Did you realize that SaleHoo is a tax deductible expense?
As long as your meet the IRS criteria for a proper business, then you can claim back the money you spend on SaleHoo (and Auction Inspector) as a tax deduction!
Many eBay sellers overlook that fact that establishing a proper business is just as important to making money as choosing a profitable item to sell. You see, because the government wants a good economy, they want to encourage business. And to encourage business they offer tax loopholes.
That’s right – ever wondered why the rich seem to be paying less tax than everyone else? That’s because they are. The good news is that you no longer need to be green with envy. An eBay business potentially opens the doors to all of these tax advantages that wealthy business owners use.
In fact, an eBay business that is run correctly can legitimately reduce your tax right down to almost nothing, meaning that you can keep your hard earned profits for yourself – and become a wealthy business owner yourself!
Do eBay sellers even need to pay tax?
Yes: Even if you are only making $50 on eBay from selling an old pair of boots and a teapot, it is all technically taxable income.
But first: you do need to be running a proper business s to get these advantages. The IRS is wise to all the old tricks of pretend “businesses” for loopholes. If you want to get the benefits, you need to do everything by the letter, record where all your money goes scrupulously and make sure your business meets the IRS criteria.
The IRS has a strict criteria that a business must meet before being deemed a proper business and not just a hobby. If you are found to be a hobby, your income from eBay will be taxed and you won’t be allowed to make most tax deductions. Selling stuff from around the house doesn’t count as a real business, working sporadically on eBay doesn’t count as a real business.
In order to make the most money and pay the least tax, you need to set your sights on the real mccoy: register a business, register for state and federal tax and keep scrupulous financial records and accounting.
While many sellers begin as a sole proprietor, this is not actually the most beneficial state for tax advantages. Plus, your personal assets have no protection should you get your business into debt, or an angry customer decide to sue.
As a new seller, the best idea is to register as a Limited Liability Corporation or an S Corporation. A Limited Liability Corporation protects your assets with the minimum amount of paperwork, which makes it attractive for new sellers. Plus you can choose the way which you want to be taxed.
The big advantage of an S Corporation is it allows for writing off any business losses against your personal income – dramatically reducing the income tax you have to pay. This is a great choice if you expect your business to make a loss in the first couple of years. An S Corporation also offers limited liability protection, but on the downside, it doesn’t cover personal actions.
You can find out more about registering and structuring a business in our free eBay resources area. Yes it does cost to incorporate, but it’s worth it for the long-term benefit. And don’t forget that incorporation expenses (any lawyer’s fees, filing fees and incorporator fees) are all tax deductible!
Both LLCs and S Corporations allow for maximum deductible expenses and are perfect for new businesses with lots of operating expenses in their first years.
Related: eBay Sales Tax Guide
What can you deduct?
There is a myriad of operating expenses that are able to be deducted including: Rent/mortgage, education and training, wholesale inventory, advertising expenses, legal and accounting expenses, auto expenses, equipment, insurance, interest on loans, your eBay fees and software purchases, traveling expenses, wages and a whole lot more.
Note: If your business shows a loss, you cannot deduct your home office – although it will carry over to the next financial year.
It’s vital to keep receipts of all of these things, both to make sure you can get maximum tax deductions and also in case of an audit.
Needless to say, accounting software is critical for anyone serious about making the most of tax deductions. There are a variety of accounting programs that you can use, however we think that Quick Books Pro is the best option as it incorporates inventory management as well sales.
Speak to a Professional
We’ll say it right now – we aren’t accountants, nor have we any specialist training in this area. Make sure you find a professional to help guide you through your business set up and help you set up a good accounting system. And please, shop around! Not all accountants are equal and you can save yourself thousands by getting a good one. Use what you have learned in this article to ask questions at your initial appointment and find out whether they really know their stuff.
The holiday season is a great time of year to think seriously about stepping up your business another notch so that you can get a system in place and take advantage of tax deductions in the next financial year!