Taxes for Online Sellers

eBay Income - Hobby or Business

noreply@blogger.com (Simon Elisha) — Sun, 05 Oct 2008 18:17:00 +0000

Is eBay Money Income?
The short answer is yes. The money you received from selling items online is, indeed, income. If you have no receipt or other documentation to prove the amount you originally spent on the item, everything you received from selling it is considered profit. In this instance, it is as if you got the item for free and sold it for 100% gain, incurring no additional expenses along the way.

Nothing in this world is free. So we will assume you did not obtain the item for free. How do you convince the IRS of this if you lost your original receipt? Give your inventory value. On your taxes, when valuing your inventory (the stuff you have sold or have available for sale) you can choose to use the exact amount you paid for something or the fair market value – which ever is less. This means, if you no longer have the receipt documenting what you paid for that old television you sold, you can use the fair market value. It is unlikely the fair market value would now be greater than what you originally paid for it. Research similar items on a site like eBay. Average the prices the similar items are going for to come up with the fair market value for your item.

In order to keep accurate records of how you came up with your value in the case of an audit, it is advisable to print out a few pages showing similar items being sold at the same price at which you valued your item.

Now, we need to factor in the fees you incurred to list the item for sale. Don’t forget the amounts you spent on packaging supplies and postage to mail the item once it sold. All of these expenses may be added to the cost of your item. Now, subtract all of that from what you received from the buyer. If you ended up with a negative number, you actually lost money. Any positive number you are left with is your profit. Now, do this for every item you listed and/or sold this year and add it all up. If you made a profit, you are in business.

Net Operating Loss
If you had net earnings (after expenses) from self-employment (selling online, for instance) of $400 or more in a given tax year, you must report it. Even if you had less than $400 in self-employment income, it may be to your advantage to file. If, with deductions, you get your self-employment income down to a loss, you may be able to offset other income earned by you or your spouse. If you have made quarterly, estimated payments, you may be due a refund.

When claiming internet income, you will need to file a Schedule C, along with your 1040. Schedule C is where you will account for both your business income and expenses. It is a form which basically walks you through the steps of determining profit discussed above. If you get to the end of your Schedule C, and the remaining number is negative, you have what is called a net operating loss. This simply means you lost money this year; the cost of doing business was more than the income. The IRS understands that businesses, especially in their start-up years, may not always make a profit.

Hobby or Business
What if you lost money, but you were truly trying to make a go at an online business? If you make a profit, you are in business. If you continuously lose money, however, you risk having your business activity classified as a hobby. The IRS sets several guidelines to determine whether they think you are a business or indulging your hobby at a discount. You do not necessarily have to make money, but must show you are making an honest effort to do so.

3 Out of 5 Rule
One thing the IRS looks at to determine your intentions is to examine the past five years of your business. If you have made a profit in three out of five consecutive years, the IRS considers your venture a legitimate business. So, in essence, you may claim a loss for at leas the first two years before anyone bats an eyelash. However, this is not the only thing the IRS studies.

If you fail the 3 out of 5 rule, but can still prove you are actively pursuing profit, you can still be classified as a business. Ways to do this include advertising, keeping good business records, past success in a similar business, having a business license (which isn’t necessary to be considered a business with the IRS in the first place, by the way), courses taken to improve your skills, and if this is your sole source of potential income, because that proves financial need.

Why Does it Exist?
The hobby rule exists to keep people from indulging their hobbies by continuously offsetting their other income with business losses. Even online selling can be considered a hobby if you keep losing money at it.

What if it is a Hobby?
What if you never make a profit from online selling? What if the IRS decides to classify your business venture as a hobby? In this case, not all is lost. You may then still deduct some of your expenses, as long as those expenses do not create a loss. The deductions you may take from hobby expenses are filed on a Schedule A (instead of taking the standard deduction) and are subject to the 2% floor on miscellaneous personal deductions. Hobby income is reported on line 21 of your 1040 (other income).

Regardless, you must keep records of your income and expenses. If you are ever audited, and the IRS finds you had internet income, you will need to be able to prove the expenses associated with that income. Otherwise, the taxes and penalties may be heavy.

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Filing Quarterly - Making Quarterly Tax Payments

noreply@blogger.com (Simon Elisha) — Tue, 22 Jan 2008 23:00:00 +0000

Filing Quarterly – Making Quarterly Tax Payments

Who is Subject to Paying Quarterly?
Everyone, in essence. Individuals whose tax obligation for any year exceeds $1000 need to make payments on those taxes due throughout the year. Most of us do without realizing it. If you are an employee at a regular job, most likely, those taxes are withheld from your paycheck by your employer. If, however, you are an independent contractor, own your own business, or make other money on the side, you are responsible for making those payments.

When and What to Pay
Four times per year, you must pay estimated taxes on your income and self-employment tax using Form 1040ES. Due dates for these payments are: April 15, June 15, September 15, and January 15. You are supposed to estimate the amount of income you will earn and subsequent taxes you will owe for the entire year. Self-employment tax must be taken into consideration when figuring estimated payments. You need to then pay 25% of this amount each quarter.

Tax software generally figures your estimated taxes based on what you did in previous years. It can also prepare estimated forms for you.

If you are not liable for paying estimated taxes prior to a given due date, but become liable before the next due date, file for the quarter you become liable, but increase your percentage paid.

Example:
Dan has a regular job through which taxes are withheld from each paycheck. He begins selling online. During the first part of the year, he is having enough taxes already withheld to cover his online income, as well as his regular income.

In July, however, Dan’s online sales spike significantly. He realizes the amount withheld from his regular paycheck will no longer cover his total tax liability. He may file a Form 1040ES by September 15, paying enough to equal a total of 75% (when combined with his regular withholdings) of his estimated tax due without realizing penalties (75% because it is the third quarter).

Dan may also be able to increase the amount he has withheld from his regular paycheck, instead of having to file estimated payments.

If you (and/or your spouse if married filing jointly) has income tax withheld from a paycheck, no estimated taxes are due if the withheld taxes cover more than 90% of the total tax bill for that year – or – if the tax withheld totals more than your entire tax bill from the previous year.

This means if you (or your spouse if married filing jointly) is an employee at another job besides the business, just make sure to have enough tax withheld from each check to cover taxes due from your business income, too. If so, you can forget about making estimated, quarterly payments. In essence, that withholding is paying your quarterly business payments, as well as the taxes due on the other earned income.

IRS Publication 919 will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much additional withholding you may need each payday from your regular job in order to avoid owing taxes and penalties for not filing quarterly. To add to the amount withheld from your regular job, you will need to fill out a new W-4 for your employer.

Form 1040ES
Form 1040ES is a simple payment voucher where you list your and your spouse’s names, social security numbers, and address. The only other space on the form is to write in the amount you are paying. Don’t forget to include a check. There is a worksheet to help you figure your estimated tax in the instruction booklet for 1040ES.

If you earn under $150,000, quarterly payments must equal 90% of your final income tax bill or at least 100% of last year’s tax bill (amount due before deducting what had already been paid – line 63 of 1040).

If you earn over $150,000, you must pay at least 110% of last year’s tax bill, spread out quarterly, or risk and under-payment penalty.

Overpayment
If you over pay your estimated taxes and expect a refund, you may elect to apply it to next year’s estimated payments.

Underpayment

You could receive a tax penalty if you under pay or miss a deadline. If you are late, you could also end up paying interest on what you owe. Your state may require quarterly payments, as well.

This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008

Claiming the Standard Mileage Rate

noreply@blogger.com (Simon Elisha) — Thu, 17 Jan 2008 17:02:00 +0000

Claiming the Standard Mileage Rate

Claiming the standard mileage rate for an automobile on your taxes takes a little record keeping. Some taxpayers hope to avoid that hassle by claiming actual expenses, instead. Truth be told, even more record keeping is necessary with the actual expense method, and you must keep mileage records either way. These records will not be filed with your taxes, but must be available for review in the case of an audit.

If you use your vehicle for obtaining inventory or supplies for your business, you may deduct the business percentage of your automobile expenses. The first step is to record your mileage. Make a habit of writing down the odometer reading on January 1st each year. You may use a spreadsheet (like the PDF example shown here) or something as simple as a pocket calendar you keep in your glove box. Whatever the method, make sure to write it down. Record your starting mileage, ending mileage, where you went, and the purpose of your trip. Jot down your mileage on a scrap of paper if you have to. When you return home, you can fill in the remaining information on your spreadsheet. Total how many miles you drove for business only ─ round trip. The remaining miles used on your vehicle this year are either personal or commuting. Vehicles are considered listed property. Therefore, you must keep records denoting business use.

If your office is in your home, you will not have any commuting mileage. If, however, you work in an office on Main Street, instead of your home, the number of miles between your house, that location, and back again are your commuting miles. Write the number of business, personal, and commuting miles down in the appropriate blanks on Part IV of your Schedule C. You figure your total mileage for the year by subtracting your odometer reading on January 1st, from the odometer reading at the end of the year.

You may either claim the Standard Mileage Rate (SMR) or Actual Expenses, not both in the same year.

Standard Mileage Rate

Taking the standard mileage rate means you are able to deduct a certain amount for each business mile driven in a particular year (48.5 cents in 2007). You multiply the number of business miles driven by 48.5 cents per mile in order to figure your standard mileage deduction. This amount is figured in Part IV of your Schedule C, then deducted in Part II, line 9 of the same form. There are spaces to account for commuting and personal miles in Part IV, Schedule C, but those miles are not deductible.

You may also deduct the business percentage of parking fees and tolls, and the business percentage of state and local personal property taxes on the vehicle, in addition to the standard mileage rate. If you itemize your household deductions instead of taking the standard deduction, you may claim the remainder of your state and local personal property taxes on the vehicle on your Schedule A.

Example:
Dawn drove her car a total of 4530 miles this year. She drove her car 453 business miles this year. She multiplies that number by 48.5 cents (453 x 48.5 cents = $219.70). If she does not have any parking fees or personal property taxes to report on her car, she can simply carry the $219.70 to line 9 of her Schedule C.

If she does have parking and state and local personal property taxes on her car, Dawn will figure the business percentage she used her car by dividing the business miles by the total miles. (453 ÷ 4530 = 10%) Now, she will total her parking and state and local personal property taxes on her car, separately.

If she paid out a total of $150 in parking fees, she will figure 10% of that by multiplying 150 x 10%. Dawn will be able to deduct $15 in addition to the $219.70 for the standard mileage rate. She will then enter $234.70 on line 9, Schedule C.

If Dawn had a total of $200 in state and local personal property taxes for the vehicle, she will find her business percentage (200 x 10%). She may also deduct $20 on line 23 of her Schedule C.

If you want to use the standard mileage rate on a vehicle, you must choose it in the first year the automobile is available for use in your business. Then, in later years, you may choose to use either the standard mileage rate or actual expenses. If you switch from the SMR to actual expenses and want to deduct depreciation, however, you must use straight-line depreciation, as opposed to an accelerated method, estimating the remaining useful life of the car.

When the SMR is NOT allowed:
You may not deduct mileage on a car for hire (taxi).
You use five or more cars in your business at the same time.
You claimed an accelerated depreciation method in previous years on the same car.
You claimed a Section 179 deduction on the car.
You claimed actual expenses on a car you leased after 1997.
You are a rural mail carrier who received a qualified reimbursement
You claimed actual expenses on the same vehicle in the first year you used the automobile in your business.

Beware! When you sell the vehicle or switch to actual expenses for depreciation purposes, you will have reduce your basis by a certain amount (17 cents per mile deducted in years 2005 and 2006).

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Recapture ─ Selling Business Assets

noreply@blogger.com (Simon Elisha) — Thu, 10 Jan 2008 15:56:00 +0000

Recapture ─ Selling Business Assets

The most common way to dispose of equipment used in your business is by selling it. When you sell that asset, however, you will create income from the proceeds you realized on the sale.

If you have taken any Section 179 deductions or depreciation on the equipment, you may be subject to what is called a recapture tax. Don’t let this scare you. It is not as bad as it sounds. It simply means a portion of the income you receive from the sale may be taxed as ordinary income, which you might have assumed anyway. Let’s see how it works.

First we need to figure your tax basis in the item. You figure this by subtracting any Section 179 deductions or other depreciation you have taken on that item over the years, from your investment in it. (Your investment is usually what you paid for it when you purchased it.) The result is your tax (or adjusted) basis.

If you never took any Section 179 deductions or depreciation on the item, you figure your tax basis using the amount of depreciation that would have been allowable had you depreciated it using the straight-line method. Consider the number of years and the amount you could have taken based on the year you purchased and put the asset into use in the business.

How much money did you receive from selling the asset? Subtract your tax basis from the amount received (amount you sold it for). The result is your total loss or gain.

Any amount of profit produced from selling an asset, above your tax basis, up to the amount you were allowed to depreciate, is taxed at ordinary income tax rates. Any amount over that is taxed at (generally more favorable) long-term capital gains rates, unless you have Section 1231 losses from previous years which need to be figured first. (Chapter 8 – Taxes for Online Sellers)

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com/
Copyright 2007 -2008

Depreciation ─ Conventions

noreply@blogger.com (Simon Elisha) — Thu, 03 Jan 2008 16:23:00 +0000

Depreciation ─ Conventions

When choosing to depreciate a business asset, you need to choose both a method and a convention. A convention simply refers to figuring how much of the item’s basis you may depreciate the first year, based on when during that year you purchased and put the item to use in your business. This article will explain the differences between the half-year convention, the mid-quarter convention, and the mid-month convention.

Half-Year Convention (H/Y) ─ Under the half-year convention, your item is treated as though it was purchased and placed in service at the mid-point of the first year, no matter when during that year the purchase was actually made. Therefore, only half of the otherwise allowable depreciation amount is able to be deducted during the first year.

The half-year convention is standard with all depreciation and must be used unless the mid-quarter convention rules apply. (Except in the case of depreciating the business use of your home, in which case the mid-month convention applies the first year. This is explained below and in Chapter 10.) The half-year convention is built into depreciation tables found in IRS Publication 946.

Example: Using the straight-line method of depreciation (because it’s easier for me to demonstrate the half-year example using S/L), Morgan is able to depreciate her office desk (seven year property), used 100% for business, over a seven year recovery period. Her basis in it (the amount she paid) is $700. She is able to take equal, $100 deductions each of the seven years. Because of the half-year convention, however, she may only deduct half of that in the first year.

Year One - $50
Years Two through Seven - $100 each year
Year Eight - $50

Morgan may continue to take a deduction into an additional year (year eight) beyond the desk’s recovery period (seven years) in order to fully depreciate it.

Mid-Quarter Convention ─ Under the mid-quarter convention, all property placed in service during a particular quarter of the year is treated as having been acquired at the mid-point of that quarter. Depreciation tables with the mid-quarter convention built in may be found in IRS Publication 946.

The mid-quarter convention only applies if more than 40% of the combined bases of property is placed in service during the last three months of the tax year. Section 179 deductions are not included when figuring this amount.

You can avoid the mid-quarter convention in a couple of ways. Plan your purchases, so over 40% of the cost of them doesn’t get spent at the end of the year, by buying early or waiting until January. You could also choose to use Section 179 to expense some of your end of the year equipment purchases. Those items’ bases would then not be a part of your calculation of the 40% mark.

Mid-Month Convention ─ When you depreciate the business percentage of your home office, you will use the mid-month convention in the first year. This means you may only deduct expenses beginning in the month you first began using the home for business purposes. This not only includes using mid-month depreciation tables, but it also means you may only deduct other business-related expenses for the home from that month forward. See IRS Publication 587 for more information on taking a home office deduction.

This and other information may be found in the book listed below.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Depreciation ─ Choosing a Method

noreply@blogger.com (Simon Elisha) — Wed, 02 Jan 2008 17:55:00 +0000

Depreciation ─ Choosing a Method

Depreciation is a way you are allowed to deduct the normal wear and tear of business assets (equipment, computer software, automobiles, office furniture, etc). You may claim an item which: you use in your business, wears out over time, AND has a useful life exceeding one year. Because the item is expected to wear out over time (longer than one year), time frames have been assigned to different classes of items, depending on how long that item is expected to be useful in your business. These time frames are called classifications or class life.

Some common classifications:

3 years: off the shelf computer software
5 years: cars, trucks, trailers, computers and peripherals, copiers, calculators
7 years: office furniture, fixtures, unclassified personal property
(See IRS Publication 946 for more detailed lists.)

When depreciating an item, you will need to choose both one method and one convention.

Methods:

Declining Balance─The General Depreciating System (GDS) is the standard, accelerated method of depreciation under MACRS. Using the GDS 200% declining balance (200DB) method (150% for 15 and 20 year property) means you get to deduct more of the item’s value in the early years of its recovery period.

Straight Line─The Straight-Line (S/L) method of depreciation allows you to deduct the value of your item equally over the recovery period.

Alternative Depreciation─The Alternative Depreciation System (ADS) uses the straight-line method of depreciation over a specified number of years. The recovery period for ADS is usually a little longer than used under general or straight-line depreciation methods. (Comparison charts found in the book.)

Choosing a Method

The year you purchase and put your item into use in the business is generally the first year you will take depreciation deductions. That first year is when you will choose what method of depreciation to use. It is standard to use the GDS 200% declining balance method for computing most of your business property. Sometimes, however, you are required to use a different method (usually when business usage is 50% or less on listed property).

You may generally elect to use either the ADS or Straight-Line method for business assets, instead of an accelerated method. The catch to doing so is you must make that election for all property of the same class life put into use in the same year.

Example: If Morgan made the election to depreciate her office desk (7 year property) using the straight-line method, she would also have to use the straight-line method for all other 7 year property purchased and put into use in the same year.

Once you choose a depreciation method, you need to stick with it for that particular item until it is fully depreciated (unless you are required to change, as with business usage dropping to 50% or less).

Listed Property
In order to use an accelerated method of depreciation for listed property, you must use the equipment more than 50% for business purposes. If you use the item 50% or less for business purposes, listed property must be depreciated using the Alternative Depreciation System.

If you initially use your listed property over 50% for business, but then in drops in a later year, previous accelerated depreciation deductions are subject to recapture. The amount recaptured is the amount previous deductions exceed the depreciation that would have been allowable under ADS. (See Chapter 8 of the book for a thorough explanation on recapture.)

This and other information may be found in the book listed below.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Listed Property - What It Is

noreply@blogger.com (Simon Elisha) — Mon, 31 Dec 2007 05:19:00 +0000

Listed property consists of items the IRS considers having the potential for personal use. Computers, vehicles, and cell phones all fall into this category. For these items, you must keep detailed records of personal versus business use.

Just keep a notebook next to the computer, for instance. Whenever the item is in use, jot down when and for how long, and whether it was business or personal use. This may sound tedious, but during an audit, you will have to produce these records.

It is the very same concept as keeping mileage journals for your vehicle. In fact, because automobiles fall under listed property, it is why you have to keep mileage records.

If in doubt whether something is considered listed property, keep records. If you question whether or not the IRS thinks you could be abusing the tax deduction, they probably do, too. More explanation of which items are considered listed property is given in IRS Publication 946.

Note: In order to use an accelerated method of depreciation for listed property, you must use the item more than 50% for business purposes. If you use it 50% or less in the business, listed property must be depreciated using the Alternative Depreciation System (ADS).

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Section 179 - Do You Qualify?

noreply@blogger.com (Simon Elisha) — Thu, 20 Dec 2007 17:43:00 +0000

What is Section 179? Section 179 is called a loophole by some. For anyone with any tax experience, however, it is as standard in the IRS world as claiming mileage. Section 179 (Form 4562) allows people claiming items (meeting the criteria listed below) to simply expense certain things instead of depreciating them. This means you get to claim all of the money paid for the item in the year you purchase it and put it to business use (assuming 100% business use). Depreciation makes you spread that benefit out over multiple years.

In order to use Section 179:

● You must have taxable income of at least the amount you expense. This taxable income can come from the business, another business claimed by you, other wages and tips, and even your spouse’s wages and tips if married filing jointly.

● You can either expense (Section 179) or depreciate, not both, on the same item in the same year. Though there are special rules enabling you to depreciate the remaining amount of an item in future years you weren’t able to fully expense this year.

● You must use the item more than 50% for business purposes. If you use it less than 100% for business, you can only claim the percentage of the purchase price based on the percentage used in business (business percentage).

● You should still use that equipment 50% or more for business purposes over the number of years you would have otherwise been allowed to depreciate it (class life─explained on page 60 in book).

Section 179 does NOT apply to:

▪ Real estate
▪ Inventory
▪ Gifts or inheritance
▪ Property purchased from a relative
▪ Items you already owned in a previous year and are converting to business
▪ Heating and air conditioner units

Basically, if you purchase equipment for your business, Section 179 gives you a way to deduct the cost in one year, instead of little by little over multiple years. There are some further limits and rules associated with Section 179 explained in more detail in the book. I simply do not have the room to go into all the detail here.

About me...and the book

noreply@blogger.com (Simon Elisha) — Thu, 20 Dec 2007 16:50:00 +0000

I am a tax researcher, online seller, and author of Taxes for Online Sellers─A How-To Guide for Individuals on Federal Tax for Internet Sales. Taxes for Artists is due out in 2008.

My books focus on taxes for the little guy. I don’t know about you, but I don’t gross a million dollars per year. I knew some information needed to be put out there for the individual. Many books teach taxes geared toward corporations. Others leave you with the same questions the tax forms throw at you. I wanted to provide answers for the average person (sole proprietor) trying to make it in his own small business.

Are my books simply small business tax guides? Yes. I geared everything toward online sellers and artists in each of the books respectively, but they could be used as a tax guide for any small business started or run by an individual. The examples use certain professions, but the rules are generally the same.

If you have further questions or comments, please email me at: simon@taxesforonlinesellers.com. Though I will do my best to answer all questions, I am bombarded with a great deal of email. Please ask anyway. Subscribe to this blog or check back often─your answer may turn into my next post.

All blog entries, information, advice, and books mentioned are for the individual. My expertise caters to the sole proprietor. Tax rules may differ for any other tax entity. Please seek further advice from a tax professional.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Basis, Business Basis, Tax (Adjusted) Basis - Defined

noreply@blogger.com (Simon Elisha) — Thu, 20 Dec 2007 04:41:00 +0000

Basis: Generally the cost of your item, increased by sales tax and improvements.

Business Basis: Multiply the basis of your item by the percentage you use the item for business purposes. The result is your business basis of the item.

Tax Basis (Adjusted Basis): Your basis, reduced by any Section 179 or other depreciation you have ever taken on the item for tax purposes.

Examples:

Joel has a computer. To figure his basis, he needs to know what he paid for it (plus sales tax). He paid $1000. $1000 is his basis.
(Improvement) He adds a larger hard drive to the computer for a cost of $100. His basis is now $1100 (1000 + 100).

Joel only uses the computer , with the larger hard drive, 70% for business purposes. His basis is $1100. But, his business basis is $770 (1100 - 70%).

When he is ready to sell the computer, he will need to know his tax, or adjusted, basis. Over the years, he has depreciated the computer using straight-line depreciation. The amounts he has taken thus far, add up to $440. He subtracts that from his $1100 basis. His tax basis becomes $660.
His basis is $1100. His business basis is $770. His tax basis is currently $660.

If Joel had never taken any deductions on his computer, his tax basis would be his basis, reduced by the amount he could have depreciated it using straight-line depreciation tables.

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com

Repair versus Improvement

noreply@blogger.com (Simon Elisha) — Mon, 17 Dec 2007 19:51:00 +0000

When figuring the worth (basis) of most items claimed for expense or deduction on your taxes, the amount is generally what you paid for it ─ including sales tax. This amount can be increased by improvements, but it is not increased by repairs. What is the difference?

Imagine a number line. The condition of an item when you purchased it is in the center of your number line, at zero. Wear and tear, including damages, drags the condition number down into the negatives. When you repair something, you are simply getting it back to zero, the original condition, on your number line. When you improve something, you are improving the condition into the positive numbers on your number line. You are making the item better than it was when you purchased it.

This and other information may be found in the book listed below.

Permission to use or excerpt with proper attribution.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com

Finding Business Percentage When Expensing or Depreciating Items on Taxes

noreply@blogger.com (Simon Elisha) — Sat, 15 Dec 2007 17:08:00 +0000

Deducting expenses on your taxes is straight-forward in many circumstances. For instance, if you pay advertising costs for your business, simply total the receipts and list the figure under advertising on your Schedule C. If, however, you are depreciating or expensing an item, which you don’t use 100% for business purposes, you will need to find your business percentage.

Business Percentage: Business Time used divided by Total Time used equals Business Percentage. Your answer will be a decimal number. Multiply that decimal by 100 to find your business percent. Total Amount Paid times Business Percent equals the amount you may deduct.

Let’s look at an example:

Kathy wants to claim actual expenses on her vehicle this year. She keeps track of her mileage. She notes she has driven her car a total of 20,000 miles this past year. Of that 20,000, only 2000 of the miles were for business purposes.

Kathy divides the 2000 business miles by the 20,000 total miles.

2000/20,000 = 0.1
0.1 x 100 = 10

Kathy used her vehicle 10% for business purposes this year. She may now deduct 10% of the total, actual costs for her vehicle.
Her receipt totals are:

Gasoline = $4000
Tires = $200
Repairs = $650
Insurance = $250
Registration = $76
Interest = $150

Total = $5326
Kathy may multiply her total expense ($5326) by 10% to arrive at the amount she may deduct in actual expenses for her vehicle ($532.60) on line 9 of her Schedule C.

Finding your business percentage works the same general way whenever you are figuring how much you may deduct for any item or service not used exclusively in business.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com/

Ten Ways for Online Sellers to Keep Records

noreply@blogger.com (Simon Elisha) — Sat, 08 Dec 2007 22:49:00 +0000

Ten Ways for Online Sellers to Keep Records

1. Keep receipts—If your receipt doesn’t show all the necessary information, you may write it on the back. You need to show: the cost of each item, the date purchased, who sold you the item (store name), and how you will use the item in your business (i.e. inventory). If you have purchased equipment for the business, also jot down when you began using the item for business purposes. Keep all receipts—even ones you may not think are relevant off the top of your head. When figuring taxes, they may become useful.

2. Record your mileage—If you use your vehicle to drive to the post office or to scout for inventory, you are allowed certain deductions. Whether you take the standard mileage rate or a percentage of your actual gasoline and maintenance on the car, you will have to know how many miles your vehicle was driven. You will also need to know how many of those miles were for business purposes. Track your mileage by jotting down the odometer reading, where you are going, and for what purpose every time you get in the car.

3. Print out online statements—Periodically print out online statements. These include everything from internet postage statements to income statements from online selling venues. This information will come in handy while filling out tax forms—not to mention in the case of an audit. You never know how long these online statements will be available on the web, so print new information frequently.

4. Make spreadsheets your new friends— Spreadsheets can be invaluable. Whether you keep them on your computer screen with predefined categories, or print out blank ones to fill in along the way, spreadsheets are a great way to organize information. Use them to track how many miles you drove and when. Use a spreadsheet to tally expenses with separate columns for where, when, why, what, and how much you spent.

5. Use an accordion-style folder filing system—Where do you stuff all of those receipts and print-outs? Drawers and shoeboxes don’t cut it. Invest in an accordion-style folder. You can make your own tabs fitting the categories you use: inventory expenses, supplies, mileage records, etc. This will make sifting through it all much easier come tax time. Start a new file each year.

6. Invest in accounting software—Many of the accounting computer software programs on the market today assist in not only helping you keep track of expenses and income, but they also integrate with tax software to help you prepare tax returns based on the information you have fed into it each year. Some software programs even assist with keeping track of your inventory.

7. Keep credit card statements—Credit card statements may be used to help when figuring your taxes. You may use them as receipts for business purchases as long as they show the necessary information. You may also deduct the business percentage of any interest you pay to credit card companies.

8. Keep bank statements—Bank statements help jog your memory about what you purchased and when. They may be used as receipts as long as they show the necessary information. Are you charged service fees on your business banking account? Bank statements show those fees—which are deductible.

9. Keep previous tax returns—Keep previous tax returns much long than you ever thought necessary. Just because you no longer have a copy of it, doesn’t mean you can’t still be audited on it. For serious issues, the IRS can audit you for up to six years. If they feel something is outright fraud, there is no time limit. If you expensed an asset, then later sell that asset, you may have to pay recapture taxes for up to five years. You need to have these records to properly record that information.

10. Account for your inventory—Use your new friend, the spreadsheet, to keep track of your inventory. Write everything down as you buy it. Record what you purchased, where, the date, etc. When that item sells, go back to your spreadsheet to mark it as sold. Note the selling price. This will make your life unbelievably more organized.

Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

www.taxesforonlinesellers.com