Small Business Q&A with Tim Knox

Q: I made extra money selling things on eBay last year. These
were items I picked up at yardsales mostly. My husband says I
am responsible for paying income tax on the money I made, but
I disagree. This is just my hobby, not a business. What do you
think?
-- Gladys A.

A: With so many people selling on eBay these days this is a
question I get all the time. To many eBay sellers the thought of
running an actual business is about as appealing as getting
negative feedback, so they go out of their way to convince
themselves that selling on eBay is really "just a hobby" and
therefore, should not be susceptible to income tax laws.

While you might think selling on eBay is just a hobby and the
extra money you're making is not reportable as income, depending
on the circumstances, the IRS just might disagree with you.

The IRS rules are clear: you must pay taxes on all personal and
business income and that includes money you make selling on eBay.

In its most basic sense, the IRS rules mean that if you buy a
vase at a garage sale for $10 and sell it on eBay (or elsewhere)
for $20 you made a $10 profit and therefore must report it as
income and pay Uncle Sam his fair share.

In reality, if you are a casual seller who only sells a few
items on eBay every now and then it's doubtful the IRS is going
to lose much sleep over the few bucks you make.

However, if you consistently sell on eBay the IRS may deem your
activities to be business oriented and you will be required to
file a Schedule C and claim the income.

The IRS uses a number of factors to determine if a hobby
is really a business. These factors include:

1. Do you carry on the activity in a business-like manner?

If you conduct your eBay activities in a business-like manner,
i.e. you keep business records, track profit and loss, keep a
separate checking account, etc. then whether you think so or
not, your hobby is really a business.

2. Do you spend considerable time working on your hobby?

If you put considerable time and effort into your eBay sales, the
IRS may contend that you do so for profit and not fun. It seems
the folks at the IRS don't believe in doing things strictly for
pleasure. My guess is, neither do you. If you weren't making
money selling on eBay I doubt you'd bother getting up at
4 a.m. to hit all those yardsales.

Then again, maybe you would... :o)

3. If you depend on income from your eBay activities for your
livelihood?

If so, it's a business, not a hobby.

There are a number of other factors the IRS uses to determine if
a hobby is really a business, but that covers the basics.

You can learn more at the IRS website at www.irs.gov.

What's eBay's take on all this?

eBay is vehemently opposed to anything tax related (especially
the forced collection of sales tax, which is a whole 'nother
issue). It's understandable that eBay is not a fan of the IRS
since trying to enforce tax rules on buyers and sellers would
undoubtedly be detrimental to the way eBay does business.

eBay does not does not issue 1099 tax forms to sellers, nor does
it report seller's sales figures to the IRS. eBay considers itself
a faciliator, i.e. they provide a marketplace in which buyers and
sellers come together to do business.

However, since eBay is not directly involved in the transactions
that take place between buyers and sellers, it would be impossible
for eBay to report sales figures. Furthermore, eBay does not
track if a seller actually gets paid by the buyer, so they have
no idea how much money actually changes hands, making it
impossible for eBay to issue accurate 1099s to sellers.

On the bright side, if you do sell on eBay as a business you can
deduct a number of business expenses, including the cost of
inventory, listing fees, shipping, envelopes, packing materials,
etc. You might also be able to deduct things like the purchase
of a computer for business use, office space (even if it's a
home office), office supplies, and more.

I'm not accountant (nor do I play one on TV), so please do not
take any of this as tax advice or legal opinion. Talk to your
accountant if there's any doubt as to whether you should or
should not be paying taxes on your eBay earnings.

Here's to your success!

Tim Knox
tim@dropshipwholesale.net
For information on starting your own online or eBay business,
visit http://www.dropshipwholesale.net

Small Business Q&A is written by veteran entrepreneur and
syndicated columnist, Tim Knox. Tim serves as the president and
CEO of three successful technology companies and is the founder
of DropshipWholesale.net, an online organization dedicated to
the success of online and eBay entrepreneurs.

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