Many eBay sellers start out as a hobby, or just to clean out their closets. Many times, this hobby can lead to a profitable business.
A hobby is an activity that you do simply because you love doing it, but it may also earn you some income. That income must be reported on your tax return, even if it is just a hobby.
Some hobbies may actually be businesses, which would allow you to deduct expenses against any income you earn. On the flipside, some businesses may only be hobbies, in which case you would only be able to deduct expenses up to your earnings.
How can you tell if your activity is a business or a hobby? Basically, it's whether you have a profit motive or not.
Learn what factors the IRS looks at when determining whether a business is a business or a hobby. The IRS looks at nine factors to determine if you are trying to make a profit, or if you're just enjoying a hobby:
* Whether you run the activity in a business like manner
* How much time and effort you put into making a profit
* Whether you depend on the activity for your livelihood
* Whether your losses were due to conditions beyond your control
* Whether you changed your operating methods to improve profitability
* Whether you or your advisors have the knowledge needed to carry on a successful business
* Whether you successfully made a profit in similar activities in the past
* Whether the activity makes a profit in some years, and how much
* Whether you can expect to make a profit in the future from the activity
Here are some things you can do to show that you are indeed operating a business and not just a hobby:
* Get an employer identification number (EIN)
* Apply for a business name
* Have a separate checking account to be used for business transactions
* Hire an accountant to keep your books
* Create a business plan
* Keep track of the time you spend each week doing business activities
* Consult other business owners or advisors to help make your business profitable
To minimize the income tax on your eBay sales, you should treat your business like a business, not a hobby (even if it is just a hobby!). By following the tips in this lesson you will be able to deduct your business expenses and keep your tax liability to a minimum.
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