Although you need to report all profits and/or income from a hobby as well as a business, you’ll first need to determine whether you can report your sales as a hobby or a business, so that you can claim the appropriate deductions, losses, etc.
Some basic factors the IRS considersto differentiate between a hobby and a business are:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circ*mstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
If your eBay sales are a hobby:
Your hobby income from eBay will need to be reported onForm 1040, usingSchedule Afor itemized deductions. Since your activities are considered a hobby, you won’t be able to claim losses.
When it comes to deductions, you can claimany expenses such as eBay fees, shipping, packing and mileageto bring down your net income.
If your eBay sales are a business:
If you’re selling on eBay as a business, report your profits and losses onSchedule C , which is used for self-employed people who don’t have bosses that withhold taxes for them. Even if you’re employed part-time or full-time elsewhere, you’ll still need to fill out the Schedule for your eBay activities.
If you’ve made more than $400 in net profit from your eBay sales, you’ll also need to fill outSchedule SEto figure out how much you owe in self-employment taxes.
You can also claim any losses from your eBay business as deductions to reduce your income. Other deductions include inventory costs, shipping fees, eBay and PayPal fees, travel expenses, software, as well as office expenses. However, you are only allowed to claim home office expenses if you use the space exclusively for your eBay activities. Otherwise, you may be eligible for a business-use percentage deduction on your office supplies and furniture.
If you’re just getting started, check outour guide to all the terms, forms and dates you need to be aware of.
