PayPal: Payment Card and 3rd Party Network Transactions

[GACollectibles]

Consult with an(your) accountant. Thread closed.

 

Bam. +1

 

Because we all have accountants?

 

If you are generating enough income to receive tax documents from Paypal then it's well worth your time to talk to an accountant to discuss your filing options whether you use them or not to do your taxes. There many variables that need to be accounted for, not just the Paypal income/offsetting expenses.

 

 

[Shrevvy]

 

Any information you have for me is truly appreciated. Getting this form is a major bummer since I buy way more than I sell

Then you will have a nice tax refund!

 

I think this is a joke, but no you will not. You cannot write-off purchases unless they are then sold. Otherwise, it is called "inventory" and held on the books until it is sold. Buy a book for $10, sell it for $15. Your Rev is $15, your cost of good sold is $10 and your gross profit is $5. The IRS taxes on income (profit), not rev. Your tax would be based on the $5 of gross profit less any additional expenses (con admission, shipping, boxes, tape, Paypal fees, etc). But if you buy two books for $10 each and sell one for $15, your gross profit is still the same. The second $10 book cannot be expensed until it is sold, destroyed, etc. The difference is that you have an asset at the end of the year for $10 - the book is recorded as inventory. If you get a 1099 from Paypal saying you received $20,000 in cash through Paypal, you are not taxed on the $20,000.

 

The above assumes all the transactions are part of your biz. If that second $10 book was for your collection and never for sale, it would not be a cost nor an asset for the "business" as far as the IRS is concerned.

[shadroch]

 

 

Each year, you can deduct the cost to you of all of the items you sold on eBay. For example, if you purchased 400 troll dolls for $800 and you sold half of these, you can deduct $400 as your "cost of goods.” For eBay businesses that sell hundreds or thousands of items each year, the calculation can become very complex, especially if the goods are handmade or manufactured specifically for sale on eBay. In the latter case, several costs must be calculated in order to determine the cost of goods.

 

The cost of goods sold is calculated on Schedule C of your tax return. The IRS illustrates this calculation on its website — see lines 35 through 42 of a sample Schedule C. In summary, the lines are completed as follows:

 

Line 35. If you are buying and selling merchandise, list the cost to you of the inventory of merchandise on hand at the beginning of the year. Usually this amount is identical to the prior year's closing inventory. If it isn't, you must explain why to the IRS. If this is your first year of operations, beginning inventory would be zero. If you are a manufacturer or producer of goods — for example, you manufacture handmade clothing for sale on eBay — include the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods, but only those that were part of inventory at the beginning of the year. The IRS provides an explanation on valuing inventories at its website.

 

Line 36. Here you provide the cost of all merchandise you purchased during the year. If you manufactured goods for sale, include the costs of all raw materials you purchased in the year that were necessary to manufacture those goods. Subtract the cost of any items withdrawn for personal use.

 

Line 37. If you manufacture goods for sale, calculate labor costs: the amounts paid to employees for manufacturing. Do not include any amounts paid to yourself. If you are simply reselling merchandise and not creating new products, you will not have labor costs associated with your inventory. Of course, if you have employees that are not involved in manufacturing items for sale, their labor costs will be deducted elsewhere on the tax return and are not included in the cost of goods sold.

 

Line 38. If you manufacture goods for sale, list the amount paid for materials and supplies, such as hardware and chemicals, used in manufacturing goods.

 

Line 39. If you manufacture goods for sale, you can list additional costs such as containers and packages that are part of the manufactured product, costs of freight to bring in supplies, and overhead expenses — for example, rent, heat, light, power, insurance, depreciation, taxes, and maintenance — that are direct and necessary manufacturing expenses.

 

Line 40. Total lines 35 through 39, which will represent the total cost of inventory your business held in the year.

 

Line 41. On Line 41, you enter the value of the inventory unsold at the end of the year. Keep in mind that the value of the remaining inventory is not the price you plan to sell it for; it is the amount you paid for it or, if you are a manufacturer, invested in it. This amount will become your beginning inventory for the next year — that is the number you will use on Line 35 of the following year's tax return. Note that most businesses do a "physical" inventory at the end of the year — that is, actually count and record the type and number of each remaining inventory item. The results of this work will provide the basis for the year-end inventory calculation. Physical inventories also allow you to inspect and discard inventory if it is damaged or no value, thereby "writing it off" of year-end inventory and increasing the costs of goods sold deduction. A physical count also will alert you to items missing from your inventory.

 

Line 42. On Line 42, you subtract the amount listed on line 41 (ending inventory) from line 40 (all inventory costs). The result is the amount you claim as your cost of goods deduction.

 

Because of the potential complexity in managing inventories, especially manufacturing inventories, many eBay entrepreneurs use software such as QuickBooks or Microsoft Office Accounting in conjunction with spreadsheets or auction management software

[1904 Comics]

again, I can't thank you all enough for this info. I am working on the number crunching tonight using all the helpful advice everyone has given me.

[Sensei Ryan]

Okay - I'm in the same boat now and have some very general questions that hopefully someone can help me.

 

If I received a 1099 k and grossed around $20,000

 

Does this mean I'll owe rough $6,000 out of this (around 30%)?

 

Also, can I take out the 'eBay' fees as a deduction from that total + any of the shipping costs/returns that I had to pay back to buyers?

 

Sorry for the questions - I'm about to have a meltdown trying to figure this out. Thank you.

 

 

[1904 Comics]

 

Also, can I take out the 'eBay' fees as a deduction from that total + any of the shipping costs/returns that I had to pay back to buyers?

 

 

from what I understand from everybody's help: eBay fees, CGC fees, CCS pressing fees, PayPal fees, supplies associated with the comics, all must have an underlying trait: it must be sold to apply credit.

 

otherwise, if its something in your inventory, you can't write that off. theres a downloadable link on paypal to get this data, and eBay monthly summarizes your accounts fees. the eBay phone support was awfully slow (just FYI)

 

Also, TurboTax is really supportive in guiding you step-by-step for someone like me who doesnt have an accountant nor the resources to acquire one. I'm going through the steps and it's walking me very user friendly to ensure all aspects are correct

[chrisco37]

They would seriously visit me in my small condo with my little podunk side business?

 

What a tremendous waste of cash that would be for them.

 

I don't understand that at all.

 

Peace,

 

Chip

 

IF you've made enough income through Paypal to trigger the $20,000 and 200 transactions threshold, and you start claiming everything as "business use" and you're working out of your home, then yes, they would come to your small condo to check your records for your "little podunk" side business.

 

That's why it's important for people who sell lots of merchandise, or high dollar sales, to report everything properly. Most people don't have a clue how to do it, that's why it's recommended to have an accountant look over everything for you.

 

You may think you're a small fry, but to the IRS, you'll just look like a victim to them if you're not prepared.

 

If you make enough on PP sales to break the 20k threshold and don't have an accountant, you're not doing yourself any favors.

 

Get one. You can even write them off the following year on your taxes as part of your business expense.

[shadroch]

Accountants are like advertising. They don't cost, they pay. My situation is a good deal more complicated than a normal tax return, but my accountant sets me up with a diary to fill out and ends up saving me thousands each year. I'm amazed by the legit deductions he is constantly finding. After a decade or so, you would think I would have a handle on them, but he pulls new ones out all the time.

The one constant is he insists I don't deduct for a home office.

[Shrevvy]

Okay - I'm in the same boat now and have some very general questions that hopefully someone can help me.

 

If I received a 1099 k and grossed around $20,000

 

Does this mean I'll owe rough $6,000 out of this (around 30%)?

 

Also, can I take out the 'eBay' fees as a deduction from that total + any of the shipping costs/returns that I had to pay back to buyers?

 

Sorry for the questions - I'm about to have a meltdown trying to figure this out. Thank you.

 

 

No, it does not mean you owe $6k on the $20k in "revenue." The IRS taxes on income which is revenue less expenses. See my example a couple posts above.

 

Expenses are anything that would be related to selling including, but not limited to, cost of product sold, eBay fees, Paypal fees, CGC fees, bags, boards, convention admission (to acquire inventory or make sales), milage to and from cons, safe depsoit boxes (if used to store inventory), postage, bank fees, etc.

 

I posted in another thread in Dec with some answers as well;

http://boards.collectors-society.com/ubbthreads.php?ubb=showflat&Main=322317&Number=7234661#Post7234661

 

Also, tax rates are based on income. The 28% bracket starts at $146,400 for married couples ($158,500 including the standard deduction) and $87,850 for singles ($93,950 with standard deduction). Your marginal rate can be higher or lower depending on your adjusted income.

 

If this next statement is political (it's not meant to be), I will delete it. Anyone getting these 1099s that are not part of an ongoing business should write their reps. The noose will get tighter in the interest of the "greater good" and the amount which triggers 1099s will gradually be reduced. Collecting items involves upgrading, with buying and selling being a large part of collecting. Many people have or will be caught in this net that should not be.

[shadroch]

If you sell a book you bought for $5,000 for $8,000, you think that should be a tax free transaction as long as you upgraded to a better copy? Buying and selling is also part of investing in stocks, art, automobiles and real estate. Why should comics be different?

 

[Shrevvy]

If you sell a book you bought for $5,000 for $8,000, you think that should be a tax free transaction as long as you upgraded to a better copy? Buying and selling is also part of investing in stocks, art, automobiles and real estate. Why should comics be different?

 

No, I didn't say that. In the terms of the law, they should pay an appropriate tax rate on gains less qualified expenses (collectibles are treated differently though).

 

What I said is that many have or will be caught in this web that do not need to be. Basically, the IRS is requiring everyone receiving a 1099 to prove their innocence. It was already law to report the income of the sale you reference above ($3k gain). What will happen is many people who ultimately will not be taxed (because once the revenue is fully burdened with costs, there will be no income) will have to go through the stress and costs of figuring out that they owe nothing. Many will overpay either through fear or ignorance.

 

In the eyes of the IRS, comics are different (as are art and autos - assuming you meant collectible autos - just try deducting the cost of your 5 year old Honda ). The IRS gets its cake and eats it too. Whereas you can deduct losses from stocks or bonds against your income, you cannot do so with collectibles. If you exit the hobby and sell your collection for $100k, but purchased it for $150k - you're out of luck. No tax recognition of that loss. You may carryover that loss to deduct against future collectible gains though. Collectibles also do not qualify for the same long term cap gains. They are taxed at higher rates than stocks or bonds.

 

Trying to keep it non-political, I am not commenting on the differing treatment of collectibles by the IRS. I am merely stating the differences.

 

As stated before, I am not a tax accountant and tax law changes frequently. shadroch has given good advice to seek the help of an accountant.

 

 

[Sensei Ryan]

Okay - I'm in the same boat now and have some very general questions that hopefully someone can help me.

 

If I received a 1099 k and grossed around $20,000

 

Does this mean I'll owe rough $6,000 out of this (around 30%)?

 

Also, can I take out the 'eBay' fees as a deduction from that total + any of the shipping costs/returns that I had to pay back to buyers?

 

Sorry for the questions - I'm about to have a meltdown trying to figure this out. Thank you.

 

 

No, it does not mean you owe $6k on the $20k in "revenue." The IRS taxes on income which is revenue less expenses. See my example a couple posts above.

 

Expenses are anything that would be related to selling including, but not limited to, cost of product sold, eBay fees, Paypal fees, CGC fees, bags, boards, convention admission (to acquire inventory or make sales), milage to and from cons, safe depsoit boxes (if used to store inventory), postage, bank fees, etc.

 

I posted in another thread in Dec with some answers as well;

http://boards.collectors-society.com/ubbthreads.php?ubb=showflat&Main=322317&Number=7234661#Post7234661

 

Also, tax rates are based on income. The 28% bracket starts at $146,400 for married couples ($158,500 including the standard deduction) and $87,850 for singles ($93,950 with standard deduction). Your marginal rate can be higher or lower depending on your adjusted income.

 

If this next statement is political (it's not meant to be), I will delete it. Anyone getting these 1099s that are not part of an ongoing business should write their reps. The noose will get tighter in the interest of the "greater good" and the amount which triggers 1099s will gradually be reduced. Collecting items involves upgrading, with buying and selling being a large part of collecting. Many people have or will be caught in this net that should not be.

 

Shrevvy,

Thank you so much for the help! I have a couple of other questions for you…

 

If you can count in your expenses the cost of an item sold, for example - say I bought a book for $10, sold it for $5 - is it possible to count that item's original expense as a deductible toward the 1099K total sales (to prove I didn't take in that much profit)?

 

Also, what if the total amount of your expenses exceeds the amount on your 1099K- is it possible, then, that you wouldn't be paying anything extra toward your taxes? I hope this make sense. If you can prove the cost of your expenses, say sales receipt or an invoice via email, would these costs be considered 'expenses' and therefore deductible?

[Shrevvy]

 

Shrevvy,

Thank you so much for the help! I have a couple of other questions for you…

 

If you can count in your expenses the cost of an item sold, for example - say I bought a book for $10, sold it for $5 - is it possible to count that item's original expense as a deductible toward the 1099K total sales (to prove I didn't take in that much profit)?

 

 

Yes, you can. Not everything sold will be sold at a profit. A loss on one comic can offset a profit on another to the extent that you have profits. But, you won't be able to take advantage of an overall loss - see below.

 

 

Also, what if the total amount of your expenses exceeds the amount on your 1099K- is it possible, then, that you wouldn't be paying anything extra toward your taxes? I hope this make sense. If you can prove the cost of your expenses, say sales receipt or an invoice via email, would these costs be considered 'expenses' and therefore deductible?

 

Yes, it is possible for your expenses to exceed your 1099 "revenue" which would result in a loss. In that case, you would not pay any additional tax. However, and this is where the IRS gets you, you cannot use that loss to offset your income like you can other investment vehicles (stocks and bonds). You may carryover that loss into later years to offset collectible profits you may have in the future.

 

Yes, documented sales receipts would prove your expenses. You can use emails, Paypal receipts, eBay auction invoices, credit cards receipts, etc. However, it is better to seek the advice of a tax professional.

 

[bushwood]

The best tool that I use is Outright. It cost $10 a month and runs through eBay and connects to your PayPal account.

 

It keeps track of EVERYTHING that you sell on eBay, buy on eBay, PayPal money coming and going, fees, etc.

 

You have to do a little work of adding in your costs of goods, mileage, etc. but if you want something that just runs in the background it's the best $10 you can spend.

 

If you think $10 is a rip-off then let it tell you how much you pissed away with eBay and PayPal fees.