
If you are, indeed operating a business, you will need to report the results of the operations of your business on Schedule C. One this form, you show all your income and deduct any expenses in earning that income.
Generally, you can deduct expenses that are ordinary and necessary in the operation of the business. Ordinary means that the expense is one that is common in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. You will need to distinguish between capital expenses, personal expenses, and business expenses.
Capital expenses are expenditures for assets that have a life greater than one year. These cannot be expensed, but must be written off over the expected life of the asset. Personal expenses are generally not deductible. If an expense has elements of both business and personal use, you must divide the cost between the business and personal elements.
Business expenses are those that are incurred in operating the business. These may include a deduction for the business use of your home and car. Other types of business expenses may include employees' pay, rent expense, interest, taxes, professional fees, and insurance.
If your business earns a profit, you will also need to file Schedule SE and pay self-employment taxes your profits. While these are 15.3% of your profit (in addition to income tax), you can deduct one-half of these taxes on page 1 of the 1040.
This is Getting Complicated. Is There Help?
When you have a Schedule C business, your tax return gets more complicated. You also have to develop an accounting system that accurately reports the results of your operations. You might need to have an effective advertising program. You need to learn what expenses are necessary and what expenses should be avoided. There are business advisors who will guide you through all this, but they cost money. Is there a less expensive way to learn all I need to know?
Fortunately, there are a number of free resources available to you. You can consult the Small Business Development Center in your state. The Service Corps of Retired Executives (SCORE) provides assistance and guidance to small business owners. The IRS has a number of publications that will help you comply with the tax laws and operate your business more efficiently. Two helpful publications are "Small Business Tax Workshop DVD" (Publication 1066C) and the "Small Business Resource Guide CD" (Publication 3207). The DVD is an online classroom that will help you understand the tax issues relevant to your business.
In starting an online business, you are not alone. Additional tax advice is available from www.irs.gov
, or from www.webtaxcenter.com
. In addition, your tax professional can guide you through the complicated world of business taxation.
Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.