Tax Questions for Sellers (Schedule C)
 

I started selling cards for the first time last year, mostly via ebay (and some BST here, and am planning on using GSB in the future). I'm working on my taxes and am filling out schedule C for the first time, and have some questions. If this thread is not appropriate for this board, please delete it. :)

(1) For type of business (Line B at the top), would this be: 454112 Electronic Auctions?

(2) For revenue (Part I, line 1), I assume I exclude any sales tax paid to me by buyers (which I then pay to the state). Is this correct? Basically, I'm assuming that I do not need to put sales tax paid to me anywhere on my return.

(3) If I buy an item meant for resale, but then return it with a restocking fee, is there a particular line that is meant to handle this loss? For example, if I purchase an item for $100 but only receive $80 refund for it, is there a particular line that I put this loss on?

(4) Similarly, if I bought a card, but later find it is deemed worthless (e.g., because the card was not authentic), is there a line that I can write off this loss?

(5) If I lose/damage a card, is there a line to write off this loss? I'm not sure if (3-5) can just be grouped under separate line items in line 27 / Part V?

(6) For purchases under Part III, Cost of Goods Sold, line 36, I assume that this means any items (purchased for resale) that I purchased in 2010, and would include both items I sold in 2010 and items not sold (but placed in inventory). Is this correct?

(7) I assume under line 39, Other Costs for Cost of Goods Sold, I can put the costs of sending the cards to TPG's for grading / authentication. Is this correct?

(8) Finally, for checkbox 32a/b, the question is whether "All investment is at risk" or "Some investment is not at risk." Is it correct to check that all
investment is at risk? Although I don't expect all of my cards to go to 0, all of my cards can decrease in value from the price that I purchased them at. Is this the correct reasoning.

Again, thanks for any help here. I called the IRS on Friday night to ask some of my questions, and was on hold for 3-1/2 hours. I talked to them for 5 minutes, and then my call dropped. Crazy.

Hi Gary - I'll try to help you with your Schedule C questions. However, FYI, I am a retired corporate & governmental accountant (NOT a tax accountant), and the only tax returns I do are my own; but I do Schedule Cs for our (my wife and me) eBay sales activity. If there are any tax accountants/attorneys on this Board, please do not hesitate to correct me if I am wrong. This said, here are my responses to your questions:

(1) Yes
(2) Yes
(3) I would include this $20 "loss" on Line 36. Alternatively, it could be included on Line 39.
(4) Yes, by virtue of including the cost of this worthless card on Line 36 and not including it on Line 41, you will in essence be writing this "loss" of via the Cost of Goods Sold on Line 42.
(5) Same as (4) above. If you put items (3) thru (5) on Line 27-Part V, the end result will be the same, however I believe that the costs associated with the products you sell should be reported in Part III.
(6) Yes. The purchases you didn't sell would be reported on Line 41.
(7) Yes. And, the TPG costs for cards you didn't sell become part of your end-of-year inventory on Line 41.
(8) I trust that you realize that checkbox 32a/b is applicable only if you had a net loss on this business activity. I assume you would check box 32a, unless there is an unusual situation, such as someone else having agreed to cover any losses that you incur.

I hope this is helpful to you. Please don't hesitate to LMK if you have any questions.
Best,
Val
ekehl333@aol.com

Thanks, Val. Really appreciate your answers. That helps a lot. For (8), yes, I did incur a small loss for my first year. Thanks! Gary

One thing to keep in mind is that if you continue to only have "losses" on your returns, the IRS may determine them to be "hobby" losses, which are not deductible.

I disagree with item #1 and #4 and #6.

For item #1, that would be the business type for Ebay, Inc. You would be a reseller of some sort.

For item #4, maybe. But you need proof that the card is wortless, i.e. rejection by TPG and then disposal. I prefer to just sell it as a reprint and then I can get the actual loss.

For item #6, the items you purchased in 2010 and didn't sell is inventory. Think of it this way....you can't buy/sell for a profit of $200K for the year and just buy a T206 Wagner on Dec 31st for $200K and say that is COGS and no profit was made.

Definitely be careful about having a loss year. Whenever you are borderline, make it a net gain for the year. Having a loss 3 out of 5 years can put you on the audit radar, especially with this type of business.

Tax Questions for Sellers (Schedule C)
 

Taxpayers are required to show all income and related deductions for the tax year. However, you can make various elections that will also vary the outcome. Not reporting expenses is as incorrect as not reporting some income. Schedule C is deemed "earned income". And earned income determines the amount of the Earned Income Credit, which is refundable. Overstating income is a method of increasing this Earned Income Credit. Which is a very serious offense that the IRS is very deeply concerned about. Have a tax firm review what you are filing, and forget about the advise you will receive via the forum. I am not saying that all is bad advise, only some is just knee jerk responses to how to file your 1040!

Response to egbeachley:

Re item #1, if you don't agree with Gary's code, then what code do you suggest he use?

Re item #4, I believe that I am correct if Gary uses the "lower of cost or market" to value his ending inventory and checks block 33b (assuming this card is worthless). However, if Gary uses "cost" to value his ending inventory (block 33a)("cost" must be used if Gary is using the "cash" accounting method - see Line F), then I believe that technically he cannot deduct his cost of the worthless card until he actually disposes of it (gives it away or trashes it, if it is truly worthless) - once he does this, its cost would no longer be included in the ending inventory figure.

Re item #6, you said the same thing I did (Line 41 is "inventory at end of year").

Val

Reseller, hobbyist, something like that. But he's not in the business of running electronic auctions.

For #6, to the specific question of whether items purchased in 2010 should go to COGS, even if put to inventory, the answer is No.

I imagine that backing out the COGS of inventory items will put the small loss into a gain.

Re item #6, Gary's question is, as I understand it, are ALL purchases for 2010 reported on Line 36, and the correct answer IMHO is YES. Then, those purchases that Gary did NOT sell in 2010 are reported as year-end inventory on Line 41, which is then subtracted from Line 40 to arrive at the cost of goods sold for 2010.
Val

Got it. The form calls it COGS but it really is purchases that gets you to COGS later. Only the IRS could do it that way.

It's not "only the IRS." As I think anyone who has taken Accounting 101 will attest, the basic CGS formula for a wholesaler or retailer is: Beginning inventory plus purchases minus ending inventory = CGS. For a manufacturer, the basic concept is the same, but the application is more complex.
Val

Thanks, all. Appreciate the responses here.

I actually understand all this accounting talk... and I collect sportscards, could I be a bigger nerd?