How will I file 2023 taxes? As a business?

[coloradodude]

In January I moved into a new place. Decided I was done with my storage unit and I was going to become a minimalist and not buy things unless I REALLY wanted/needed them.

I have 150 items in my store, I’ve sold over 80 items this year, and I have about 200 more to list… almost 5k in sales for the year already. 

I’m planning to replace my old vehicle when I finally get rid of all the clutter. 

Now to my questions about taxes. I’ve read a lot of forums and websites but still don’t fully understand. 

Say I sell a bunch of stuff, let’s just imagine 20k in sales. In those sales, I lose 8k on the original amount paid for 80% of the items. But a few items (collectibles and rare clothing) actually make me a profit of 2k. 

Am I still reporting a loss of 6k? Or am I simply not paying taxes on 18k of the total, but I have to pay capital gains on the 2k profited regardless of losses?

I keep everything logged and I have receipts for about 70-80% of my items since I purchase most stuff online and have for the last 10+ years. I’m not worried about an audit unless I file incorrectly. I’m more worried about simply not doing what’s best for me. I also want to file honestly and accurately. The reason I’m asking this so early in the year is so I can find out if I should file as a business and if I have to pay quarterly business taxes in April. 

To my understanding, there are 3 ways to file.

-As a hobby seller, which sucks because you can’t report any losses so whatever the total earnings reported is is what you pay taxes on - I can’t do that I will get demolished. 

-As a garage sale. This means you don’t pay taxes but you can’t use the losses to offset other forms of income (from my jobs). I don’t mind doing this, but I don’t think I can because I have already sold a couple things this year for more than I paid. Or can I file this way, and simply pay capital gains on these individual items? Because this is truly the most honest description of my store - an online garage sale. I just don’t want to do it wrong and I want to save the most money. This is where my earlier confusion comes from. Would I pay capital gains on the 2k I profited, or would the more significant losses on all the other items zero out the capital gains owed? 

-I could also file as a business. I have sold a few items at a profit, and I have several more (even rarer collectible items) that I’m considering listing that would reel in a profit. In this case, would I be able to still report the overall losses even having sold some profiting items? Would this help my taxes overall? I have 2 jobs. Or would the losses only apply to the business taxes? This way feels like cheating because I wouldn’t have to pay taxes but I could sell a handful of profitable items.

I’m also not sure if I’m technically a business because everything I bought was out of stupid consumption, not business need. But it does feel like I’m running a business. How would I even file as a business? Would I have to pay quarterly taxes even if I took a significant loss on the original amounts paid for items overall? Or am I required to pay quarterly taxes on the individual items that profited, then get that tax money refunded to me when I report the losses at the end of the year?

If my store does in fact meet the requirements to be considered a business, how do I declare it as a business in a fashion that satisfies the IRS? Do I just do nothing but file my taxes accordingly and quarterly?

I’m going to meet with a tax professional as soon as I have time. But I wanted to get some insight here, so that maybe anyone else in my situation can find some info. 

Essentially my confusion is coming from:

1. I’m selling my possessions, not things I bought to flip. I sell almost everything at a loss, but yes a few items do profit. My overall bottom line at the end of the year will be a loss. What way of filing taxes is the best for me and is also in accordance with the law?

2. Can and should I file as a business? If yes, how do I do this? I have to pay quarterly tax payments right? But if it’s all a loss, then I don’t owe anything quarterly?

Thank 

[monica-sells]

It would be worth your while to visit an accountant...it will be well worth the couple hundred based on your projected amounts...

You have a basic concept of what you need to do, but everyone has a different scenario, and what is good for me might not be good for you....

Looks like Schedule C is your friend......

[luckythewinner]

I keep everything logged and I have receipts for about 70-80% of my items since I purchase most stuff online and have for the last 10+ years. I’m not worried about an audit unless I file incorrectly

I would file as a business on a Schedule C

• Claim cash basis account
• Read Publication 334  (the section on "inventory as as non-incidental material or supplies")
• Report all my gross receipts
• Deduct all returns and refunds
• Deduct all eBay fees
• Deduct all shipping costs and packing material costs
• Deduct the original cost of all items sold
• Deducts any other allowable expenses
• Limit my original cost deductions so I show a small profit ($100-$200)
• Pay about $50 in taxes and be done with it

eBay has a single report that will give you everything you need except your original costs and other expenses (unless you buy your shipping somewhere besides eBay labels).

If you lost $6K on $20K in receipts, it sounds like you should have more than enough fees, shipping costs, and original receipts to cover enough inventory cost to offset the income.

CashApp has free online filing including the Schedule C. I just did mine this morning.

[coloradodude]

Thank you. Those numbers were hypothetical. I’m actually kind of worried that the losses will make it impossible to claim a profit at the end of the year. Is fudging the numbers so that you owe taxes done in order to avoid being audited or considered suspicious? 

Wouldn’t claiming a loss help me on my taxes overall? Or is it such a headache to risk an audit (even if your taxes are 100% honest and accurate) that you may as well fudge the numbers to show a slight profit?

[luckythewinner]

---

@coloradodude wrote:

I’m actually kind of worried that the losses will make it impossible to claim a profit at the end of the year. Is fudging the numbers so that you owe taxes done in order to avoid being audited or considered suspicious? 

---

Generally speaking .. in order to be a business, you must show a profit every so often. 

As for fudging the numbers to show a profit ... if you fail to produce a receipt for an item and report the cost as $0 and end up showing a profit, how in the world is the IRS going to challenge that?

Are they going to get a search warrant and search your house for the receipt and force you to take additional expenses? 🤣

I had three trips to antique shows that I could have deducted mileage for. But it was spread across three different vehicles and amounted to less than $45, so I just didn't report any business use of my vehicle.  I have ZERO fear that this will be brought up in an audit and that I will be forced to document and deduct my mileage. 

[mega-ma-roo]

You should definitely work with a tax professional in your situation. Before you meet with one, you might want to see what the IRS says about filing:   Understanding Your Form 1099-K | Internal Revenue Service (irs.gov)

You have said here that you are selling your personal possessions, so pay special attention to the first part of that page:  What should I do if I received a 1099-K in error or for a personal item I sold? If this is how you file, you will owe capital gains tax on any profitable sales you made and you will not be able to offset any of those profits by the losses incurred on other sales.

One of the factors the IRS uses to determine if income is derived from operating as a business is that there is an intent to make a profit. This does not mean there must be a profit, but there should be an honest intent to make a profit at some point. In your case, it appears you would benefit from filing as a business. Even if you are audited (which is very unlikely), probably the worst that would happen is you would need to recompute your tax return as above for selling personal items. This is something you need to discuss with your tax advisor.

[dbfolks166mt]

     Without a lot of details that you probably do not want to post on an open forum the advice you get here is going to be mixed. There are just WAY too many variables. You need to talk to a tax professional as others have suggested. 

     Not sure if you are talking about filing your 2022 returns or if you are talking about filing your 2023 returns in 2024. If it is the later based on the discussions you have with your tax professional you may have to tweak your eBay account a bit. 

     Most sole proprietorships/businesses file their business income/loss as part of their personal taxes using a schedule C to report business transactions. 

[chris13]

Insert usual disclaimer that this is not tax advice nor am I a qualified tax professional...

I have done my own taxes for 35yrs, including itemizations and capital gains ins/outs. Long ago I played a role as Accts Payable for a corporation and participated in 4 public audits with KPMG and had no issues. Receipts and records are king. Using tax software makes it easy since the late 90's.

That said, I plan on reporting my sales this year as Hobby Income. I dont need the added hassle of calculating a million line items to depreciate my stapler or whatever, so I will report I earned X and if it makes me gasp at a bump in taxes then I will report that I lost Y and perhaps had a cost basis of Z.

Here’s how to tell the difference between a hobby and a business for tax purposes | Internal Revenue...

I bought things I loved, restored them, studied them, showed them off, and now its time to pass them along... this falls under this clause on the above page. 

"If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8"

Your mileage may vary. Pay a pro if you want but they often know less than a few google searches will tell you. I never pay for audit protection when I file, am never scared of an audit I can win, and always fight back. It's just numbers and IMHO if you are honest, you always win.