By Cliff Ennico
SucceedingInYourBusiness.com
'Tis the season for last-minute tax advice. Last week, I was privileged to co-host a webinar for online sellers sponsored by Kabbage.com, a lender that specializes in financing accounts receivable and inventory for people who sell on eBay, Amazon, Etsy and other web retail venues.
Here are some of the questions that came up during the webinar:
Q: "I am not yet registered as a business with the government, so I have no tax I.D. number. I was just doing this as a trial for myself to see how it went first, and now plan on going forward as a registered company. How do I list myself on my tax return? Am I a sole proprietor?"
A: You have a choice here. If you don't want to fill out Schedule C as a sole proprietor, you can report any income you received from selling stuff online as "hobby income" on line 21 of your Form 1040. The great thing about filling out Schedule C, however, is that by doing so you qualify for all kinds of great business deductions that people with only a "hobby" can't take. Talk to your accountant about filling out Schedule C and using your Social Security Number as a tax I.D. number for now.
Q: "I have been selling merchandise on eBay for a supplier, whereby I list the items, collect the money via PayPal, keep my commission, and then send them their percentage of the profit. I just received a Form 1099-K from PayPal showing the total amount of my sales for this supplier as income. How do I show the IRS that I only received a certain percentage of each sale?"
A: This is called "drop shipping." What you need to do is report your commissions as income, and deduct the amount you paid to the supplier as part of your cost of goods sold (COGS) on line 4 of your Schedule C. You should also send a Form 1099-MISC to the supplier showing the total amount you paid them if it was more than $600.
Q: "We started selling merchandise out of our home last year and claimed the home office deduction. We've just been notified that we have been selected for a random home office audit by the local IRS office (lucky us). What are some of the things we should do to prepare for the audit?"
A: First of all, don't panic. Hire an accountant and have him or her participate in the audit. IRS audits can sometimes turn into "fishing expeditions" if you're not careful - the auditor will ask some seemingly harmless questions during his or her visit, and if you're a little too candid, you might be opening a door that will enable him or her to audit other parts of your tax return. A trained accountant is less likely to make that mistake.
Also, go through your home office and remove any items of furniture, artwork and other decorations that would not be appropriate in an office setting - this is the first thing they look for when auditing home offices. A good rule of thumb: if you wouldn't have it in an office cubicle, don't have it in your home office.
Q: "If I borrow money for my business from Kabbage.com or anywhere else, how do I treat that on my tax return? Is that considered income?"
A: You don't have to report loans on your tax return, nor do you have to pay income tax on loans. Because you're obligated by a written agreement to repay the loan, the IRS doesn't consider the money to be income, either earned or unearned.
When you repay the loan, you can deduct the interest you pay as a business expense, but not the principal portion.
Q: "I sell on Amazon. Normally they hold on to the money I make for a few weeks before sending it on to me. Do I report as income amounts they were holding for me on December 31 that weren't paid to me until after January 1?"
A: The answer depends on whether you are a "cash basis" taxpayer or an "accrual basis" taxpayer. If you are an accrual basis taxpayer, you probably should report the amounts Amazon was holding on December 31 as income. If you are a cash basis taxpayer, you probably would report it as income in 2013 when you actually received it. If Amazon sends you a Form 1099 showing the amount as income for 2012, then you should as well.
Q: "I didn't get a Form 1099-K from PayPal this year. Do I still have to report my profits from eBay selling as income?"
A: Yes, yes, a thousand times yes! Under current law, PayPal is required to send a Form 1099-K only if your gross sales last year were $20,000 or more AND you had more than 200 sales transactions using your PayPal account. If you made even one dollar of profit selling on eBay last year, you are required to report that as income.
Cliff Ennico (
SucceedingInYourBusiness.com), a leading expert on small business law and taxes, is the author of
Small Business Survival Guide,
The eBay Seller's Tax and Legal Answer Book, and 15 other books. COPYRIGHT 2013 CLIFFORD R. ENNICO. Permission granted for use on DrLaura.com.
