Turning an eBay hobby into a full-time business has many tax ramifications, so we asked Diane Kennedy, CPA and author of Tax Loopholes for eBay Sellers, to share some tips.
What does it take to be considered an official business on eBay in the eyes of the IRS?
Diane Kennedy: Here is what they're looking for.
- They want to see that you're [running your business on eBay] in a businesslike manner. So have a separate bank account, some way of keeping receipts and a filing system. [Run] financial statements, maybe just once a year, to show that you've got a true business.
- You're truly [spending] time and effort to create a business. If you're selling on eBay and you can prove you're doing it, you're going to pass that test.
- Even if you're not making money now, you have a plan to and are trying to. The goal is to make money and be dependent on the income.
- If you have losses, they're reasonable.
- If you've got experienced advisors helping you in the business, like through eBay workshops, you're showing that you're trying to get more education.
- You're truly building a business that's got some value to it, that you can maybe even sell at some point.
The [main] idea is that you're doing this in a businesslike way. It's not a hobby anymore.
What common tax mistakes do new eBay entrepreneurs make?
Kennedy: [They say,] 'I'm just selling a few things, so I don't have to pay taxes.' I speak at the eBay Live! Community Conference, and I can't tell you the number of times I get asked the question: Does eBay report these sales? [No, eBay doesn't report sellers' sales to the IRS, but] the IRS is very aware that millions of people are selling on eBay [in the United States]. For example, you might be buying a lot of inventory; you're buying things that you're going to sell. Those aren't a current write-off; they're actually considered an asset of [your] company because they are something you're going to sell and make money on. So at the end of the year, if you have a lot of inventory sitting around, you might actually owe taxes and not even know it.
Planning For The Best
Barbara Weltman, author of The Complete Idiot's Guide to Starting an eBay Business and monthly newsletter Big Ideas for Small Business, gave us the skinny on preparing a business plan for eBay.
What's the first element of a successful business plan for a business on ebay?
Barbara Weltman: For many businesses, not just ones on eBay, it's not uncommon to lose money in the startup years while you're acquiring inventory or other equipment that you need for your business. So what you want in your business plan is to show how you expect to make money. You need a reasonable expectation that you're going to make a profit, whether it's a year from now or two years from now. Usually for businesses on eBay, you can be profitable rather quickly.
Do you need to include the same things in your eBay business plan that would appear in any business plan?
Weltman: Absolutely. Just because it's easy to [have a business on] eBay doesn't mean you want to overlook any legal steps. You may want [your business plan to include steps] to incorporate the business or form a limited liability company, especially if you're doing business with somebody else.
How do you plan for the growth of your business on eBay?
Weltman: There are various ways to expand. One is just expanding your product line. The other is to expand how you sell: [opening] an eBay Store, for example, which is effectively like having an online catalog, if your product line is big enough; or having your own website, separate and apart from eBay, where you drive traffic to eBay and eBay drives traffic to your website--those kinds of things.
Should your business plan include contingencies for possible difficulties? In the eBay environment, what should new businesses be prepared for?
Weltman: If you're thinking of doing this as a business, don't quit your day job until you have established yourself. Test the waters. Make sure this is something you really want to do. It may sound great, but working alone and doing all the activities required [to run] a business on eBay may not, in the long run, be something you want to do [full] time. If you thought of this as a full-time business, make sure this is something that you really can do, and that you're suited to. Also, be realistic about what your sales are going to be. Not everything that gets posted [sells]. The sell-through rates vary with the items being sold, and just because you list something, there's no guarantee it's going to sell. [There's] certainly no guarantee it's going to sell for what you hope it's going to sell for.