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Put
simply, if you are making income from selling merchandise on
online auctions, you've got to report it to Uncle Sam. Believe
it or not, e-commerce venues, including eBay and other major
auction sites, are on the IRS's radar screen. If you don't want
a federal or state bean counter pouring over your books, you
better report. Here are some important tips on what data you
should keep for your income taxes, how and when you should
report, and, best of all, what you can deduct.
Professional
Advice
For starters, this information serves as only an introduction.
Consult a CPA (certified public accountant) when determining
what your tax liability is because of your profits from selling
online. Depending on where you live, different county, state,
and federal regulations might apply to you. For instance, many
states require people to have a business or merchant license to
deduct business expenses from their taxes. (See our tip on obtaining
a business license.) Moreover, you might have to report
income generated from an online auction sale as a capital gain,
even if you are not in the ''trade of business.''
Report
Card
Understand that many banks report to the IRS how much
nonemployment-related money an individual deposits. They do this
to avoid liability if the IRS tries to prosecute an individual
for tax evasion. While this practice has been contested to
determine if it's legal, it remains common in the banking
industry. It's better to be safe than sorry--report the income
you generate.
Capital
Gains
If you have ever bought and sold a block of stock for a profit,
you know what a capital gain is. The IRS taxes an individual's
gain on any capital asset that was sold for more than it was
purchased--the cost basis. This can apply to any piece of
property, from a share of stock to a classic car to a piece of
fine art.
If you are not in the ''trade of
business,'' but sell an item for more than it was purchased,
technically the profit should be reported as a capital gain on Schedule
D, Capital Gains and Losses with Form 1040. Realistically,
most personal, nonmerchant auction transactions do not apply.
Because of depreciation, personal merchandise usually sells for
less than it was originally purchased. In this case, a seller
has no tax liability or reporting responsibility. Unfortunately,
unlike loses on securities, individuals cannot claim loses on
the sale of personal merchandise. No one said life was fair!
File
It Away
Though laborious, it's a good idea to file copies of all your
auction transactions, as well as keep all receipts related to
your sales, including postage, insurance, and packing materials.
Finally, track all of your auction site charges, such as listing
and final value fees. With this information you will be able to
itemize your expenses and make legitimate deductions. (See our
tips on starting an auction
business, setting up an auction
office, and keeping records
for guidance on organizing your auction expenses.)
Estimated
Payments
Sole proprietors of a business are required to file taxes
quarterly (four times a year) as opposed to just once on April
15. If you claim more than $2,500 in business expenses, consider
reporting as a business on Schedule
C, Profit (or Loss) from Business or Profession, with your Form
1040.
With each filing you must include an
estimated tax payment, calculated as a quarter of what you
believe your total tax liability will be for the year. The
filing dates are April 15, June 15, and September 15. A final
return is then required on January 18 of the following year.
Happily you don't have to report every auction transaction you
completed each quarter. You can give a summary of your profits,
calculated by deducting your auction expenses from your gross
sales profit. The difference between the two is your estimated
taxable income
Social
Security
As a self-employed businessperson who files quarterly returns,
no one withholds tax from your paycheck. This, however, does not
mean you are exempt from making contributions to Social Security
like everyone else. Typically, this contribution is called
self-employment tax. Applied as fixed percentage, it must be
computed at the end of the year and added to your year-end
taxable income on your Form 1040.
State
Sales Tax
Sales tax, as it relates to online auction transactions, is one
of the most confusing and misunderstood subjects for
sellers. Currently, online auction sellers are not
required to apply sales tax to transactions made with buyers
outside their state. In other words, sellers are not required to
remit sales tax to the buyer's state.
In 1998, congress passed The Internet
Freedom Act, which waived sales tax on out-of-state online
sales. (It also placed a moratorium on new Internet tax
legislation for three years.) With more than 7,500 U.S.
municipalities and differing tax codes in each, Congress
determined that the application of sales tax on out-of-state
Internet transactions would be too burdensome for online
merchants.
However, auction sellers in the
"trade of business" are required to add sales
tax to in-state transactions. Also, buyers are
technically required to assess a "use" tax to their
out-of-state purchases, remited to their state. This is rarely,
if ever, done. Change might be on the way, though. Currently,
Governor Gilmore of Virginia, is leading a commission to
evaluate the current laws. Also, sales tax software is in
development, which would provide the sales tax for any item in
any municipality and make it technically feasible for sellers to
remit state sales tax on any sale. Yikes!
Deductions
Beyond the standard business expenses, such as final value fees,
postage, and packing materials, you also can justify deducting
the cost of mileage to the post office and magazine
subscriptions that relate to your specialty. You should also
think about trying to deduct the monthly expense of your
Internet Service Provider if you use a dedicated line for your
auction activity. If you buy supplies and merchandise from a
discount warehouse store, you could even try to deduct the cost
of your membership.
If your home is your principal place
of business you also might be eligible for the new home
office deduction, rolled out in the 1997 tax code. In
addition, the update tax code's new Section
179 expense deduction allows self-employed business owners
to deduct as much as $19,000 a year on business equipment.
Previously, self-employed individuals had to deduct expenses on
large items over several years as a depreciation deduction.
That's no longer the case--now you can deduct the cost of whole
items, such as a high-end computer, all at once. Finally,
because of adjustments to the tax code, the self-employed health
insurance deduction will increase from 60 percent in 1999 to 100
percent in 2003 and after. That's right--you'll be able to write
off 100 percent of your health care premiums.
Tax
Breaks and Shelters
Another way to offset taxes if you are self-employed is to open
up a retirement plan, such as a Roth
IRA or Keogh retirement plan. Income is either tax
deductible going into a plan or tax deductible after being taken
out at retirement. Remember, there are penalties if you deduct
money from an IRA before retirement.
If you are self-employed and your
auction business is unincorporated, you also can shelter income
from taxes by employing your under-18 child or children. Income
paid to self-employed individuals under-18 dependents is not
subject to taxes. In essence, the parent is allowed a tax
deduction of as much as $4,000 for the wages paid to the child.
That's a good chuck of change! Before applying this technique,
consult with a certified tax accountant.
Back to Auction tips &
tactics
by Vendio Services
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