Perennial question #1: paying taxes

So...

If you ever go through the ebay message boards, there are usually a few questions people post that I like to call "The Perennial Tax Questions":

1. "Do I have to pay taxes on the stuff I sell?"
2. "Do I have to collect sales tax?"

What I'd like to do here is address the first question for now. I'll handle the other one eventually in another post.

PLEASE note, though, that I am not an accountant (nor do I play one on TV), but my accountant IS an accountant and also a former IRS agent. So the words I speak are true.

And here are your answers...

1. maybe.
2. maybe.

OK, maybe not so clear cut. But these are usually not simple answers.

A lot of people will bring up some piece of the IRS code about "hobbies". And you can do whatever research you want into this.

But I'll save you some time. If you answer yes to these questions, then you need to declare your ebay income (or whatever venue you use) on your taxes...

1. Do you sell regularly?
2. Do you buy stuff to resell in one form or another?

For example:

1. If you sell monthly, this ain't no hobby. You're a real seller. Have a collection of 80's New Wave LPs you want to sell? But not much else? OK, maybe you're not a real seller. The keys here are "volume" and "regularly".

2. If you hit the garage sales to find stuff to sell, then by gum you're a real seller. If you buy yarn to make and sell laptop cozies or beercan hats, then, again, you're a real seller. The key here is "resell".

So lets put the keys together, shall we? "volume", "regularly" and "resell".

Does that describe your sales activity? If so, then guess what? You'll get to become great friends with Schedule C.

Does this describe your activity? For example, a sporadic activity or a hobby does not qualify as a business. If so, then you're probably safe.

Now, you may be wondering "Hey, Rich. I sold a ton of stuff so far this year, so I am probably a real seller, but I hardly made anything. Shouldn't "profit" be part of what makes me a 'real seller'?"

No.

And for 2 reasons:

1. Being a "real seller" doesn't automatically make you a "good seller". There are plenty of real sellers out there who end up netting only about 5% to 10% of their total sales.
2. Schedule C is for profit OR loss. If you cleared (for example) $100 on $2000 in sales, you still made a profit, and you are a real seller...just not a very good one. If you lost money in sales, you made a loss, which is beneficial for you at tax time anyway! BTW, either if these describe you, you may want to revisit your business model ;-)

Still confused? God, you shouldn't be. If you are wondering if you need to use Schedule C or not and reading this blog, then you probably do need to use it.

Hope this helped a little bit.