IRS PayPal questions!? Help Us!!

[garpike]

Originally Posted by jlzinck

You should also expense anything else used in the business if it's not included in the 10%

P1 $20K
P2 18K+ if you paid for the shipping/supplies etc out of your cut.

OMG...That is cool. I never thought about that.

Now how much documentation will I need to send in with my taxes to prove all this stuff?

ALSO: Thank you guys so very much for this info, I absolutely love this board and its members.

[momosgarage]

Sorry I couldn't follow the ramblings you posted.

Bottom line people- PAY YOUR FREAKING TAXES

Umm...OK

Let me paraphrase his points for you (this was not my original post, but was something I also thought of) and yes I understand how taxes are paid on "profits".

point 1 - if someone sells $20,000+ worth of household goods "at a loss" over the course of a year and is not a regular seller on ebay (basically a one time big 'monty hall' sale). What do they need to do? Considering that they likely will not have recipts for said $20,000+ worth of stuff accumulated over a lifetime. Do they pay taxes on items they took a loss on and were used, just because they hit the 1099 threshold?

point 2 - just because the federal government doesn't say you owe taxes due to losses, does not mean the state will accept the same conclusion. So, once again a person sells $20,000+ worth of household goods "at a loss" over the course of a year, but despite not owing federal taxes they can possibly still owe state taxes simply beacause the state says so.

What is a person to do in these to above scenarios? Since in the above cases it will not be someone running a business, even as a sole proprietor. I say this because selling a pile of stuff one year on ebay that was sitting in your house, does not meet the IRS's checklist for what constitutes a business.

If I am only getting $2,000 there is no way I should be taxed on the $20,000.

That was the point of the gambling losses example. The IRS can say you owe just on your $2000 profit, but the State can say different, even with proof of what the IRS said. Also who says the IRS won't want taxes for the whole $20,000. What proof do you have otherwise if audited? You won't have a shoebox full of recipts to prove the original cost of the items.

You should also expense anything else used in the business if it's not included in the 10%

This also doesn't address the IRS discounting write-off's for losses by simply saying ebay is a "hobby" and not a business. Hence the: "IRS's checklist for what constitutes a business"

[auctionjmm]

I just noticed something VERY interesting. I went into Paypal to look at my sales reports (I didn't know they existed prior to reading this thread.) Anyway, my sales report summary said that I had $1,400 in sales for January, but when I opened the detailed report I noticed I actually had $4,500 in sales, but Paypal deducted all of my debits (debit card usage, eBay payments, withdrawals by ATM, etc.)

Anyway, it appears that Paypal is calculating deductions for us, and only reporting the net sales after deductions. Could this be a loop hole? If you use your Paypal account to pay bills and off set your monthly sales, will Paypal deduct those and only report your net sales? This doesn't make sense to me as it would be a HUGE loophole, but I can clearly see in my summary detail that Paypal is only counting my net sales right now. Anyone know enough about this to clear the air?

[cking]

So let me get this straight, and please take into account I did not read the whole thread. I can buy a box of cards for lets say $100 dollars. If I sell 1 card out of the box for lets say $10 dollars,I have to pay income tax on that $10 dollars? If that is the case that is messed up. Screw them let them come to my house. I will let Brutus Attachment 36805 answer the door.Good luck Mr. IRS man you are gonna need it

[auctionjmm]

Originally Posted by cking

So let me get this straight, and please take into account I did not read the whole thread. I can buy a box of cards for lets say $100 dollars. If I sell 1 card out of the box for lets say $10 dollars,I have to pay income tax on that $10 dollars? If that is the case that is messed up. Screw them let them come to my house. I will let Brutus Attachment 36805 answer the door.Good luck Mr. IRS man you are gonna need it

No not at all. You really should read the thread.

[cking]

Originally Posted by auctionjmm

No not at all. You really should read the thread.

I know I should,this is probably information I should have.

[auctionjmm]

Originally Posted by cking

I know I should,this is probably information I should have.

It scared me enough to get an Ohio vendor's license! My Paypal activity is gonna have red flags all over it if I don't take care of things now. Luckily I've only been breaking wax for 8 months so I have enough documentation if they decide to ask me why my "business" suddenly came out of nowhere. But I lost so much money on Topps Chrome presales that they'll probably stay away from me anyway cause they wouldn't want a re-file to go in my favor lol.

[momosgarage]

Originally Posted by momosgarage

Umm...OK

Let me paraphrase his points for you (this was not my original post, but was something I also thought of) and yes I understand how taxes are paid on "profits".

point 1 - if someone sells $20,000+ worth of household goods "at a loss" over the course of a year and is not a regular seller on ebay (basically a one time big 'monty hall' sale). What do they need to do? Considering that they likely will not have recipts for said $20,000+ worth of stuff accumulated over a lifetime. Do they pay taxes on items they took a loss on and were used, just because they hit the 1099 threshold?

point 2 - just because the federal government doesn't say you owe taxes due to losses, does not mean the state will accept the same conclusion. So, once again a person sells $20,000+ worth of household goods "at a loss" over the course of a year, but despite not owing federal taxes they can possibly still owe state taxes simply beacause the state says so.

What is a person to do in these to above scenarios? Since in the above cases it will not be someone running a business, even as a sole proprietor. I say this because selling a pile of stuff one year on ebay that was sitting in your house, does not meet the IRS's checklist for what constitutes a business.



That was the point of the gambling losses example. The IRS can say you owe just on your $2000 profit, but the State can say different, even with proof of what the IRS said. Also who says the IRS won't want taxes for the whole $20,000. What proof do you have otherwise if audited? You won't have a shoebox full of recipts to prove the original cost of the items.



This also doesn't address the IRS discounting write-off's for losses by simply saying ebay is a "hobby" and not a business. Hence the: "IRS's checklist for what constitutes a business"

Any thoughts on the above?

[raiderguy10]

Originally Posted by momosgarage

Umm...OK

Let me paraphrase his points for you (this was not my original post, but was something I also thought of) and yes I understand how taxes are paid on "profits".

point 1 - if someone sells $20,000+ worth of household goods "at a loss" over the course of a year and is not a regular seller on ebay (basically a one time big 'monty hall' sale). What do they need to do? Considering that they likely will not have recipts for said $20,000+ worth of stuff accumulated over a lifetime. Do they pay taxes on items they took a loss on and were used, just because they hit the 1099 threshold?

point 2 - just because the federal government doesn't say you owe taxes due to losses, does not mean the state will accept the same conclusion. So, once again a person sells $20,000+ worth of household goods "at a loss" over the course of a year, but despite not owing federal taxes they can possibly still owe state taxes simply beacause the state says so.

What is a person to do in these to above scenarios? Since in the above cases it will not be someone running a business, even as a sole proprietor. I say this because selling a pile of stuff one year on ebay that was sitting in your house, does not meet the IRS's checklist for what constitutes a business.



That was the point of the gambling losses example. The IRS can say you owe just on your $2000 profit, but the State can say different, even with proof of what the IRS said. Also who says the IRS won't want taxes for the whole $20,000. What proof do you have otherwise if audited? You won't have a shoebox full of recipts to prove the original cost of the items.



This also doesn't address the IRS discounting write-off's for losses by simply saying ebay is a "hobby" and not a business. Hence the: "IRS's checklist for what constitutes a business"

Originally Posted by momosgarage

Any thoughts on the above?

I was not really looking at this because it was long and the points have been touched upon earlier in the thread, but I can again and I'll expand my explanation to show how to do it.

Point 1 - You aren't going to sell $20,000 worth of "household goods" throughout the year. Let's be realistic. 99 Times out of 100, if you have $20,000 in sales it's not personal property; you'd be a business. That's why paypal (IMO) got away with the 200/$20,000 limitation where it's $600 everywhere else.

That being said, let's say you have a rare instance where you sell a car on ebay, or you get in trouble and have to sell your personal belonings to pay for medical bills. Personal property is not taxable. If I sell my clothes, there is no tax associated with that sale. You will get a 1099 from paypal. You will have to file a schedule c, but there is a spot in your software that will say "if you are reporting different income than what is on your 1099, put your reason here.

Point 2 - Same scenario.

Your take on hobby vs. business was also addressed earlier. You are in essence being penalized by having it classified as a hobby. You want it to be classified as a business so you can write off expenses, and you aren't subject to 2% limitation. If it's business, you take deductions on schedule C. If it's a hobby you take your expenses on schedule A - misc itemized deductions and only get the deductions if 1) you itemize, and 2) your misc itemization exceed 2% of your AGI. As far as whether you are a business or a hobby, there is no rhyme or reason - each case is separate. One person it can be a business, the next a hobby. The burden of proof is on your to show it's a business, not a hobby and not on the IRS. You have to prove your MAIN REASON is to make $, and that you don't get too much personal enjoyment on the side.

[raiderguy10]

Originally Posted by raiderguy10

I am a CPA who prepares tax returns.

You are responsible to claim income on ALL receipts regardless if you receive a 1099 or not. If you make over $20,000 and have over 200 transactions on Paypal they will send you a 1099. You are required to report ANY amount of income and you are responsible for any income you make, whether it's below $20,000 or not.

Lots of people will tell you just to claim it's a hobby. That doesn't help you any either. You still have to claim hobby income, and your expenses are only deductible if 1) you itemize your deductions, and 2) they are subject to a 2% AGI limitation floor. You are better off having it be a business than being a hobby because most people won't be allowed to claim hobby deductions.

Originally Posted by raiderguy10

If you are a sole proprietorship, and if you can legitimately prove to the IRS that you shouldn't classify it as a hobby, then yes your statement is correct. Getting an EIN for a sole proprietorship can go a long way in proving that (and it's free). But the burden of proof is on you to show it wasn't a hobby (ie you don't get personal pleasure from doing it on top TRYING to make a profit). You can't do it trying to create a tax shelter.

Originally Posted by raiderguy10

If you sell one card you don't. A tv is tangible personal property. Like a car is not subject to taxation. If you have multiple sales and transactions you become a car dealer and report income accordingly. Its a case-by-case scenario. Its not black and white

These were posted earlier and should help a little.

[momosgarage]

You aren't going to sell $20,000 worth of "household goods" throughout the year. Let's be realistic. 99 Times out of 100, if you have $20,000 in sales it's not personal property; you'd be a business.

Personal property is not taxable. If I sell my clothes, there is no tax associated with that sale.

Thanks for clarifying, but its highly probable that anyone with a professional income will have $20,000+ worth of goods that can be sold sitting in the house. So essentially you are saying, as long as its a one time thing on a single return (not multi year) a person can file the proceeds of the sale on a schedule C as "personal property" without any recipts or proof of such? As was stated in the first example I posted, I could sell a spare car, a treadmill and other sporting equipment like bikes etc and easily hit the $20,000+ mark. I am sure you could too.

The burden of proof is on your to show it's a business, not a hobby and not on the IRS. You have to prove your MAIN REASON is to make $, and that you don't get too much personal enjoyment on the side.

How would one go about doing that? In my experience dog breeders run into this all the time. They have an EIN, paperwork, noted expenses, recipts, etc and IRS says "no write off, this is a hobby". Seems to me the IRS would skew this in thier favor during an audit and say most of the time that ebay is a hobby, so no deductions. My guess would be that infrequent, high dolar ebay sellers are in the same boat as high dollar, infrequent dog breeders.

Plus, you didn't address the State vs Federal issue with losses, where one entity says, yes you can deduct losses, yet the other says, no you can't decuct.

[Nicnac]

Originally Posted by saintsfan67

Now they are going after kool-aid stands and garage sells...If you buy from a company taxes are paid. If you buy a box the taxes have been paid on the cards,they are yours to do with whatever you please. Keep the receipt from BO. It looks like the 2000 chaos all over again!!

Well since the government will never go after the bank executives who ripped off trillions of dollars, they have to penny pinch the middle class. It seems to be a mantra in the US these days. %^$& the peasants.

[raiderguy10]

Originally Posted by momosgarage

How would one go about doing that? In my experience dog breeders run into this all the time. They have an EIN, paperwork, noted expenses, recipts, etc and IRS says "no write off, this is a hobby". Seems to me the IRS would skew this in thier favor during an audit and say most of the time that ebay is a hobby, so no deductions. My guess would be that infrequent, high dolar ebay sellers are in the same boat as high dollar, infrequent dog breeders.

Plus, you didn't address the State vs Federal issue with losses, where one entity says, yes you can deduct losses, yet the other says, no you can't decuct.

As I eluded to earlier, simply having an EIN doesn't qualify you as being a business. There are a number of factors that get considered when you determine a business/hobby. There is no black and white; it's a case by case scenario. For most here, they have a PC of sports cards/memorabilia and they also buy/sell a lot as well. It's going to be pretty hard to pass it off as a business if the IRS comes to your house and you have autographed jerseys all over the place; EIN or no EIN.

There also is nothing to address on the State side. I can't speak on behalf of states as each has their own tax code. The starting point is always the same - taxable income at the federal level. They each have a series of adjustments to make from that starting point to arrive at state taxable income. I'm not up to speed on the 50 different states' tax codes - and there are 9 states that don't even have an income tax. I guess for the state question you need to consult a CPA in your state to ask about their specific adjustments.

[momosgarage]

There is no black and white; it's a case by case scenario.

Thanks for recapping this point.

But for the other item where someone cleans house one time on ebay and has $20,000+ gross sales.

You essentially are saying, as long as its a one time thing on a single return (not multi year) a person can file the proceeds of the sale on a schedule C as "personal property" without any recipts or proof of such?

[raiderguy10]

Originally Posted by momosgarage

Thanks for recapping this point.

But for the other item where someone cleans house one time on ebay and has $20,000+ gross sales.

You essentially are saying, as long as its a one time thing on a single return (not multi year) a person can file the proceeds of the sale on a schedule C as "personal property" without any recipts or proof of such?

If you are able to prove it's personal property and you file your schedule C with the 1099 reported by paypal and give the explanation why it's different, theoretically yes taht is correct. I'm not coming out and saying the IRS won't penalize you because I am not going to go on record saying they won't. Personal property is not a taxable transaction, but the burden of proof is on you to prove it was personal property. If you prove that, then yes your assessment would be correct.

[nephinfan]

This is probably a dumb question, but I don't care. I've been following this thread as it gets updated & my question is this:

How are cards NOT considered personal property? What's the difference between selling online vs. selling at a garage sale?

(I've already paid taxes on them when I bought them.)

[raiderguy10]

Originally Posted by nephinfan

This is probably a dumb question, but I don't care. I've been following this thread as it gets updated & my question is this:

How are cards NOT considered personal property? What's the difference between selling online vs. selling at a garage sale?

(I've already paid taxes on them when I bought them.)

Personal use tangible property is not taxable.

You paid sales tax, which is a completely different tax than income taxes.

Theoretically, personal use property will be considered a capital asset. The kicker is you are not allowed to deduct a capital loss from personal use property. You need to report a gain as a capital gain - however because of two key factors there usually isn't tax associated with the transaction of gains on personal use property.

1) Capital gains are given preferential tax treatments. So if you are a 15% or less marginal rate taxpayer you have no tax associated with capital gains.

2) Personal use property nearly never is sold for more than you paid for it. How often can you sell clothes you've worn for two years, a car you've driven for 4 years, a table your kids have colored on for 18 years, etc. for more than you paid? Next to never. But in the rare case where you sell personal use property for more than you paid for it - then yes you would have to report a gain associated with the sale. It happens so little and is so far a few between that in the industry is almost common knowledge that personal use property is not taxable. But I guess there could be the rare case where you skidded up undies and wife beaters are worth more when you sell it than when you bought it

[nephinfan]

Originally Posted by raiderguy10

Personal use tangible property is not taxable.

You paid sales tax, which is a completely different tax than income taxes.

That's true, didn't think to separate that out.

As far as the personal use part:

I "use" my magazines to read & educate myself, just as I can say I "use" my cards to read & educate myself. I just don't see how the IRS can single out some of these things when "personal use" can be such a vague description. Maybe it just depends on how technical a person gets. The whole idea just frustrates me. Next, we'll all have to fill out forms before having a garage sale. Why doesn't the government go pick on the millionaires for a while.

(I know, I'm really reaching here, but when is enough actually enough?)

By the way, raiderguy, thanks for all the help you've been providing on this thread. I know there are a lot of us that appreciate it.

[raiderguy10]

Originally Posted by nephinfan

That's true, didn't think to separate that out.

As far as the personal use part:

I "use" my magazines to read & educate myself, just as I can say I "use" my cards to read & educate myself. I just don't see how the IRS can single out some of these things when "personal use" can be such a vague description. Maybe it just depends on how technical a person gets. The whole idea just frustrates me. Next, we'll all have to fill out forms before having a garage sale. Why doesn't the government go pick on the millionaires for a while.

By the way, raidersguy, thanks for all the help you've been providing on this thread. I know there are a lot of us that appreciate it.

LOL good luck making that argument. That made my day right there.

I expanded on my statement as well above.

The reason the gov't doesn't come to garage sales is because it's personal use property. Who on Earth would buy a used toaster if they could get a new one for the same price? It's a used toaster, and it sells for less for a reason - so it's a win-win for the buyer/seller. The IRS knows you sold your toaster for less than you purchased it. Because you can't claim losses on personal use property - it is ignored.

You use your car to get you to work. You use your clothes to keep you warm. What do you "use" your Sam Bradford autographed football for? If it's personal enjoyment, it's insignificant because you will hold it forever and won't have to worry about a sale. But are you holding it hoping it goes up in value? I'd venture to say that most of us here are.....

[nephinfan]

Originally Posted by raiderguy10

LOL good luck making that argument. That made my day right there.

I expanded on my statement as well above.

The reason the gov't doesn't come to garage sales is because it's personal use property. Who on Earth would buy a used toaster if they could get a new one for the same price? It's a used toaster, and it sells for less for a reason - so it's a win-win for the buyer/seller. The IRS knows you sold your toaster for less than you purchased it. Because you can't claim losses on personal use property - it is ignored.

You use your car to get you to work. You use your clothes to keep you warm. What do you "use" your Sam Bradford autographed football for? If it's personal enjoyment, it's insignificant because you will hold it forever and won't have to worry about a sale. But are you holding it hoping it goes up in value? I'd venture to say that most of us here are.....

LOL. Yeah, like I said, I was reaching....and really just trying to make a point more than anything. So, are you saying that if you can show that you've lost money on the sale, such as the used toaster example, you can take it as a loss and not get taxed? I think that's the way I've been understanding it in this thread so far. However, if that is the way they see it, does that apply only to federal or does that also include the way the state would look at it?

[raiderguy10]

Originally Posted by nephinfan

Lol. Yeah, like I said, I was reaching....and really just trying to make a point more than anything. So, are you saying that if you can show that you've lost money on the sale, such as the used toaster example, you can take it as a loss and not get taxed? I think that's the way I've been understanding it in this thread so far. However, if that is the way they see it, does that apply only to federal or does that also include the way the state would look at it?

I am saying that if it is personal use property. I am NOT saying that if it is a hobby. Because of the limitations mentioned above, hobby expenses most of the time are not deductible. And you also cannot generate a loss from a hobby. So you basically have 4 options to figure out what your income is:

1) Personal use - capital gain/loss. Can't claim a loss, and hardly ever can generate a gain. Cards/Memorabilia are not personal use property, but personal use property was asked about earlier in the thread so I addressed it here

2) Hobby - claim all income. Losses are itemized and can only take them if 1) you file schedule A and itemize your deductions, and 2) your hobby expenses exceed 2% of your AGI. Also cannot generate a loss, so you can only claim expenses up to hobby income earned.

3) Business - Report all gains/losses on schedule C. No income/loss limitations for business

4) Investment - Gain/losses are capital gains. Capital gains get preferential tax treatment (15% maximium tax rate) and losses can be deducted $3,000 in the current year and anything above that needs to be carried forward to future years (after being netted with other capital gains/losses)

[nephinfan]

Originally Posted by raiderguy10

I am saying that if it is personal use property. I am NOT saying that if it is a hobby. Because of the limitations mentioned above, hobby expenses most of the time are not deductible. And you also cannot generate a loss from a hobby. So you basically have 4 options to figure out what your income is:

1) Personal use - capital gain/loss. Can't claim a loss, and hardly ever can generate a gain. Cards/Memorabilia are not personal use property, but personal use property was asked about earlier in the thread so I addressed it here

2) Hobby - claim all income. Losses are itemized and can only take them if 1) you file schedule A and itemize your deductions, and 2) your hobby expenses exceed 2% of your AGI. Also cannot generate a loss, so you can only claim expenses up to hobby income earned.

3) Business - Report all gains/losses on schedule C. No income/loss limitations for business

4) Investment - Gain/losses are capital gains. Capital gains get preferential tax treatment (15% maximium tax rate) and losses can be deducted $3,000 in the current year and anything above that needs to be carried forward to future years (after being netted with other capital gains/losses)

Got it! That really helps, thanks! So, if I only generate MAYBE 1-2K per year, but spend probably twice that if not more, which category would you suggest? I definitely buy more than I sell & really only sell to help with the funds to buy more.

[raiderguy10]

Originally Posted by nephinfan

Got it! That really helps, thanks! So, if I only generate MAYBE 1-2K per year, but spend probably twice that if not more, which category would you suggest? I definitely buy more than I sell & really only sell to help with the funds to buy more.

9 times out of 10 it's a hobby. Do you have a PC? Do you have memorabilia on display? Think of it this way. If the IRS comes to your house is there something that will lead them to believe you get personal enjoyment from sports cards? That's the easiest way to think about it.

[nephinfan]

Originally Posted by raiderguy10

9 times out of 10 it's a hobby. Do you have a PC? Do you have memorabilia on display? Think of it this way. If the IRS comes to your house is there something that will lead them to believe you get personal enjoyment from sports cards? That's the easiest way to think about it.

Yes, I actually have a whole room dedicated to the displays. I take it that could classify it as a hobby then? Is that what they would need to see if they came calling?

[raiderguy10]

Originally Posted by nephinfan

Yes, I actually have a whole room dedicated to the displays. I take it that could classify it as a hobby then? Is that what they would need to see if they came calling?

Hobby is the conservative approach. When in doubt, with the IRS it's always better to be conservative than even risk them calling....