The American Recovery Plan (ARP) had one big change that’s going to impact everyone who sells online. Effective this year (2021), third party network sellers like Amazon, eBay, and Etsy and Merchant Service Providers like PayPal, Square and Stripe, have to submit a Form 1099-K for every seller who sells $600 or more in the year.
It doesn’t matter if you only sell a few things. It doesn’t matter if you’re just selling personal items.
If you sell over $600, you’re getting a Form 1099-K and the IRS is going to be looking for a report.
Now here is the problem, effective 1/1/2018, there is no place for you to expense sales expenses unless you are a business.
You have to pay tax on the whole gross income, without expenses.
That brings up a whole lot of other questions. For example, as someone wrote in to USTaxAid.com, what if you sold off your lifetime’s collection of memorabilia totaling $130,000? There was a cost of goods associated. Can’t you deduct that?
And the answer is that we honestly don’t know.
Here’s what we do know.
When Your Business Sells Goods
A business that sells goods online is just like any other business. Provided you have sufficient basis and actively participate in a business, you can take a business loss against other income.
And provided you have a business, you can take deductions against that income.
What does it take to have a business? There are 9 factors that the IRS follows:
Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
Whether you have personal motives in carrying on the activity.
Whether the time and effort you put into the activity indicate you intend to make it profitable.
Whether you depend on income from the activity for your livelihood.
Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
Whether you were successful in making a profit in similar activities in the past.
Whether the activity makes a profit in some years and how much profit it makes.
Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
That list is straight from the IRS and there obviously strategies that you can use to present a stronger case to the IRS. That’s just one of the many strategies we discuss as part of Wednesday coaching.
For more information on the Form 1099-K and how it will impact your business, make sure you read New Form 1099-K Rules Hit Every Casual Internet Seller.
Your business must prove it’s a business. It’s not just a case of being able to use a business loss against your other income. You now need it in order to take ANY deduction. Here’s a review of the rules Prove You Have a Business
Can You Deduct Costs For Your Hobby?
If you aren’t selling items as a business, the default is a hobby. In the past (pre-2018), you could take deductions up to the gross sales amount. So you couldn’t have a deductible loss, but at least you didn’t pay tax on the whole sales amount.
Now, there is a big issue. You don’t get the deductions and that means you pay tax on everything.
The strategy here is to turn your hobby into a business. That way you get the deduction. Don’t think you can hide under the radar anymore. The new rule requiring reporting of total sales of $600 or more means you’ll likely get reported at the end of the year.
Can You Deduct Costs For Sales of Personal Items?
This is the tough question. There are some tax professionals who have said “yes”. In other words, you can deduct the cost to buy your personal property from the sale. So, let’s say you buy a bunch of purses for $1,000 and sell them for $600. You can’t take a loss, so you can only take $600 of the costs as a deduction. No gain, no loss, that means reporting. I’m not sure that I agree.
Since we don’t have any guidance, we’re all just guessing at this point.
We know that we can’t take deductions for hobbies. Although it doesn’t really say explicitly, the only deductions seem to be just for businesses. Selling your personal property wouldn’t qualify as a business. Based on that, there doesn’t seem to be any guidance that allows us to take the deduction.
Additionally, I’m not sure WHERE you would report the expenses. In this case, you’d receive a Form 1099-K for $600. The IRS’s matching program will want to see the $600 reported on your tax return. So, where do you report the expenses?
You can’t put it on Schedule C. That’s for businesses. In the past, you would have shown it as part of a miscellaneous expense. But since 2018, that’s gone.
In answer to the original question, I really don’t know what you can do about the $130,000 of memorabilia. The best strategy is to start a business.
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