If you believe that the issue of taxes in accordance to your business should only be realized the eve of April 15th of each year, you might not want to read this blog.  If you are a geniune seller, proposed to gain a profit within your storefront, it should be a discussion you muddle each and every day.

In a previous blog, I referred to the idea of "inventory" and the IRS legitimate reasons as to the definition of business versus a hobby to a E-bayer.  It mentioned that the IRS proposes that a business of nine "definitions" as to whether or not a business (such as your's) should be considered for tax purposes, a realized store or a "weekend project" or hobby.  (The nine definitions of a business for tax purposes will be outlined in a different blog, stay tuned...).  One of the nine steps mentioned is whether or not your business is "carried on in a true business-like pattern."  As with most definitions within tax code, this "idea" can often be confused.  Your defiinition of "business-like" can very different than your neighbor's, or even your husband's or wife's.  Take the issue of  Friday's "casual attire" in the office.  To some, it's breaking down and allowing the Banana Republic khaki's to take a field trip, while other's grap the spandex and tank tops created only for the beach (and that might be a stretch).  "Business-like" is relative.  Do you feel your store front (even if you are a part-time seller) is a legititmate storefront?  Well, let's analyze some situations. 

1)  Do you conduct your finances (within your store) in a written fashion?  (Such as Quickbooks, or even a Excel spreadsheet?)

2)  Are you trying to make a profit?  (Even if you have not made a profit, is it your general purpose to prove in the next couple of years to create a sustainable stream of steady income?)

3)  Do you try to collect the monies that are due you?

To most, number one could be easily blurred.  Excel can be somewhat foreign to most (still) and without accounting experience or understanding, some might not even know where to begin.  But, do you keep even "penciled" records or your purchases, selling costs, etc?  And, number two, most would bark, "yes!," otherwise why would you even waste your time?  However, believe it or not, there are many who "sell" products as solely an enjoyable experience and will almost purposely lose money in the process of their weekend hobby.  (For years, my uncle built wooden train sets and sold them in local craft shows.  After paying the cost of materials, storage, craft show fees, advertising, billing, etc., he almost was always in the red of at least $25-$50 per wagon.  Why is that?  He was retired, bored and spent hours creating new paint colors to design the most original wagon.  He was there only for the purpose of lighting up a child's eyes for their birthday.  He was forced to pull money from his pension, and saved so much money over the years, I truly think he had to think of some way to spend it.  I know....I wish).    As for the third question, if we spent the time enlisting our products on E-bay, and paid the according fees, of course, if someone were to bid, and, later win, well....they better pay, right?  But, again, leaning to the example of my uncle, he had at many times checks bounce and credits cards "not go through," shrug and move on to the next sale. 

Now, for the next question: Do you separate your business finances with your personal money?  (Well, first off, it is never a wonderful idea to include your personal checking account information via E-bay in which you would draft your electric bill or even your mortgage from).  Ugh....I can't think of a more negative situation in which one would invade someone's account and siphon money that you would pay your groceries with.  However, in regards to your account within a "business-like" manner, the IRS specifies that a legitimate business is one in which a owner does SEPARATE his business monies from personal finances.  Otherwise, to the IRS, it doesn't appear that you are serious in which to actually perform in a business manner.  Actually, in my experience, in four out of five situations in which I am dealing with an audit with the IRS or even a "standard letter" from the IRS, that is one of the first questions they ask of my client.  In several cases, even though my client performed his business as an entity to gain profits, some deductions and credits were actually disallowed due to the fact that he/she funneled business profits with their utility payment.  They barked that it was a "hobby."  Sure,  a hobby can be good, but if you are in existence to gain notoriety as a storefront, and not run your business in a fashioned that the IRS condones, you can lose valuable credits and deductions, and in the end, pay lots LOTS more tax than you could even imagine.  (Plus, once the IRS deems your store as a hobby, it can be difficult to change their mind).  Within a legitimate business in the eyes of the IRS, if a business funnels profits, they are entitled to a grand amount of write-offs and deductions.  A hobby does not.  If a hobby makes money, you pay tax.  In most cases, a lot of tax.  Even if you enveloped your entire garage for the sole purposes of making those colorful wagons, it doesn't matter.  My uncle could not even deduct most of his material costs....virtually nothing.  If he made $5,000 in his wagon sales and was listed in the 15% tax bracket, he coughed up an additional $750 within his tax return.  If he would have performed his operation in the eyes of real business, he could have deducted a vast array of items.....material costs (including paint, wood, etc.), craft show fees, storage costs, computer expenses (for accounting purposes), even a portion of his utility bill, not to mention mileage reimbursement for some his grand trips across the United States for a listed toy show.  Since he was blowing money and just feeding his need not to be bored, one year I figured that his $5,000 gain in wagon sales (about $50-$100 per wagon) could have allowed him an actual loss of over $10,000.  This loss could prove to be quite valuable.  Taking into account, that he recieved a pension (and so did his wife), and they had to withdraw monies from his IRA, they "made" enough money (including his hobby income of $5,000) to create a "taxable" situation in relation to their Social Security funds.  (The amount of Social Security the elderly is taxed is proponent to the other money listed on their tax return.  It is a sliding scale, however, the more money you show as "gross income," the higher your social security monies received are taxed).  Going back to the loss of $10,000, if he were to be deemed as an actual business, sliding this number into his tax return would subject his pension of $20,000 of year to become $10,000 a year ($20,000 - $10,000 business loss).  With his income lower, his Social Security was taxed at a limited amount, and in 2002, his tax bill would NOT have shown the $750 bill, BUT a refund of over $3,000!!!!  Can't believe it?   It's true!!

What the general population does NOT realize is that there are specific situations in which the government has created what is called measures to promote "public policy."  These are the issues in which we give tax payers the child tax credit of $1,000 per child, or companies get tax breaks if they open buildings in poverty stricken neighborhoods.  The government uses money to push our options into their favor.  Of course, in the end, it almost always benefits the government (nothing is free, right?), however, in regards to business legitimacy, it can prove rather important to follow IRS published guidelines.  Some call it "loopholes," other's - scams, or other negative definitions.  But, you need to remember that this is almost always never the case?  What separates you from the other seller or storefront is gained knowledge.  That's it.  Your neighbor can have the same value of house, the same number of exemptions, the same mortgage interest, possibly even the same income....but, if you take your taxes to a specialist, and gain insight to savings, and he pulls out his tax return the night before it is due and half-hazardly fills in the blanks, who wins?  Knowledge does.  The deductions and credits that are due you are exactly that.  If you propose your store as the half-hazardly, shuffled mess, your taxes will reflect that.  Each and every year, the IRS collects monies, millions and millions, that actually belonged in your account.  In some situations, they have corrected the manner (if it is completely obvious), but in real life, they pocket it, shake their heads, and use your "dumb" story, as a "guess-what?" as the water cooler. 

Treat your store as a business, and the IRS will treat you to your deserved breaks. 

Jennifer Erickson, MBA