Net Operating Losses
- Q: "Please address the issue of net operating loss (NOL) for business. Can bad years be safely woven in with better ones? Is this a red flag? Should losses be carried forward?"
- Q: "Should the cost of postage be deducted, or should it be incorporated into the item cost for cost of goods sold?"
- Sales Taxes
- Q: "If I pay sales taxes to buy goods at retail and then resell them on eBay for an even higher price, can I deduct the sales taxes I pay as a business expense?"
- Shipping and Handling Fees
- Q: "If I charge my buyers shipping and handling fees, how do I account for that on Schedule C?"
- Q: "If I charge more for shipping than it actually cost me, how do I report this on my tax return?"
Q: "Please address the issue of net operating loss (NOL) for business. Can bad years be safely woven in with better ones? Is this a red flag? Should losses be carried forward?"
A: Generally, if you have an NOL for a tax year ending in 2005, you must carry back the entire amount of the NOL to the two tax years before the NOL year (the carryback period), and then carry forward any portion of the NOL you cannot use for up to twenty years after the NOL year (the carryforward period). You can, however, choose not to carry back the NOL and only carry it forward. See IRS Publication 536 for more specific information.
Although taking net operating losses is certainly not an audit trigger, make sure you're doing it right. If you find out next year that you should have taken an NOL in 2005, you will have to amend your 2005 tax return to claim the deduction retroactively, and that just might wake some "sleeping dogs" at the local IRS office.
Q: "Should the cost of postage be deducted, or should it be incorporated into the item cost for cost of goods sold?"
A: Postage cannot be deducted right away but must be added to your cost of goods sold and deducted from the final sales price (the winning bid in your eBay auction) when the item is sold.
Q: "If I pay sales taxes to buy goods at retail and then resell them on eBay for an even higher price, can I deduct the sales taxes I pay as a business expense?"
A: Taxes you have to pay to sell and buy on eBay (especially sales and use taxes) may be deductible if your buyer has not reimbursed you for them on top of the purchase price or winning bid amounts. Taxes that are deductible include:
• Inventory or "floor" taxes (if imposed by your state) on the year-end value of your eBay inventory
• One-half of self-employment taxes you pay (note, however, that you take that deduction on your Form 1040, not on your schedule C)
• Personal property taxes on equipment and supplies (if imposed by your state)
• Sales taxes you pay when you buy goods for resale on eBay
• Sales taxes you pay when you sell goods on eBay (unless you are reimbursed for these sales taxes by the buyer, in which case it is a wash—you don't deduct them, nor do you report the sales tax amount as income)
• Telephone service taxes (for a dedicated business telephone line)
• Use taxes (paid to your state when you buy items from out-of-state vendors for use in your business—not for resale—and when you don't pay sales taxes)
Shipping and Handling Fees
Q: "If I charge my buyers shipping and handling fees, how do I account for that on Schedule C?"
A: Most eBay sellers charge their buyers a shipping and handling fee precisely to cover the costs of postage, packaging materials, and other selling expenses. If you charge your eBay buyers a shipping and handling fee, then you cannot deduct the cost of these items, nor is the shipping and handling fee treated as income to you. It's a total wash, as if you took the buyer's shipping and handling fee out of one hand and paid it to the supplier with the other hand at the same moment.
For example, you buy $100 worth of inventory for sale on eBay, plus $10 for a cardboard box that the item fits in. You then sell the inventory on eBay for $100, plus a $10 shipping and handling fee to cover the cost of the box. You would include the $10 cardboard box in the cost of goods sold and report $100 ($210 minus the $100 item cost minus the $10 box) as income on your Schedule C, paying taxes on that amount. The $10 shipping and handling fee would offset the $10 you added to your cost of goods sold for the box.
Q: "If I charge more for shipping than it actually cost me, how do I report this on my tax return?"
A: This is not a recommended practice for any eBay seller. Not only might it violate eBay policies and get you kicked off eBay, but it might also violate consumer protection laws in your home state. If winning bidders find out you are inflating their winning bid by overcharging for postage or shipping materials, you are almost certain to generate negative feedback on eBay's Feedback Forum—not a good thing, especially for new sellers.
If you do engage in this practice, you will have to pay taxes on the excess shipping fees, which are income to you. The proper approach when filling out your tax return—and what the IRS would prefer you to do—is to total all the shipping fees you receive from winning bidders on eBay and report the total as Other Income on Schedule C. Then, total up your actual postage and shipping costs and report the total as deductible Materials and Supplies on Schedule C. If you do it right, the net income subject to tax is the total amount of your excess shipping and handling fees, which is where you should end up.
Be forewarned: If you are ever sued by an eBay buyer (or eBay itself) for fee gouging, the first thing a lawyer will ask to see are copies of your Schedule C.