Shipping and Packaging Materials

Q: "Should the cost of shipping materials (such as plastic peanuts and duct tape) be deducted, or should it be incorporated into the item cost for cost of goods sold?"

A: Shipping materials, such as boxes, peanuts, and bubble pack, used for wrapping merchandise, 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.

Start-up Expenses

Q: "What expenses qualify as business start-up costs?"

A: Start-up costs are business expenses you have before you start your business selling on eBay. General preliminary costs, such as researching whether you want to sell on eBay, are not deductible, but conventional expenses of setting up your eBay selling business are deductible. For example:

• Legal and accounting costs of getting a tax ID number and/or forming a limited liability company (LLC)

• Office stationery and business cards

• Preopening advertising (such as in the Yellow Pages)

• Rent, telephone, and other expenses you incur before you make your first sale on eBay

Under current IRS rules, the first $5,000 of start-up expenses is fully deductible in the year you incur them. Beyond that, start-up expenses must be amortized over a period not to exceed five years (sixty months).

If you haven't made your first sale on eBay, wait until you do. Everything you spend money on after that point is deductible as a business expense, and you won't have to worry about IRS start-up cost rules.

Time Spent on eBay Selling Activities

Q: "Can I deduct my time, such as the time spent traveling to the post office or preparing my tax return?"

A: Unfortunately, although time is often the single biggest expenditure you make in a business selling on eBay, it is not deductible.

Travel, Meal, and Entertainment Expenses and Education Expenses

Q: "Can I deduct trips to conventions, such as eBay Live!?"

A: If you are a frequent seller and are treating your eBay selling as a business for tax purposes, then the answer is clearly yes. But there are a few rules:

• You must be an established seller. If you are just starting out on eBay, the IRS may not let you take these deductions because attending eBay Live! will be seen as training you to enter a new business, not helping you improve your skills at an existing business.

• You can deduct only 50 percent of meals and entertainment expenses, although you can deduct 100 percent of qualifying travel expenses to and from the convention.

• Unless your spouse is a partner in your business (e.g., you file IRS Form 1065, have a formal partnership agreement, and split profits and losses with him or her based on an agreed-upon percentage), you can deduct only your own travel, meals, and entertainment expenses—not your spouse's.

Q: "I want to improve my understanding of import and export laws and rules. The university in my town has a great class. There is also a very good class in Tampa, Florida, about forty miles from my favorite vacation islands (Sanibel and Captiva). Can I take the Florida class and still deduct the cost of the air tickets, the class, the hotel, and meals?"

A: If you are already an eBay seller and have at least some international sales, you should be able to deduct all travel expenses, including hotel, meals, and entertainment—within reason.

If you are a newbie and are just thinking about selling on eBay someday, be careful: The IRS does not allow you to deduct educational expenses for getting into a new business, and the rules are highly technical here. You might want to hold off until you actually have sales before you sign up for this seminar.

More Information About Deductions

Q: "Where can I get more information about deductions for eBay sellers?"

A: Chapter 9 of my book The eBay Seller's Tax and Legal Answer Book has an overview of tax deductions a typical eBay seller can take.

Appendix E to this book contains a fairly detailed checklist of items that a typical eBay seller can deduct, while Appendix F to this book contains a fairly detailed checklist of items that a typical eBay seller cannot deduct. In using these checklists, please keep in mind that:

• They are not comprehensive.

• Some of the deductible and nondeductible items listed are subject to conditions, limitations, and restrictions that are not included in the checklist. To find out more about these, talk to your accountant or tax adviser.

Finally, for a comprehensive list of small business deductible expenses in an easy-to-read format, see the books 422 Tax Deductions for Small Business, by Bernard Kamoroff (Bell Springs, 2007), and J.K. Lasser's Small Business Taxes 2008: Your Complete Guide to a Better Bottom Line (J.K. Lasser's New Rules for Small Business Taxes; John Wiley & Sons, 2008), by Barbara Weltman.

 
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