Is Your Hobby a Legitimate Business? If you're spending considerable time and making considerable profit with a part-time business, then Uncle Sam might want a piece.

Q: I made extra money selling things on eBay last year. My husband says I am responsible for paying income tax on the money I made, but I disagree-this is just my hobby, not a business. What do you think?

A: With so many people selling on eBay these days, this is a question I get quite a bit. In fact, several readers have e-mailed me recently to argue that just because their little eBay hobby generates a little cash, that doesn't make it a real business. It seems they consider the income from their little eBay hobby to be financial manna from heaven and thereby not taxable by earthly tax collectors. (And this is also true of many "hobby" business owners, so this answer applies to non-eBayers as well.)

I've always been amused by folks who try to impress me with talk about their "little side business," but when the subject turns to taxes, they suddenly refer to it as "my little hobby."

All arguments aside, the conclusion I come to regarding this kind of situation is always the same: While you may think that selling on eBay is just a fun pastime and that the money you're making is not reportable as income, the reality is that, depending on the circumstances, the IRS would probably disagree with you.

It seems that everyone likes making money but hates carving off a piece for good old Uncle Sam. Welcome to free enterprise, folks. If you're going to come to the dance, you have to pay the fiddler.

The IRS rules are clear. You must pay taxes on all personal and business income-and that includes the money you make selling on eBay.

In its most basic sense, the IRS rules can be interpreted to mean that if you buy an old vase at a garage sale for $10 and sell it on eBay (or elsewhere) for $20, you made a $10 profit and therefore must report it as income and pay Uncle Sam his fair share.

In reality, if you are a casual seller who only sells a few items on eBay every now and then, it's doubtful the IRS is going to let loose an army of agents to collect taxes on the few bucks you make. However, if you consistently sell on eBay, the IRS may deem your activities to be business-oriented and you will be required to file a Schedule C and claim the income.

According to the IRS, a number of factors are used to determine if your hobby can be considered a business and thereby make you susceptible to the IRS tax rules governing business:

• Do you carry on the activity in a business-like manner? If you conduct your eBay activities like a business (you keep business records, track your profit and loss, keep a separate checking account and so on), then your hobby is considered a business.
• If you put considerable time and effort into your venture, the IRS may contend that you do so for profit and not fun. It seems the folks at the IRS don't believe in doing things strictly for pleasure. My guess is, neither do you. If you weren't making money selling on eBay, I doubt you'd be bothering getting up at 4 a.m. to hit all those yard sales. Then again, maybe you would.
• If you depend on income from your eBay activities for your livelihood, it's a business, not a hobby.

What's eBay's take on all this? Naturally, eBay is vehemently opposed to anything that might rock the eBay boat. eBay considers itself merely to be a facilitator, meaning it provides a marketplace in which buyers and sellers come together to do business, therefore eBay does not issue 1099 tax forms to sellers, nor does it report sellers' sales figures to the IRS.

On the bright side, if you do sell on eBay as a business, you can deduct a number of business expenses, including the cost of inventory, listing fees, shipping, envelopes, packing materials and so on. You might also be able to deduct things like the purchase of a computer for business use, office space (even if it's a home office), office supplies and more.

Talk to your accountant if there's any doubt as to whether or not you should be paying taxes on your eBay earnings.

Tim W. Knox is the founder and CEO of three successful technology companies: B2Secure Inc., a Web-based hiring management software company; Digital Graphiti Inc., a software development company; and DropshipWholesale.net, an online organization dedicated to helping entrepreneurs launch and prosper from their eBay or online sales business.

The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.