 |
Online Auctions:
When using eBay becomes an e-Business
The popularity of online auctions for
peddling everything from artwork to automobiles has exploded in recent
years. As of December 2004, eBay -- the leading online auction house
-- had 30 million items listed for sale, according to company officials,
and another 3.6 million were being added every day.
Online auction participants range from the curious to the addicted.
But for tax purposes, there’s really only one distinction: People
who are making a profit selling items on the Internet and those who
are not. If you’re making more money on the items than you spent
for them, the Internal Revenue Service wants to know about it.
On the other hand, if you are merely cleaning out your closet or unloading
a couple of sugar bowls, the IRS doesn’t much care. People who
trade on eBay as part of a legitimate business may be eligible to
take tax deductions and claim losses. For the most part, the rest
of the eBay junkies can’t.
“eBay is the 21st century garage sale,” says Kathy Burlison,
director of tax implementation for H&R Block. “If you’re
just buying and selling stuff, that’s not a hobby. If you’re
making stuffed rabbits and you make a few too many and put them for
sale on eBay, that’s a hobby.”
Entrepreneur or shopaholic?
Stuffed rabbits aside, the IRS has developed
some specific tests to separate hobbyists from legitimate business
operators. A for-profit business is one that meets most of the following
criteria:
- You carry on the activity in a business-like manner.
- The time and effort you put into the activity indicate you
intend to make it profitable.
- You depend on income from the activity for your livelihood.
- Your losses are due to circumstances beyond your control
(or are normal in the start-up phase of your type of business).
- You change your methods of operation in an attempt to improve
profitability.
- You, or your advisors, have the knowledge needed to carry
on the activity as a successful business.
- You were successful in making a profit in similar activities
in the past.
- The activity makes a profit in some years.
- You can expect to make a future profit from the appreciation
of the assets used in the activity.
Generally speaking, an activity is considered by the IRS to be for-profit
if the income you derive from it is greater than expenses for three
out of five tax years.
How to deduct a hobby
If you do not meet the tests for a business,
you may still be able to take some deductions, which means you can
reduce your taxable income by a given amount. But you’ll have
to take them in a certain order.
- Deductions you could have taken anyway, such as home mortgage
interest.
- Expenses that don’t result in an adjustment to the basis
(value) of your property such as advertising, insurance premiums
and utilities.
- Deductions that result in a change in the basis of your property.
If you bought a $2,000 digital camera to shoot photos of the products
you sell, you could now depreciate the value of that camera, resulting
in a deduction from your income
If you subtract the deductible amount in the first category from your
income and you still have a profit, you can take deductions from the
second category. If, after adding up all those deductions and subtracting
them from your income you still show a profit, you can take deductions
from the third category. Ultimately, if it’s a hobby and not
a business, you will likely wind up with no taxable income from your
activity.
Neither fish nor fowl
Some people meet the criteria for neither
professional sellers nor hobbyists. However, they’re still expected
to pay for any profit they earn.
For example, Burlison says, if you inherit your grandfather’s
lunchbox collection and sell it, that’s taxed as a capital gain.
Or if you have a collection that counts as an investment property
and you sell that, that’s also a capital gain.
Of course, if you’ve met the litmus test for being a for-profit
company, you’ll have to keep very careful records. You’ll
need to keep track of what you paid for an item, the expense of getting
the item to you, the expense of any manufacturing you might be doing,
the expense of selling the item and what your buyer paid for it.
And if you are legitimately self-employed, you have to pay Social
Security and Medicare taxes as well as income taxes. But there are
also beneficial deductions for having a home office, health care expenses,
mileage and other costs.
Then there are those rare instances where individuals make boatloads
of money on items that don’t require a whole lot of documentation,
like the woman who sold her father’s ghost on eBay for $14,000
or the one who got $28,000 for a 10-year-old grilled cheese sandwich
with a face on it that she said was the Virgin Mary.
Since neither of those women were really operating a business selling
iconoclastic sandwiches or ghosts, they would probably qualify as
hobbyists.
The point is, even if you think you’re only dabbling, it’s
a good idea to understand how the IRS looks at your online auction
activity. At the least, it could keep you from audit trouble later.
And at best, you could qualify for some deductions that make your
clicking even more profitable! For more information, check out IRS
Publication 535, Business Expenses. |
| |
 |
|
|
|
|
|
