AC Dickson: eBay Power Seller

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Tax Time Tips
by acdickson

Granted, AC is a little late to the table for this year, but for those of with eBay businesses gearing up in 2006 or are filing late for 2005, AC has some pointers. Just to be clear, I'm no CPA, but I'm competing in the amateur circuit.

The bad news is that you have to pay taxes on your eBay earnings. According to the I to the R to the S, if you make more than $400 outside of W-2 and 1099 wages, you got to report that cash as earnings. So, if you have the occasional yard sale, or sell the occasional record on eBay, you're fine. But once you cross the $400 threshold, you gots to pay the piper.

Ignore the temptation to the ignore paying taxes. The only thing the IRS can put you in jail for is not reporting income. How do you think the Mafia and Pro Athletes pro athletes get taken down. In recent news Survivor champion Richard Hatch is fighting to stay out of prison blues for 'forgetting' that he made a cool million winning the reality show.

So how do you figure out how much money you made on eBay? Keep records. I print out a summary of my winnings off my "my eBay" page every month and keep the print outs in a file. But you got to keep up, eBay wipes everything clean after two months (although I'm sure they keep records to show the IRS). At the end of the year, I tally it up. Bingo, that's the magic number as far as income goes. You can also check your PayPal sales for the entire year at the end of the year and cross reference them with your bank statements for people who paid with a personal check or money order.

Assuming you're making more than $400 a year on eBay, this is probably what the IRS would consider a business, hence you report this sum total on the Schedule C. It comes in the big ass 1040 booklet you get at the post office or in the mail.

The good thing about reporting your eBay income on the Schedule C is that it's a treasure trove of deductions. That's the good news. You can legally deduct everything having to do with your eBay business so that the amount you'll actually have to pay taxes on is significantly less than your total sales. Let me count the ways...

First off is the cost of goods. In other words, what did it cost you to buy all the stuff you sold on eBay during the year. Having receipts from thrift stores and estate sales is ideal. If you don't (for instance if you're selling your childhood toys), a conservative estimate of what they cost back in the day should keep you out of hot water.

Right off the bat you deduct the costs of goods from the eBay income in the Schedule C section I. That's a nicer number, huh?

Now comes the deductions from running a business. Here are the big ones.

eBay fees. This will likely be 5-8% of the total eBay income. Your eBay fees probably come off your credit card, so checking your old statements or getting an online summary should yield a yearly total pretty easy.

PayPal fees. Another 3.3%. Again, check your yearly total for your PayPal account. PayPal will tally your total PayPal fees per month. I put both the eBay fees and PayPal fees on the back side Section V of the Schedule C.

Another expense I add is my Internet charges. Not the whole bill mind, you but a realistic tending towards conservative guess as to what percentage of my Internet is used for eBay. 25%? Then take a quarter of your yearly Internet bill as another Section V expense. Keep in mind if audited, you'll have to justify this to the IRS, but I figure showing them the amount of time it takes to list an auction, answers questions, send an invoice and deal with customer emails will satisfy them.

How about office supplies? Envelopes, bubble wrap, rubber bands, pens, and the like. I put these in the Section III under supplies.

Not let's no forget driving around finding stuff to sell and hauling it to the post office. Every mile you drive on these errands is deductible to the tune of 48.5 cents a mile (40.5 before September 1st, 2005). That means if you drive to your favorite suburban thrift store 10 miles away to cruise for eBay stuff you can take just shy of $10 off for that trip alone! That adds up pretty high pretty quick. The pain is that you got to a keep a detailed mileage log throughout the year to show the IRS you're on your game. Which is tough. After years of training I finally have the discipline to write down my mileage every time I go anywhere. You then fill in Section IV on your Schedule C with your total mileage for the year, and the total mileage for eBay errands. Keep that mileage log handy. If you ever get audited, you bust that out to prove to the IRS you weren't just whistling dixie but in fact were going to the post office once a week (round trip 3 miles, 50 trips a year, almost a $75 deduction). And hold onto things like your post office receipts to back up your case.

But wait, there's more. Did you buy a new computer this year? If so you can depreciate it. Click here for a PDF of IRS form 4562 online. First you need to figure out the percentage of time you use the computer for eBay (or whatever your business is for you professional artists). If it's over 50% you can use the 179 deduction, which basically means you can take the entire deduction (say $750 if you use your new $1000 iBook 75% for eBay) in the year your purchased it. You can also deduct it over the life of the computer (which you have to do if you use it for under 50% business). The IRS figures a computer lasts for 7 years, so you can deduct the business percentage of your computer over 7 years. There are some very hard to figure out charts and diagrams but you'll roughly get (in the $750 example above) a deduction of over $100 for the next 7 years this way. If that sounds confusing that's because it is. But it's worth figuring out to save money, right? Whatever this number ends up being you put on Schedule C line 13.

Okay, so now you total up the Section V expenses, enter them on Section II and add up all your total Section II expenses. This is the amount of money that comes off the total of your eBay income minus the costs of goods. A much lower amount to pay taxes on. But wait again, there's more still. Assuming you still have a positive income you can deduct the business use of your home.

Do you use any part of your house or apartment exclusively for eBay? A room, a basement, a part of your room, a closet? If so you can get your self the IRS form 8829. Now if you have a house... I envy you, but I also pity you. This form is pretty simple for us renters, if you own a home, good luck to you. But if you rent, it's easy. Break out the tape measure. Figure out the square footage of every room in your house. I'm talking the shower, closets, the works. Now figure out the total square footage of your eBay empire. Form 8829 will help you figure out the percentage of your place that is for eBay. Let's say 8%. Now, you add up your rent and bills (water, electric, gas, not cable or phone) for the year. You then can take 8% of that total as another expense. Nice.

The total from your 8829 then gets deducted on the bottom of Schedule C part II. This is the income you have to report to the IRS. It goes on your 1040, but also on Schedule SE, a tax that self-employed people have to pay so that we get Social Security and MediCare take out of our income. It'll end up being a little less than 15%. Which is a lot, but you can also deduct half of this tax from your total income on the 1040. Plus, if you have Schedule C income and pay a monthly health care premium (out of pocket, not with help from your day job), you can deduct that entire expense on your 1040.

(At this point you should picture AC pleased by exhausted sitting back in his chair, arms folded).

If you any questions fire away. Believe it or not there is a part of my that kind of enjoys figuring all this out. Of course the other part rues the day the IRS invented all these forms and would like to have the last two weeks of my life back.

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