eBay Sellers: Recordkeeping For Purchases & EIN How-tp

Hello.

I have purchased your book and it has been very helpful.

I have my own ebay business. It started selling mostly things in the house I was no longer using. Now, I purchase items at yard sales and resell them on my store. If I keep a list of items that I purchase at yard sales and what I paid for them, will this serve as a receipt for expenses?

Also, I want to expand my business this year by buying some wholesale items to put on my store. Some require an EIN to purchase. Do you recommend getting an EIN? I am a little afraid to use my social security number when purchasing items.

Your advice would be appreciated. Thanks so much!

Tammie
Lewisville, NC


Dear Tammie,

It's good to hear that you business is growing. Not an easy thing in these hard times. And It's also good to hear that my book is helpful to you.

Your goal in keeping purchase records is not simply to know what you paid for items, your records also need to show that you have a "business motive." That means the more business-like your records or the more they can show that you put some time and effort into them, the better your image should the IRS take a look.

So yes keep a list. If possible get a receipt -- bring your own paper & pen -- from the garage sale seller. Save the ad announcing a garage sale. Take a camera and photograph the sign at the end of the driveway that alerts passersby to the sale. If you buy a big item then photo it. Anything that shows you're doing your best to keep accurate records.

And yes, an EIN is a good idea in your case. Here's the link to apply. And here are some of my posts on EINs.

Best,
June

Indies Who Collect Social Security

Hi Ms. Walker,

My Dad and I run an internet website business selling music education products.

We, or I should say he has been in business since 2000 as he is the sole proprietor. I'm 29 and have basically been non-existent in the eyes of the IRS since 2003 after I came home from college to help Dad out with the business. He is now taking his Social Security so he cannot make over $14,000 of income. So he said it's time to incorporate the business, in my name for that reason and for protection reasons (a trust to protect me from crazy relatives who may try to take a piece of the business and all of the scenarios that can happen in that realm).

I recall reading some info about Social Security Administration getting suspicious if they think a family member is simply funneling income to another family member, but still working. Is this a myth?

What would you suggest in our situation?

Thank you,Mike


Hello Mike,

I can't advise about the crazy relatives. That's a legal question and I strongly urge you to contact an elder care or estate attorney and talk over your dad's situation.

If your dad is a sole proprietor and you work for him the most simple and least expensive solution is for you to become his employee.

You didn't give me any numbers so I'll pull some out of the air to give you an idea of how it works.

Dad's indie business grosses $100,000 and his expenses are $20,000 which leaves a profit of $80,000. Dad wants to work less and play more golf or go hiking in India and so you do about 85% of the work. He pays you a salary of $68,000 a year which, when subtracted the business profit of $80,000, gives him a net income of $12,000. That's below the Social Security limit.

Things you must keep in mind:
-- You really must do 85% of the work.
-- You set up the payroll according to the rules.
-- You claim all your income.

Other advantages:
Dad could set up a pension plan for you as well as give you medical benefits.

Something else for you and all indies to keep in mind:
Many self-employeds cheat themselves because they don't know all the possibilities in structuring an indie business. They think that keeping business under-the-table or "non-existent in the eyes of the IRS" is the smart tax-saving way to do things. It's not smart. Often it costs you more than were you doing business on the up-and-up. And it could be considered fraud. Which is really not good.

Best,
June

To deduct or not to deduct.

Hi.

I'm a small business owner online retailer for 1 year.

Is it wiser to spend more money through my business and claim legitimate deductions, than to spend less? If you spend less of your business income, or "save money", then the IRS is going to get a larger portion of the unspent money as taxable income, so why not just spend more through the business? You can spend more on what you want, while reducing your taxable income at the same time.

Any downsides to this?

Jamie
El Paso Texas


Hi Jamie,

This is a confusing question. I am not sure what you are asking. However, here is what you and every indie should do regarding business expenses: Deduct every single legitimate business expense you possibly can. Don't cheat by deducting personal expenses.

A business deduction typically saves 1/3 in taxes. So a $900 expense save $300 in taxes. Could be less. Could be more.

The upside to a low income: Helps when applying for school financial aid or government benefits.

The downside to low income: It make it more difficult to get a mortgage or other loan or credit card.

Be sure to read Is it a deductible Business Expense? on my website.

And visit here for a complimentary List of 100+ Indie Business Expenses .

-- June

Selling on Ebay? Fear be gone!

Ms. Walker,

Thanks so much for the business expenses list!

I started selling on eBay in December, trying to make some extra money to pay off some bills. I still have a full-time (45-50 hr/wk) "W-2" job.

Since I began to consider selling on eBay, the IRS has never been far from my thoughts! My Dad (now retired) had his own business for as long as I can remember, and my Mom handled the bookkeeping. Everything went well for many years, then in about 1969 some of the paperwork was done incorrectly, and we were audited. This was in the time before the "kinder, gentler IRS", and it didn't end well for us. I was only about 10 years old at the time, but I can still clearly remember what a horrible time this was! I remember that my Dad had bought a brand new 1968 VW Beatle for my Mom for her birthday in December, and shortly after that came the audit. Needless to say, the Beatle was lost. A very difficult time for my family!

I follow several personal finance blogs and sent in a question to one blog (Moolanomy) concerning eBay and taxes, and they recommended your book. I immediately went to the library and found the book. It is excellent!

Thanks so much! It has really put my mind at ease. I had been saving all my receipts, but really didn't know what else to do. And now I know!

Ruth
Texas


Dear Ruth,

Thank you so much for giving me a peek into your indie world. I find that the real experiences of real indies help other self-employed get a better perspective on their solo ventures.

40 years is a long time to have the black-cloud fear of the IRS hanging over you! Time to clear the sky. That is what I hope my writing and seminars accomplish: Give clear and simple explanation of complex tax rules and regs. By giving indies a basic understanding of taxes and money they will have the confidence to push away fear of audits and the IRS.

All the best,
June Walker

EINs in Germany

June --

This is my question: During my first deployment in Iraq (2007-2008) I started selling books, DVD, and other items online in my free time as a hobby, after a couple of months I was receiving more than a few hundred dollars from Amazon, Ebay and other websites for my sales every two weeks, but the net income was very small ex: of $600 amazon deposit, only $50 would be real profit.

In order to get wholesale prices from the on line suppliers I got an EIN (Sole proprietorship, internet sales) from the IRS website and I kept selling. I really didn’t know a single thing about taxes, I didn’t keep any records or receipts of the books or dvds that I bought to resale online….. and I didn’t take it in consideration when I got the EIN from the IRS either, that the Army taxes office in Iraq couldn’t help me to file my taxes because of that EIN. So I didn’t file in 2008.

After we left Iraq I stopped selling because I don’t know what to do with this tax and EIN situation, I want to fix this and find out how to keep selling without getting in trouble.

I read in the IRS website that you can cancel the EIN number and retake at any time, do you think I should do that?

I ‘ve been trying to talk to someone that does taxes for Americans here in Germany but it’s not that easy.

I would like to hear what you would do if you were me.

Thanks a lot!!
steven


Dear Steven,

Do not get rid of your EIN. Having an EIN really doesn't make much of s difference in your situation.

Very simply: Keep on selling. Claim the income on your tax return and reduce it by your expenses. You must keep a record of expenses. On your tax return, your tax preparer will put your social security # and your EIN.

I have clients in Iraq and in Germany. I think you'll be able to find someone in Germany who can prepare your tax return for you. The preparer just needs to know the basics of filing a return for a self-employed person. Start by asking at the base then at the bank.

Best,
June

You cannot deduct personal expenses when on a business trip.

Hi.

I'm a business owner online retailer.

Is it possible to deduct expenses like gas mileage, meals, etc on Saturdays and Sundays if I'm conducting business in the US?

For example, I travel from New York to California for business meetings on Friday and Monday. Can I deduct my weekend expenses in between? If the answer is yes, then I have 2 concerns: 1. If I wanted to go to the park or zoo on Saturday of my business trip, may I deduct my parking fees and meals at the park/zoo? 2. May I deduct all the mileage for that weekend, even though I'm not conducting any business (such as driving from the hotel, to the zoo, to a restaurant, and back to the hotel)?

Thanks!
Jamie
El Paso Texas


Dear Jamie,

If I understand you correctly, then you travel from NY to California on Friday for a Friday business meeting. You stay in California for the weekend in order to attend a business meeting on Monday. On Monday you return to NY.

If that is so you may deduct the cost of getting to and from CA. All the meals and lodging while traveling to and from, and while in CA, are business expenses and deductible. You may not deduct any personal expenses such as costs to attend or get to the Zoo or a show.

There's more info on travel expenses in these posts expenses -- travel (14) .

Best,
June

No Profit Needed As Long As You Have A Profit Motive

June,

I am An internet Sports Card Dealer in Gainesville, FL and have had my business for 6 years and have not made a profit to date.

I read your book Self-employed Tax Solutions. It is very helpful and you did an excellent job. While reading it, I remember a section that dealt with getting tax advisor advice to not report expenses to show a profit. You did not recommend that approach. However, I am trying to find that specific section to re-read it. Please let me know the Chapter and page.

Thanks.
Lou


Hi Lou,

It's Chapter One: Self-employed -- What does That Mean? It's the section: For Fun or Profit: Is your endeavor a hobby or a business? Starts on page 8.

Glad you like my book. Thanks for letting me know.

For those of you who don't have my book, I'll give an overview of what Lou refers to.

To be a business in the eyes of the IRS you don't need to make a profit, you need show only that you have a profit motive. In Self-employed Tax Solutions, I say:

"A number of books advise entrepreneurs that the best way is to just “show a profit.” That’s like telling Miles Mingus to make the charts with a hit song three years out of five … or, if that doesn’t happen, the mahogany-office accountant, Sammy Seegar, CPA, suggests that Miles forget about a lot of his expenses, pretend he made a profit and pay Uncle Sam more than is his due. Pretty bad advice!

"If you know that your self-employed business is going to make you rich someday (even though you’ve had a loss every year since you started your new venture) how do you prove to the IRS that your goal is to make a profit?"

You'll find a good part of the answer in these posts.

-- June

A new, growing indie business? Get more info.

Hi Indies,

Here's some questions from an indie with a growing business. All his questions are already answered on my blog. This applies to lots of questions indies send in. The answers are here, just takes a little work on your part. Remember the SEARCH facility in the upper-left corner of the screen. I welcome all comments on better ways of making it easier for you to reference specific questions and topics.

To Kevin I say don't go to a tax pro knowing nothing. How will you know if the guy knows what he's talking about if you know nothing? Read-Read-Read! Start here tax pros - tax prep fees - tax returns (21) , My answers to your questions are below in red. The number indicates how many posts there are on that topic.

-- June


Hello June,

My name is Kevin, and I have been self employed since November of 2007. I started a reselling business out of my parents house in Austin,TX a few months after I graduated from college, and have watched it grow exponentially.

My business revolves around sales through eBay and my own website. In 2007 my taxes were almost nothing considering I had just started the business and recently graduated from school. In 2008 my business began to grow on a monthly basis, and my tax obligation grew with it.

I have considered finding an accountant to ask numerous questions, but since I found your site, maybe you can shed some light for me.

1) I am currently a sole proprietorship, from a tax perspective, would it make sense for me to become an LLC, incorporate, or become a corporation?
Look here business entity (21)
and here business entity -- incorporation (4)
business entity -- LLC (12)

2) Do I need to make quarterly tax payments, and if I haven't made any yet this year will I have to pay a tax penalty? In 2007 I paid less than 500 in taxes.
Look here taxes -- estimated (11)

3) Do you have any other recommendations or advice I could put to use to make my business as profitable as possible? Self-employed Tax Solutions

Thanks for your time!
Kevin

Ebay Selling

June --

I am a self-employed call center agent and work out of my home on my computer where I get 97% of my income.

In between calls, while waiting for the phone to ring, I sell items on Ebay. I am at a total loss on how to treat my ebay income, and what to do about expenses. I dont know how to treat the ebay income on my taxes, or how to allocate the expenses. Some of the items are items I purchased to sell on ebay, and some of them are things I have had laying around the house and am selling just to get rid of.

Donna
Spearfish, SD



Hello Donna,

If you are selling items on Ebay just to pass the time while waiting for the phone to ring then you're engaged in a hobby.

If you are selling on Ebay to make money, then you're engaged in a self-employed business. Your income is self-employed income. All the things I've said on this blog about deducting expenses apply to you.

To figure your "cost" on an item depends on how you came in possession of the item.

** If you bought it solely to sell, then your cost basis is what you paid, including shipping.

** If you bought the item and used it for personal use then your cost is the lower of what you paid or what you can sell it for. What you can sell it for is called "fair-market-value."
**** If you paid $30 for a book and sell it for $20, then its cost basis is $20. That's called its fair-market-value. You have no gain or loss on that sale.
**** If you paid $30 for a book that is now out of print and so you sell it for $50 its cost to you is $30.You have a profit of $20 on that book.

Remember you must split the cost of your computer and ISP based on usage for the two businesses -- 97% to 3% ??

Hobby vs Business is explained in my book Self-employed Tax Solutions .

Best,
June

Husband and Wife on Ebay

June--

I am from Binghamton, NY and I work full time a database analyst for a major corporation in NY, and my wife is a housewife and full time student and she doesn't work.

In Jan. 2006, I started selling crystal and china on ebay, and I got a EIN so I could buy these products from the manufacturer direct. I do all the work with the ebay business like placing all the ads, taking all the photos, ordering the products, answering all the questions from customers, keeping track of all the money and accounting, paying the state sales taxes quarterly, etc. The only work my wife does is spends about a hour a night helping me pack the products for shipment.

In 2006, I netted an additional $33,000 from the ebay sales, and I filed a joint return with a Schedule C with me as the sole proprietor, and Schedule SE to pay any self employment taxes for the additional earned income.

I did not include my wife as a partner or employee.

My question is, with the new Small Business and Work Opportunity Tax Act of 2007, can I still continue to file as a sole proprietor and not include my wife as a partner or employee without any problems from the IRS?

-- Charles


Dear Charles,

No, there's is nothing in the Small Business and Work Opportunity Tax Act of 2007 that says you must partner or employ your spouse. So many indies are confused about this new tax act that a couple weeks ago I wrote a column explaining some of its ins and outs. Here's the post The Many Advantages of Hiring Your Spouse . I suggest you read it.

In that post and in several other posts on hiring your spouse you will find that there are many advantages to putting your wife on your payroll, even if she works for you only 5 to 10 hours per week.

BTW -- great work on Ebay!
-- June

Recordkeeping for small cash purchases

June --

I have a small home business selling used books on Amazon. Most of the book sales I buy from do not give receipts and accept cash only. Also, I pick up books at yard sales, etc where I also pay cash and have no receipt. If the amount is over $50 I usually pay by check and use my cancelled check as proof. I always keep a dated log showing what I purchased, where and the cost and mileage. Is that enough proof for the IRS for small cash purchases (under $50)?

Thanks.
Maureen from Pennsylvania


Maureen, you are doing exactly what you need to do. A log of purchases will work. And if the people selling won't give a receipt or accept a check, and the expense is a large one, just write down the book titles and / or authors. You're showing a "businesslike" method and that's what the IRS likes.

-- June

For recordkeeping how-to check out: The Confident Indie: Five Easy Steps