Taxes Get Complicated for Sellers on Internet
Dan Schuessler didn’t plan to run a small business. He has a full-time job at Intel. But the 28-year-old found a good deal on shoes one day and was convinced that he could resell them at a profit on EBay.
That was two years ago. Now, in a good month, he will sell 100 pairs of men’s loafers online. The moonlighting that once brought in only “pocket change” has become truly profitable, he said.
With the growing popularity of online sales -- EBay boasts about 2.5 million members -- Schuessler is among a growing number of entrepreneurs learning about the mixed blessing of business income at tax time.
“It’s nice to make enough that you don’t have to worry about how much you spend at dinner,” he said. “But it does make filing a tax return a lot more complicated.”
Running a business to make a profit -- even if it’s a small, part-time business -- qualifies the taxpayer for a variety of write-offs not available to those who earn wages alone, said Francine Migdal, quality assurance manager at Intuit Corp., the maker of TurboTax.
The catch: Including the so-called Schedule C -- on which taxpayers report a profit or loss from a business -- triples the time it takes to file an annual tax return, according to the Internal Revenue Service’s estimates. Assembling records, learning about the rules and filing a 1040 take about 16 hours, according to the agency. But add in the forms required for a small business, and tax time requires more than a full workweek -- 48 hours, to be precise.
That may be par for the course for people who run full-time businesses, but it can be befuddling for those who spend a few hours a week retailing on EBay. Indeed, TurboTax is so convinced that people like Schuessler will be flummoxed by the forms that it created a separate software program just for them.
The program, which retails for $60, reminds taxpayers that they can deduct the service fees paid to EBay and online payment firms such as PayPal, and prompts them to deduct or “expense” other items such as postage or cameras needed to support their sales.
It’s worth noting that some people who regularly sell products on EBay are not considered business owners under the U.S. Tax Code, noted Philip J. Holthouse, a partner at Santa Monica tax law and accounting firm Holthouse, Carlin & Van Trigt. Those who are reselling used items that they’ve tired of -- even if they sell them for more than they paid -- would not be required to file a Schedule C. If they earned a profit on the sale, they would report it either as capital gain or as “other income” on line 21 of their return, he said.
It’s only when the taxpayer is engaged in business with the intention of making a profit that they fill out a Schedule C. Intention is important because tax rules allow business owners to post a loss when they are launching a business. Consequently, had Schuessler’s expenses to equip his new enterprise exceeded his business income, he would have been able to report the loss on line 12 of the 1040, which would have cut his taxable personal income.
Entrepreneurs need to be careful about posting losses year after year, though. The IRS will assume that any business that has lost money in three of five years is a hobby, not a legitimate profit-making enterprise. That would cause the agency to nix all those business deductions. Hobby losses are not deductible.
What’s deductible when you have a part-time business? Anything that you legitimately need to produce a profit, Holthouse said.
If you bought a computer solely for the business, for instance, that can be either deducted over time or “expensed” -- taken as a one-time write-off, he said. A high-speed connection for your computer could also be written off if it was required to market a product electronically.
Paper, pens, printer ink and other office supplies also are deductible, as is money spent to advertise and purchase inventory.
People who sell products online have another raft of expenses, including registration fees and commissions charged by the online retailer, fees charged by credit card and payment services, and shipping costs, Migdal said.
Taxpayers who set aside a dedicated place in their home to conduct business also may be able to take home office deductions. These deductions can be particularly attractive for renters because they allow them to write off a portion of the monthly rent -- an expense that would normally not be deductible -- as well as a portion of utility and repair bills.
Homeowners get similar write-offs for a home office. However, because their biggest expense is the mortgage payment, which primarily consists of already deductible mortgage interest, there’s relatively less of a benefit.
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.
