As an online seller, you have expenses throughout the year for new inventory, packing supplies, postage and more. When these expenses pop up, you make note of them—and tuck away the receipts in a safe place—so that when April rolls around, you have a few deductions you can enter to reduce your tax bill. You do this, right?
We know taxes can be, well, taxing, so we came up with a few deductions you can use, should you be unsure of what qualifies as a deduction. We talked to business attorney Cliff Ennico, the author of "The eBay Seller's Tax and Legal Answer Book," to get his insights, and we did a little research of our own to see what you can claim to help keep both you and Uncle Sam happy.
First, the basics
Ennico tells us that sellers first need to figure out if their online sales are a business or a hobby.
"If you treat your selling as a 'business,' i.e. you file Schedule C on your federal income tax return, or form a corporation or LLC for your business, you may deduct all 'ordinary and necessary' expenses of that business," he explains. "If you treat your selling as only a 'hobby,' you can deduct hobby-related expenses, but they will offset only any income you derive from that hobby."
This means you can't claim hobby-related deductions against your nonhobby-related income (for example, your salary from your day job) if you had a net loss. For instance, if you sell an item for $50 that cost you $100, and that was your only income from your hobby during the calendar year, you can't claim a $50 loss as a deduction. However, if you do make a profit, you may deduct expenses related to that sale, for instance, shipping costs or selling fees.
As for businesses, what does "ordinary and necessary expenses" mean? According to the U.S. Small Business Administration, "an 'ordinary' expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business." Basically, these are expenses you have to make in order to operate your business.
Now, let's now look at some specific expenses you can claim as deductions, whether your sales are a business or hobby. You'll notice that all the expenses we discuss below have to do with online selling, as they should. You can't just write off anything. It must be related to your sales.
“If you are selling on eBay out of a home office, you are absolutely entitled to take the home office deduction”
Zeroing in on write-offs
The list of items that qualify as tax deductions is quite long, and can include a variety of expenses, so don't let our examples limit you. Look around for other possible deductions, and always be sure to consult with a tax professional. Remember, we do our research, but we're not lawyers. Let's get to it.
Your workspace: Many online sellers use a room in their homes to photograph items, pack orders, store inventory, etc. And believe it or not, you can claim this space as a tax deduction. In fact, this type of deduction even has a name: the "home office deduction."
To qualify for this write-off, you must regularly use part of your home "exclusively" for your online sales, and you must conduct most of your sales out of your home, according to the IRS.
"If you are selling on eBay out of a home office, and you have no other place of business, you are absolutely entitled to take the home office deduction!" says Ennico.
You can write off a percentage of your mortgage or rent, Ennico continues. This percentage is "basically the square footage of your home office, including inventory storage space, divided by the square footage of your home."
Just don't go overboard and try to write off everything that's in the space.
"By far the biggest mistake is to include furnishings, artwork and other decorative items in your home office that are not related to your eBay selling business," he adds.
To claim the home office deduction, you will need to file an IRS Form 8829, along with your 1040 form. But we think it's worth the added work.
Utilities, repairs, office expenses: You can also write off a portion of what you spend on your utility bills throughout the year. After all, you can't sell online without plugging in your computer, printer, camera and so on. These are necessary expenses. How much you deduct should be proportional to your home office deduction. For example, if you deduct 1/10 of your mortgage for your home office deduction, you should deduct the same percentage of your utility bill.
And if your computer or printer goes on the fritz and you have to repair or replace one of these, or another device you use for your sales, make note of these costs, too. They're necessary expenses and deductions, as well. So are any office supplies you buy for your business like tape, business cards and ink cartridges, for example.
Operations fees: Don't forget about listing and payment-processing fees that you pay. These are often a must to sell online, and they're also deductions. Also note any subscription fees you pay to third-party services to launch listings or host images, or any store or Web hosting fees you pay for your online shop. You can deduct these, too. You can even write off what you spend for shipping insurance for the items that sell.
“You can write off what you pay to get your taxes done—whether you hire a professional or buy a tax preparation software package”
Postage and packing: You have to pay postage every time you ship, and you have to ensure you have the right packing materials to get your items to their destinations safely, so it shouldn't come as a surprise that this expense can really add up at the end of 12 months. Even if you use mostly recycled materials, odds are you still buy tape, shipping labels, tissue paper, even a few freebies to include in your packages, so write down how much you're spending on these and keep the receipts! This could be a substantial deduction.
Sold items: You can also claim the cost of the products you sell as a deduction—as long as the items have sold, Ennico says. You can't write off what you've spent on inventory that hasn't sold.
"Any inventory that remains unsold at the end of the calendar year is an asset of your business, the cost of which cannot be deducted until it actually sells (or is given away and written off as worthless)," he explains.
Tax preparation: Finally, you can write off what you pay to get your taxes done—whether you hire a professional or buy a tax preparation software package. As we did our research, we saw this deduction listed among the "most easily forgotten tax deductions." But don't you forget it. It's definitely a good one, because it can give you peace of mind that you've prepared your taxes correctly—and it can prevent a lot of problems with Uncle Sam. Plus, this expense means you can let someone else crunch the numbers while you focus on selling.
We'll leave you with one final piece of advice as you're going through the rest of the tax year: Whatever deductions you decide to claim, make sure to keep good records—and keep them organized. This will make tax preparation a lot easier, notes Bruce Langston, Auctiva's controller. He suggests using a filing cabinet to keep all your business records, and using that cabinet only for your business. Don't put anything else in there.
Aim to keep recordkeeping "simple, accurate and up to date," to make bookkeeping as easy as possible, he adds. So start going through those receipts you've accumulated, and start filing.
For more information on taxes and streamlining your online business, take a look at my eBay Business All-in-One For Dummies 2E. Covers taxes and so much more.