The last time I wrote about the eBay sales tax, I described the importance of knowing your cost (or another basis) for assets you personally hold. Selling them on eBay - like selling by any other private transaction - will incur a capital gain or loss.
The situation is different if you purchase items to resell on eBay that were not acquired for personal use. When you engage in active trading, you either have a business or a hobby. Your income tax situation can benefit if you have a business because you can claim business tax deductions. In other words, business losses are deductible against other sources of income.
Do You Have a Hobby or Business?
When determining whether you have a hobby or business, keep in mind that you may only have a hobby when merely selling occasionally. The IRS generally distinguishes a legitimate business as an activity that produces a profit in three out of five consecutive years. If you don't meet that test, the IRS deploys subjective measures to determine if your activity is really a business. Proving that you have a business usually requires maintaining business-like records. Another factor indicating that you are engaged in a business activity is whether you depend upon its income to pay your living expenses.
Failing to sell regularly and constantly on eBay likely means you have a hobby. The income from a hobby is still subject to income tax. But you can only deduct expenses up to the amount of income. There are no business tax breaks, and hobby losses are not deductible.
Qualifying as a business activity is, therefore, a good deal for income tax purposes. But there is a downside to operating a retail business: the small business tax. That is, retailers have to collect sales tax. Most states exempt residents from collecting sales tax if they are not operating a business. That's why occasional sellers at, say, a garage sale don't collect sales tax.
Many eBay sellers have a large number of customer ratings. Several have ratings from over 10,000 customers. If that's your situation, it's an indication you're unlikely to qualify for sales tax exemption as an occasional seller.
Are eBay Fees Tax Deductible?
A business tax deduction is created when you deduct ordinary and necessary business expenses that exceed your revenue. eBay seller tax deductions come in the form of eBay fees, shipping costs, and other eBay-related expenses.
It would be best if you considered keeping records of these payments throughout the year. Demonstrating that an activity is a legitimate business with an expectation of profit permits the deduction of losses in the years when there's no profit. With proper planning and by being mindful of what is eligible for eBay taxes, your business will see a nice boost in revenue!
How Do You Calculate Your Tax Obligations for the Year?
Running an eBay business can come with a lot of responsibilities and calculations, such as taxable income, gross eBay sales income, net income, advertising expenses, and so on. You need to pay close attention to all your business-related expenses if you want to run a successful online marketplace.
To begin calculating eBay deductions, you must first figure out your gross eBay sales income. You can find this information on the eBay seller dashboard. Then, use this number to determine which deductions apply specifically to you and your eBay business. For example, possible deductions may include advertising fees, postage costs, eBay store fees, and shipping supplies. Learning about tax-deductible expenses could save quite a bit of money.
If you feel overwhelmed or need help calculating your annual tax payments, hiring an e-commerce accounting expert could be a better solution. Not only will this save time and reduce stress, but it may also help you make smarter financial decisions. Investing in a professional service today means taking the first step toward a brighter financial future.
Check Your State's Sales Tax Rate
States generally require your business to collect tax on transactions with buyers who live in the same state where you operate. Therefore, understanding multi-state taxation is essential for business owners who have transactions in several states.
There is a place on the eBay listing template to enter a sales tax rate for your state. Sales tax is then calculated and added to the sale price when a buyer lives in your state.
If you don't use this eBay feature, then any sales tax you owe to your state is payable from the sale amount you receive. You still owe the sales tax even if you didn't collect it from the customer. That requires a calculation to back out the tax from your sale.
eBay Shipping Costs: What You Need to Know
You may be wondering - can you write off shipping costs on eBay, and does eBay charge tax on shipping? When considering your return on investment for selling items through eBay, this can be a bit confusing.
Generally, you can write off the cost of domestic and international shipping to the buyer because these costs can be itemized in the selling price of an item. eBay does not charge taxes on shipping, as any applicable taxes will be charged by the local or federal government, depending on where you are selling from. It's important to understand how this can affect your total expenses so you can maximize your profits as much as possible when selling your items.
Tax Planning & Preparation for eBay Sellers
Tax laws and regulations can quickly become complex, so you need to understand what tax deductions you can claim to leverage significant savings. As you can see, tax planning and preparation are essential for the success of any business, especially for those who sell their items on eBay.
You should be aware of tax loopholes for eBay sellers that could save you from paying too much in taxes. You may use tax-exempt on eBay based on the type of product you are selling to save on taxes. Researching every specific eBay tax exemption can help you maximize your income and potentially save a lot of money at tax time.
As with any business opportunity, it's important to meet with an accredited tax professional before taking any actions that could have long-term financial implications. Knowing the rules and regulations surrounding eBay sales can put your online business in a position for success.
Are There Any Other Things to Consider When It Comes to Deducting eBay Expenses?
One of the most common mistakes regarding business expenses for eBay sellers is mistakenly treating business income as only tax deductions. It is important to remember that it should be noted just like any other income, and taxes should be paid on it. As with any online marketplace, reporting net income and paying taxes is vital.
In addition, many eBay sellers mistakenly assume their hobby sales will not require any tax deductions. While hobby income is generally not taxable, these expenses are still deductible when calculating net income.
Maintaining an organized eBay account is a must for understanding how to maintain tax deductions properly. It can take extra effort and research to ensure everything is being handled correctly, but the effort will pay off in the long run.
If you'd like to speak with us about how to best optimize your eBay tax deductions, schedule time with our team and we'd be happy to talk more about this with you.
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.