There's a quiet revolution taking place in the world of commerce. Tens of thousands of people are buying and selling items on eBay, and many make hefty profits by running an eBay store. The eBay business model has moved beyond a virtual garage sale and firmly into legitimate business territory.
Whether selling full or part time, those who market their wares on eBay may be entitled to significant tax breaks — the same ones available to people who run other types of home businesses. But first of all, you'll have to make sure your eBay business counts as a legitimate business rather than a hobby.
The IRS has specific guidelines, but the general idea is that you run your venture for profit and in a business-like manner. For example, if you devote a significant amount of time to business activities, change selling strategies to produce higher profits and depend on the income you make, those are signals that your eBay venture is a legitimate business. You may want to consider visiting the IRS website or consulting a qualified tax advisor for more information.
Once you determine if your business qualifies, you'll want to begin leveraging the tax breaks. Here are some tax-saving tips you may be eligible to take advantage of when you start an eBay business.
Start-up expenses: You may be able to deduct up to $5,000 in business start-up fees during the first year after you start an eBay store. Eligible expenses include items like advertising, equipment, business supplies and shipping. For expenses over $5,000, you'll have to depreciate them over a 15-year period.
Home office deduction: Since the typical eBayer conducts business over the internet from home, you may be able to write off a percentage of your home as a home office deduction. You'll need to calculate the amount of space you use to operate your home-based business as a percentage of your home's total square footage and then deduct that percentage of your mortgage or rent, insurance, taxes and utilities as a business expense. A word of caution: make sure the space you deduct is a legitimate home office that is used primarily for business purposes. You can't set up your laptop in the kitchen and write that space off as a home office. The space has to be for business use.
Office equipment, shipping and postage: If you purchase an office chair, desk and computer to conduct your eBay business, you can deduct the cost of those items as a business expense. You can also deduct the cost of boxes you use to ship items and the postage fees. Don't forget the cost of your internet connection and eBay store fees — if you're using it for your eBay business, it's generally deductible.
Buying trips: If you take a trip to purchase items for sale on eBay, you can deduct the cost of travel and lodging as a business expense. Just make sure you keep your receipts and maintain records of your purchases.
As you can see, starting an eBay business can make you eligible for some serious tax breaks. It's important to weigh your tax liabilities and likely profits, of course. It is also a good idea to get some professional advice on questions like incorporation vs. sole proprietorships, etc. But for many people, starting an eBay business can be a great way to make extra money and save on taxes.