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Article re No Hobby Deductions
Are those Trash Elves who were claiming Ebay as a hobby going to switch over to business this year? I’m switching because 2018 was my third year of making a profit anyway. Just wondering if you’ve done your taxes yet and have any thoughts to share. I just ordered Mark Tew’s book and need to start my return soon and finish COGS bookeeping. I haven’t set up a separate account and credit card, and really should do that for 2019.
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@Suzy I use $40/year Easy Auction Tracker. It’s all I need at this point. I’m very good at keeping records and receipts but not so good at keeping up bookkeeping monthly, so at the end of the year it takes a while to put in COGS. Mark Tew suggests keeping up an inventory spreadsheet at this part-time level. I’m not buying as much these days so I’m hoping to keep up this year.
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Hi Christine – I am working on mine! I have a COGS spreadsheet I fill out every 3 months, I download my sales report from ebay last 90 days into excel. Add a COGS column next to what sold and call it good.
Go Daddy takes care of my big annual number, business expenses.
I got Mile IQ for 2019 -
Hey Christine, it’s a decision I’m wrestling with. The pros for switching are strong: I have always made a profit, and that’s even with a high percentage of personal family items that are booked as a wash. EAT which I already use does make keeping the numbers easy except for having to manually enter COGS. I also already use Everlance for mileage and to record cash purchases and have a credit card I use only for eBay. I have used Schedule C often over the years, both for primary income when I was a sole practitioner and for various side businesses, and it is quite easy to fill out.
I’m also considering doing it in arrears, that is doing the Schedule C for 2018. But: Did I get permission from my landlord to have a home-based business? Did I register with state/local tax department and collect taxes on sales to my home state? Did I set up a separate bank account and card? Did I obtain a business license? Did I file quarterly estimated taxes? Did I file for a business entity LLC or corporation last year? I did none of these things. I did start to think about all this last year but procrastinated. It’s all fixable, though, so I’m leaning towards switching on the 2018 return and sucking up the pain of straightening out the administrative requirements. That is preferable to paying income tax on my gross from eBay as a hobby for 2018. That would hurt more.
Going forward I don’t think I’m going to bother with creating a business entity, though, if for no other reason than setting up a new eBay ID for the entity would shed my long-term reputation and feedback. It doesn’t seem worth the trouble at the level I’m at. I’m also not too worried about a separate business account and business credit card. As long as I can keep the records separate and I’m making a profit, the IRS doesn’t care. I’ve never not made a profit on eBay and since I don’t buy large amounts of inventory and have very low expenses it is hard to imagine that I’d ever not make a profit. It’s when you claim a business loss against other income and happen to get audited that every aspect of running the business professionally becomes important to convince the IRS examiner that it’s not a hobby.
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@Temudgin I was hoping you’d chime in. I did pay quarterlies (was a contractor at my legal job) and I did collect and pay sales tax. There are many factors but since I have been steadily making a profit for several years, never had a loss, and keep all of my records I think I’m firmly in business territory. Of course this is kind of a fun game to me, but they don’t know that and currently we are using the money for extra living expenses.
I think I need to value all of my ending inventory in order to complete schedule C though, and that’s going to be a bear bookkeeping-wise because I have a big backlog. In the past I only tracked the COGS for the items that sold during the tax year.
I agree it doesn’t seem necessary or worthwhile to create an entity. We have a steep annual tax to keep that going in CA and it seems hard to tell if resellers will qualify for the new 20% deduction. There seems to be a lot of confusion about that. Of course not for attorneys who didn’t have the right lobbyists apparently.
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Obviously get the final word from your own accountant, but you get the 205 deduction if your eBay profits are being claimed through a pass through entity: sole proprietorship, partnership, LLC, S-Corp.
An accountant can help you figure it out. Anyone is almost automatically a sole proprietorship if you claim your taxes correctly. https://en.wikipedia.org/wiki/Sole_proprietorship
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I haven’t examined the 205 deduction in depth yet. There are some complications to it but I think Jay’s correct that the entity structure doesn’t matter (so long as it’s not a C Corp). I use TaxAct for doing my returns so I’m hoping it’ll give it to me if I deserve it.
As for doing a year-end inventory, I agree that’s a pain for us random junk sellers. I plan to use an exception to enable cash accounting for retail under Revenue Procedure 2001-10 https://www.irs.gov/pub/irs-irbs/irb01-02.pdf as a “qualifying taxpayer” (NOT a “qualifying small business taxpayer” under Rev Proc 2002-28 which excludes retail sales businesses) and be exempt from “keeping an inventory” under IRC Sec 471. It accounts for retail merchandise held for sale in the same manner as non-incidental materials and supplies which are deducted when used or consumed. So “consumption” of merchandise under this revenue procedure occurs in the year it is sold. I only need the COGS for what I sold in that year – right off EAT.
In accounting terms, I’m using specific identification of inventory with EAT rather than FIFO or average cost to identify the cost of items in inventory.
https://www.accountingtools.com/articles/2017/5/8/specific-identification-methodIt’s accomplished on Schedule C by entering “0” for beginning and end inventory (Lines 35 and 41) then entering the year’s COGS on Line 36.
Since this will be my first year of operations I won’t need to worry about what’s necessary to change accounting methods, since some aspects of that have changed with the TCJA.
I think this method is not really the best for resellers with bigger operations and/or who sell commodity items and it does not track your held-over inventory as a lump sum. Also prior to TCJA there was a cap of $1M per year gross on businesses that could do this.
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Have you used Turbotax in the past? I haven’t heard of TaxAct but we had a small mail audit because of a flaw in the Turbotax software during the year my son turned 13. Turbotax allowed the childcare credit and shouldn’t have (I had entered his correct birthdate). I don’t even want to tell you about the experience I had trying to straighten it out with the IRS since they also incorrectly denied the one for my younger child and then stonewalled us.
I really don’t think I could come up with an accurate total for my used unlisted items without great effort so I will look at this – thank you. Easier to do for my new items that are left.
Mark Tew has a facebook page and gave this answer: “As of 2018 thanks to the Tax Cuts and Jobs Act, if you use cash basis for inventory as part of your regular method of accounting (deduct inventory as you purchase it), you can also do so for tax purposes.” I’m not sure I follow for old purchases, so will have to look into it.
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I have used TurboTax in the past, but that was years ago. Since then I used an accountant for a while, until he made a few major errors that I caught necessitating amended returns and he seemed to have trouble with our different income streams. Then I went to TaxAct in 2014 for the 2013 return. We use Premier at $40/year and no problems yet. TaxAct guarantees accuracy, paying up to $100K in liability for any penalties or interest incurred and audit costs, if there is liability for penalties or interest. Additionally I can buy Audit Defense coverage that provides an enrolled agent or CPA representation for an audit, even if I end up with no liability. I think last year that was an extra $75.
I don’t recall why I did not go back to TurboTax though it may have simply been the reviews at the time I was looking to dive back in to doing it myself. I’ve been happy with TaxAct.
Dealing with the IRS is awful, for sure. Unfortunately no matter how you do it, though, there’s always a risk of being wrong.
Re Mark Tew’s comment, many resellers have always wanted to deduct inventory as they purchase it and it’s easier now to do it. (But I think you still have to take annual inventory.) It is a disadvantage of my method that purchased inventory will not be deducted as I purchase it but only in the year that it is sold or disposed of. Many folks prefer the earlier deduction.
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I started on TurboTax yesterday. It looks like they did a pretty decent job in April of estimating my quarterlies under the new tax law thank goodness. They asked me if my business was a qualified trade or business, they didn’t tell me based on the code. Haven’t gotten the prompt yet for the reselling code. Interesting…
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Thanks for clarifying that last point. Since most of my purchases are behind me and what I do list generally sells within a year or two, so I prefer your method.
In this case, what it cost me was a lot of my time and frustration but not much in interest. It wasn’t complicated, the IRS just wouldn’t return calls or take action after I sent the receipts and payment but you can’t call the examiner directly. We tried the taxpayer advocate at the end. What a joke. They called our evening number once instead of the cell we left, then sent an undated letter that we were unreachable by phone. Refused to return messages. I feel for the people who have bigger issues to tackle with them. If I ever have another issue I will be way more proactive instead of waiting months for them to reply. That was nieve.
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In July (immediately after audit) I sent the payment for the older child and the receipts to prove we should get a credit for the younger child. With the shut down we are still waiting for the verdict on child #2 credit. Which we paid but appealed. It took them until October to let us know by mail they were backed up. I heard on the news that after the shut down they returned to 5 million pieces of unopened mail.
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That was my original attitude but I’m not optimistic. At worst we will eat $615 we don’t owe but it was 15+ hours of my time. It took over an hour on hold to leave a message for the examiner which would go unanswered. Techinally they are “required” to answer within 3 days or a manager in 5. Tempting to petition tax court on principle but would be even more of my time.
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