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Our friend and accountant, Mark Tew, posted a great list of tax myths.
https://notyourdadscpa.com/the-5-biggest-reseller-tax-myths-and-how-to-avoid-them/I love the myth that if you should make less money so you pay less taxes. People dont understand the idea of Progressive Taxes.
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That’s great top 5 list of myths. I have operated under the guise of several of them in my experience.
Like most people, I was terrified of letting the tax man know about my little “side hobby”. Truth be told, switching over to a legitimate business was one of the most liberating and invigorating things I’ve ever done in my adult life.
Taxes went from being “the enemy” to being my friend. I love doing my taxes. I LOVE seeking out legitimate tax deductions – it’s like a game to me.
I wasn’t afraid of the home office deduction because of the above statement.
Thinking making too much would affect all my income – GUILTY!
Limiting my profit to avoid taxes – yep I’ve had to fight that self-imposed misconception a couple times.
Was my business a hobby? Yep!
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Jay – I happened to recall today as I was doing a preview of my taxes, that you had said you don’t keep a record of expenses item by item. And listening to an old episode, it sounded like you guys mostly work by categorizing bank transactions.
If that’s the case, how do you know what’s COGS versus Cost of Goods Unsold (COGUS) for tax purposes?
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We keep a spreadsheet of all our cost of inventory that we use for taxes. I’ve mentioned that its tricky as scavengers because if you buy a table lot for $10, then you’re pricing each items for pennies if there’s are 100+ items on that table. Also true for bag sales for clothes.
Our accountant says that the IRS just wants to see that we have some logical system for keeping track of COGS.
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Ah, I see, so you do have an itemized COGS sheet. Cool! Seems like COGS vs COGUS is a stumbling block.
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I wish eBay would implement a new field when we list where we can say how much that item cost. Then at the end of the month/year, it can spit out our COGS for that time period. That would be huge.
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Seems that everyone has a different system.
We roll up our accounts monthly and have several tables:
-expenditures on items for resale
-income from items that we sold
-shipping costs
-service costs (e.g. eBay fees for the month, PayPal transaction fees)
-expenditures for items not for resale (shipping supplies mostly)We don’t reconcile each individual item – we feel that would be a nightmare! Also, as a part-time seller, we don’t currently write off our internet, rooms in our house, etc. yet as it would be minimal. Our vehicle also gets very complicated and is a minimal return at this point. We will be writing off these expenses though when we go full-time.
At the end of the month (or year), we have a profit number for taxes, and roll over the unsold inventory to the next year.
The Canadian Taxman just really wants to see that you are reporting your income – if they want to come audit me, I have no issues – everything is accounted for.
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@Inglewood, gotcha, but how do you know what fraction of your “items for resale” cost is COGS at the end of the year?
E.g., only half the money I’ve spent on inventory in 2018 will actually be COGS as of today. The rest is COGUS and therefore not a deduction.
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