Some time ago, I answered a question posed on eBay Wiki and I've
answered several similar questions since in the eBay Auction Listings
forum. Since this seems to be a popular topic, I decided to add my Wiki
answer to this website.
Basically, the question concerned whether
the eBay member should report profits on his income tax return from what
he described as a hobby. Here is my answer.
You raise some important issues.
First, you say this is a hobby. The IRS
basically says hobby revenue must be declared, but that related costs and
expenses are not deductible.
Define the term "revenue" as the cash,
and market value of goods or services, you receive in exchange for your
merchandise (that's right, even the market value of bartered goods and
services received must be declared). Profit is what's left over (if
anything) after deducting costs and expenses.
If you want to deduct costs and expenses you
need to file a Schedule C with your 1040,
showing all revenue, costs, and expenses related to your
for-profit going concern. Define the term "for-profit going concern"
to mean a business operating with a profit motive and the intention to
continue operating into the foreseeable future.
Even a part-time business can meet the definition of a for-profit going
concern and become eligible for Schedule C treatment.
Individual costs and expenses may be subject to certain tests. Those
that pass such tests may be apportioned or limited by maximums or
percentages.
Whether your revenue-producing activity is determined by the IRS to
be a for-profit going concern or a hobby, the IRS says you MUST claim
the revenue on your 1040. The difference is whether
the IRS allows you to claim your costs and expenses to offset your
revenue (and that can be a HUGE difference).
To get more information, consult expert guides such as those prepared
by J.K. Lasser. You can also visit the IRS website at
www.irs.gov
and click on the resources shown on this page and elsewhere on this
website.
You may ALSO have to collect and remit sales tax
within your state taxation framework, in which case you may be
required to get a state sales tax certificate (and
you may also have to report for state income tax). Consult your
state comptroller's website or contact them directly for additional
information. They may have an 800 number for you to call. They may also
have a local office you can visit.
Meanwhile, consider the following 3 rules:
RULE #3: Each taxpayer's situation is different. You should
consult a paid professional tax preparer such as a
tax accountant, tax attorney, or enrolled agent.
RULE #2: Always report all revenue you receive
on your 1040, then aggressively pursue all deductions to which
you are legally entitled.
RULE #1: Free advice is often worth what you pay
for it.
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