Can you please offer business and/or tax advice for ebay store?

[tefka]

Started selling as a hobby (and to declutter) on ebay during the pandemic but business has grown, and am looking for advice on structuring a full-time business and filing tax returns for 2021. I will probably consult an accountant at some point but I'd like to get some advice from experienced sellers if at all possible. Here are my questions (which I hope help other new sellers as well), and I would welcome advice on any single question:

1) Any tax advantages to forming an LLC or is it best to keep it simple with a partnership or sole proprietorship? Thinking in terms of self employment tax and deductions.  

2) Did you get, and can you use, resale certificates to buy tax exempt packing and other supplies from ebay, Amazon, etc.?

3) When you register your business in your state, do you use your store name? 

4) I do not want to keep track of unsold/unlisted inventory (would be a massive job and it's ever changing). Is that okay? I have always filed taxes on a cash basis for my prior sole proprietorship), do I need to switch to accrual? How do you account for inventory on tax return? (In the past I've just entered zeros).

5) Whenever an item sells l I enter it in a spreadsheet with vendor and amount paid (but not tracked to any individual receipt, often there is no receipt, and is sometimes it is an estimate as not all items are equal in a bulk purchase), sales price, date sold, buyer's name, shipping label cost. Is that sufficient for tax purposes. Anything else needed such as state where it was shipped, date it was acquired? Cost of supplies to ship (ugh).

6) When I have a receipt with 20 items—dated 2021, 10 items sold in 2021, 10 didn't sell of which 5 were donated and 5 are still listed—how do I write off that receipt? Is my spreadsheet sufficient? Or do I need to keep track of which item tracks with which receipt (hope not!). 

7) For items that you donate (but you purchased with the intentions to sell), do you write those off as charitable contributions on Schedule A, or do those become business losses? 

😎 If I added up all of my ebay payouts in my bank account (daily) in 2021, are those my gross earnings, and will they equal the amount on ebay's 1099 in 2021? 

9) Anyone else live in a state with Gross Receipts Tax? Our state requires businesses to pay approx. 8% GRT on gross sales and services. You will automatically get audited if you don't report and pay this tax on a 1099, or provide documentation that you are exempt. Local tax office told me gross ebay sales are not exempt from GRT even if sale tax is collected by ebay. Is this right? (This would not be the first time I've received wrong information from the tax office, and I will seek professional advice, but wondering if anyone else dealing with it. It will of course be a very burdensome tax on top of self employment and income tax). 

Many, many thanks in advance for any advice or experience you can share!

[luckythewinner]

 If I added up all of my ebay payouts in my bank account (daily) in 2021, are those my gross earnings, and will they equal the amount on ebay's 1099 in 2021?

Absolutely not!

Your payout from managed payments is the NET after eBay has deducted its fees, and also any charges (shipping, refunds, etc.) it took out of your available funds.

I do not want to keep track of unsold/unlisted inventory (would be a massive job and it's ever changing). Is that okay? I have always filed taxes on a cash basis for my prior sole proprietorship), do I need to switch to accrual? How do you account for inventory on tax return? (In the past I've just entered zeros).

You should read IRS publication 334 about inventories. There is an exception for most small businesses allowing them to use cash basis and not carry an inventory. Look for the section "Treating inventory as non-incidental material or supplies."

Whenever an item sells l I enter it in a spreadsheet with vendor and amount paid (but not tracked to any individual receipt, often there is no receipt, and is sometimes it is an estimate as not all items are equal in a bulk purchase), sales price, date sold, buyer's name, shipping label cost. Is that sufficient for tax purposes.

IMHO there is no need to track shipping costs on an item-by-item basis. You have a dated receipt for every one, and I presume you have an electronic payment record from PayPal or Managed Payments as well.

That aside ..

Receipts are always best. But as far as an audit goes, what is sufficient is whatever you can convince the auditor to believe is sufficient ( the Cohan Rule).

https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/im-being-audited-what-if-i-dont-have-r...

When I have a receipt with 20 items—dated 2021, 10 items sold in 2021, 10 didn't sell of which 5 were donated and 5 are still listed—how do I write off that receipt? Is my spreadsheet sufficient? Or do I need to keep track of which item tracks with which receipt (hope not!).

The first year that an item sells from a group receipt, I note the year on the receipt and circle the items sold or donated that year. I make a copy of that receipt and put the original in that first years' tax records.

The next year, I note the items that sold or donated that second year on the copy, and make a second copy of that first copy and put the first copy in the second years' tax records.

Rinse and repeat until the receipt is "exhausted". That way, if audited you can quickly produce the copies of the receipt for each year and show the entire "chain"of deductions.

An alternative I use for smaller receipts is to simply make a copy of the receipt for each item on it, and keep the copy with the inventory item until it sells. 

[tefka]

Thanks so much @luckythewinner for this very helpful information. I have one question concerning your first answer: 

 If I added up all of my ebay payouts in my bank account (daily) in 2021, are those my gross earnings, and will they equal the amount on ebay's 1099 in 2021?

Absolutely not!

Your payout from managed payments is the NET after eBay has deducted its fees, and also any charges (shipping, refunds, etc.) it took out of your available funds.

First, my shipping labels are paid with paypal and deducted immediately and individually from my bank account (and sometimes a credit card if PirateShip). If your shipping labels are deducted from your funds is that a setting I need to change, or is that because you have weekly rather than daily payouts?

And secondly, if the payouts are net proceeds and don't match the 1099, what is on the 1099? Sum of what? Sales price + shipping fee charged (they wouldn't include sales tax would they?!)  Presumably returns are deducted?  That will be a hell of a lot of book keeping with our state's gross receipts tax. And do you deduct final value fees and shipping fees (and cost of items) as cost of goods sold? 

Thanks again!

[katzrul15]

 Anyone else live in a state with Gross Receipts Tax?

Yes and this is where you really need a CPA.  Most States only apply the GRT to sales above a certain threshold - where we live, the first $1mil is exempt from GRT.  Not knowing which State you are in (Delaware, Ohio, Texas, Nevada, Washington) it is hard to know what might apply and which rate structure.  Ohio went to a CAT structure several years ago and 1 rate.  Doesn't apply to us as our total sales are below $1mil.

For items that you donate (but you purchased with the intentions to sell), do you write those off as charitable contributions on Schedule A, or do those become business losses? 

You really do need to consult a CPA to assist you, but Schedule A is for "your" charitable, not those of your business.  IRS regs on this are complicated - you can only ever deduct on Schedule C what you "paid" for it - not what it could have sold for, etc.  And you need to be able to prove the "paid" part.  Also it depends on how you classify your method for valuation (cash or accural) for your inventory and your COGS.  Usually "donated" items do not fall into the IRS definitions, but your CPA can guide you on how best to classify "disposed" inventory, etc.  

[onlinecentral]

1) Any tax advantages to forming an LLC or is it best to keep it simple with a partnership or sole proprietorship? Thinking in terms of self employment tax and deductions.
The self employment tax and deductions would be the same regardless of the business structure.
A corporation name ends with Inc or LLC.
A sole proprietorship is equivalent, but provides no liability protection.
A Limited Liability Corporation may pay a judgement in the event it loses a lawsuit. A sole proprietorship puts your personal property and wealth at risk.

2) Did you get, and can you use, resale certificates to buy tax exempt packing and other supplies from eBay, Amazon, etc.?
No. You have to pay sales tax on packing supplies. The sales tax exemption is applicable to Inventory you will resell. Your buyer pays the sales tax when you sell the inventory.

3) When you register your business in your state, do you use your store name?
Using a different name and adding a DBA just complicates things.

[tefka]

Thank you @katzrul15 . State is New Mexico and I will need to research about any threshold, and definitely need a CPA. There is no threshold for a service business, as I have been filing for several years, but an ebay store is different. When I called the state tax office they never mentioned such a threshold but that means nothing, and I appreciate the heads up. 

re: charitable contributions. This is very helpful thank you.

[tefka]

Thanks @onlinecentral . 1) Great, thanks. Don't think we need liability protection, will keep it simple. 

2) Thank you, never thought about shipping supplies that way, I just combined all my receipts together as costs/deductions of the business, so appreciate you pointing out the difference. Most inventory is from nonprofit thrifts or estate sales or our own personal collection, so sales tax exemptions would not apply to our inventory. 

3) So, you use your store name, is that what you are saying? 

[caldreamer]

Suggest you get a good tax accountant to teach you how to setup a business properly.   This is what my CPA told me:

1) must get business/resale license

2) keep receipts for cost of goods

3) assign inventory# to every item (when items sells record on spreadsheet)

4) keep receipts for all expenses (mileage, boxes, toner, tape)

5) report every dollar of income (even if you don't get 1099)

As with any business...there is a lot of bookkeeping involved.

[onlinecentral]

1) Great, thanks. Don't think we need liability protection, will keep it simple.
Think again, close the loophole. Without incorporating, you can't use Inc or LLC in your name.
What is gonna be simpler to put on your tax forms and checking account?
The short or the long format?
Tefka Inc
Tefka LLC
Random Unrelated Business Name DBA Tefka Inc
Random Unrelated Business Name DBA Tefka LLC

[luckythewinner]

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And secondly, if the payouts are net proceeds and don't match the 1099, what is on the 1099? 

Sum of what? Sales price + shipping fee charged (they wouldn't include sales tax would they?!)  Presumably returns are deducted?

eBay has a detailed page explaining what is included on the 1099K:

https://www.ebay.com/help/selling/fees-credits-invoices/ebay-form-1099k?id=4794 

"Form 1099-K is an IRS information return that includes the gross amount of all payment transactions you received within a calendar year. The purpose of the form is to help improve voluntary tax compliance. We'll provide you with Form 1099-K by January 31st each year if you're a managed payments seller who has received payments above the minimum IRS reporting thresholds in the previous calendar year"

"If you have multiple eBay accounts associated with the same Tax ID, your thresholds are calculated by combining all payment transactions. If your combined sales exceed the above thresholds, you’ll receive a Form 1099-K for each account, even if one or more of the individual accounts do not exceed the IRS reporting thresholds."

"As Form 1099-K is an IRS information return, it includes the gross amount of all reportable payment transactions within a calendar year. This amount does not include any adjustments, for example, credits, discounts, fees, refunds, or any other adjustable amounts. This means that the gross amount on your Form 1099-K may not be the final reportable amount on your tax return. You should consult your tax advisor to determine how best to use the information on your Form 1099-K when filing your personal income tax return."

"Additionally, Form 1099-K does not include the sales tax when it is automatically collected and remitted by eBay."

And do you deduct final value fees and shipping fees (and cost of items) as cost of goods sold? 

IMHO final value fees are "fees and commissions" and would go on line 10 of the schedule C.

IMHO shipping labels are not a "fee", but rather they are a postage expense that is fundamentally different than final value fees. 

If you calculate your COGS in Part III of Schedule C, I believe the "consensus according to Google" is that postage would go on line 39 as part of "other costs". 

Personally, I elect to treat my inventory as "non-incidental material or supplies" per publication 334, and under this election the IRS allows COGS to be entered in Part II on line 22 "Supplies". I do this, and I also choose to enter my postage costs separately as an "other expense" labeled "Postage" in Part V.