Selling in volume regarding taxes.

[Section103]

Legal entity is NOT required.

CPA

Also, you get what you pay for.

[sbfinley]

Thanks for all the input!

[birdman42]

Steven,

Advice from a tax professional (me): Keep good records. If you receive a 1099 showing gross sales, and you claim a smaller amount of income, then you might easily get a letter of inquiry. No need to panic; just produce your documentation. We deal with them all the time, and usually a return letter with photocopies of records is all that's required to settle the issue. The IRS typically runs 13-16 months behind on matters like this, so when you file your 2013 taxes next spring, any letter you get would typically show up in the summer of 2015. (Some letters go out within days of filing, but seldom for cases like this.)

What follows applies to all hobby income, whether it shows up on a 1099 or not (or even if you're selling off your collection).

If you're using the flips to fund your other purchases, then it's clearly a hobby. Steve B is correct: you can't take a loss on a hobby. If you've escalated it into a sideline business, then you need to be able to show clear intent to make a profit (even if you don't make one in some years). No need for a schedule C as long as it's a hobby. If you do decide to go the business route, you can still do it under your own SSN. That's what the Sched C is for. If you have a separate tax ID number, then you're getting into other forms. (Though my wife and I had a C corp for about 10 years, and the recordkeeping wasn't all that bad.)

The income (that's net receipts [gross receipts minus PP or CC charges, eBay or auction house fees, and returns] minus cost of goods sold) shows up on line 21 of your 1040 as "Other income."

Your expenses show up on Schedule A as Miscellaneous deductions. That's things like postage, grading fees, etc. The catches are that 1) you have to itemize deductions to begin with in order to get any benefit; and 2) your bundle of Misc deductions (hobby expenses, investment costs, etc) is subject to a 2% floor. So if your adjusted gross income is $100,000, the first $2,000 in total Misc expenses doesn't count.

Here's a simplfied example:

You buy cards for $17,500 and sell them for $23,500. You incur other hobby-related expenses of $2,500 along the way (for grading, shipping, storage, show entry). According to the IRS, you had income of $6,000 from your hobby.

Add that $6,000 of hobby income to your wages of $69,000 for a total adjusted gross income of $75,000.

On Schedule A, your hobby expenses of $2,500 go on line 23. Then using lines 25 and 26 you'll subtract the 2% of your AGI (in this case $1,500) for a net "Misc deduction" of $1,000. Many people have other Misc deductions--tax prep fees, safety deposit box rental, a few job expenses--but those often don't come up to the 2% floor. In your case, you're covering the floor with your hobby expenses, so you would get a tax benefit out of all the other stuff too.

That's the short answer. There are lots of complicating factors I won't go into here: taking travel expenses; breaking up lots; choice of hobby vs. business; and on and on. You'd want to talk to your tax preparer about these. And I would recommend using a tax pro for at least the first year--programs such TurboTax are great if you already know what you're doing, but they won't walk you through a decision tree the way a pro will.

Feel free to PM me if you want to go into anything a little deeper.

Bill

[sbfinley]

Thanks Bill! If an issue comes up around tax time I'll certainly PM you for your services!

[thecatspajamas]

Originally Posted by birdman42

breaking up lots;

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

[Leon]

Originally Posted by thecatspajamas

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

Bill can answer way better than I can, but the way I do it, is I take the total number of pieces bought and divide that number by the total price paid. That is my true cost basis per piece of a lot. The sell price is irrelevant and some will be high and some low, but the cost per piece is the same. As a cost basis it all equals out that way. As far as time you own something, I think that will have more to do with long or short term gains. Consult a tax professional >

[birdman42]

Originally Posted by thecatspajamas

Bill,

I'd be curious to hear your take on this as it relates to remaining inventory value/cost of goods sold, as most non-hobby professionals I've talked to don't seem to understand that the "value" of most purchased collections cannot be split evenly among its pieces, and sometimes value of a particular piece cannot be determined until it is sold, which may or may not happen in the same calendar year that the collection was purchased.

Or am I just making this unnecessarily complicated?

Lance,

Yes it's unnecessarily complicated, but that's not your doing. Pin this one on our tax code.

It's true that you don't always know what you'll get for an item until it actually sells, but you know what you figured it at when you bought the group, so that's an acceptable valuation.

Hobby purchases are treated differently from business purchases.

Hobby:
How to handle a lot breakup depends on what you're doing with the lot. If you buy it with the intent of breaking it up and selling it all, there probably isn't much difference between assigning individual values and simply splitting the cost evenly among all the pieces. But if you're buying a lot for one or two items and selling off the rest, then it does make a difference.

Say you buy a lot of 12 T207s for $600. There's a Johnson (which you want to keep) and 11 commons. You sell off the commons for $40 each ($440), so in your mind you now have $160 in a nice WaJo. Can you show a tax loss of $10 each on the commons? Probably not a good idea, because that leaves you with a basis of only $50 in the WaJo. When it comes time (in a few years) to sell off your collection, the IRS would frown on that valuation, saying that you were improperly offsetting current income with long-term capital gains. (Not looking for a response here, but a board member recently faced a similar decision. He posted an extremely rare card that he bought in with a group of commons.)

Business:
If you're talking about inventory and cost of goods sold, that's a business. Then it doesn't matter how long you hold onto something before you sell it; inventory is an asset rather than an investment, so it's all profit taken now or later and all taxed the same. You do need to assign a value to your inventory, but as long as you're consistent in how you assign values it all comes out even in the end.

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill

[Leon]

Originally Posted by birdman42

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

[egbeachley]

Originally Posted by Leon

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

Think of it this way, by using an extreme example. let's say you arrange a purchase of a T206 Plank for $50,000. But right before the purchase is completed you ask for the seller to throw in 4 T206 beaters that are essentially worthless. By using this method you have given yourself 5 cards with a $10,000 cost basis each.

During the next 4 years when you are in a 30% tax bracket you sell other cards and make a profit of $10,000 but also sell one of those T206 beaters for 1 cent. Your profit becomes $0 for each of those 4 years. 10 years later you eventually sell the Plank for $60,000 which gives you a $50,000 profit but you sell it the year after you retire and are in a 10% tax bracket.

Years 1-4 profit should be $10,000 and if in 30% tax bracket = $12,000 taxes.
Year 15 profit should be $10,000 and if in 10% tax bracket = $1,000 taxes.

Instead you have $50,000 profit in 10% tax bracket = $5,000 taxes.

So, in other words, if you apply high and low valued cards the same you can manipulate sales to lower your tax bill.

[birdman42]

Originally Posted by Leon

Bill- great stuff and thanks for posting. So I have a question as a layperson. As I said before, I have a CPA and another (EA) accountant who do my taxes and books so I won't personally make mistakes (and they are pretty good and don't make many). But if I buy a near set of 520 T206s, and ascribe my cost basis of $50 for each one, and add or subtract the sale price of each one, why wouldn't that work?

Leon:
Eric got this one exactly. Companies do this kind of cost-shifting all the time, even though it's somewhat shady. An example of how this would work to someone's advantage (if they get away with it):

Last month (October) you bought a 520 near-set for $26,000. You've had a great year in the business, and you realize you're looking at a monster tax bill for the year plus now you have cash flow problems from all the money tied up in the set. So you value each card at $50 then sell off 300 commons this year for $20 each. You've just created a tax loss (a reduction in your overall profit) of $9,000 for yourself. You then sell the rest of the set in 2014. Whatever profit you make shows up as 2014 income, when overall business might not be so good or you anticipate an unusual expense. {Disclaimer: This is not to be considered advice on how to beat the system.}

If you're set up as a sole proprietorship, partnership, S corp, or LLC, all the income flows directly to you personally and gets taxed at your marginal rate. In the 28% bracket that's a difference this year of $2,520 in taxes. If you're consistently in the same marginal tax bracket from year to year, it won't make much difference in the end. But if your income fluctuates significantly, or you're right at the edge of a bracket, then when you take income can matter a lot.

As I said in an earlier post, if you're consistent with your method of valuation you can probably justify it. But if you skip around from year to year, or from purchase to purchase, you're asking for scrutiny. Even if you don't get dinged for more taxes, you've gone through an investigation that's taken time and money you'd rather use for other things.

Originally Posted by N.ate

I think you hinted at this in this answer, but I wanted to ask specifically if it was okay to: assign value to a card within a lot for the calendar year it was purchased, and if not sold that year, I carry it over to the next year as a value/cost/expense of "0$", and kept the expenses in the year they were purchased during. The way I see it is that it evens out in the end, because, in that year I sell it in, I am recording it as pure profit. I've done that 2010-2012, and it was not an LLC at that time. It became an LLC in October of this year though, so I may need to do something different. Is the way I've done it from 2010-2012 moronic?

Nate:
Again, once you're talking about inventory then it's a business. You can't treat product inventory as an expense; that's for things like supplies and raw materials. If you buy a closeout deal of 10,000 CardSavers, you can expense the whole amount that year even though you take 3-4 years to use them up. But if you buy a group of cards, you can't expense the whole purchase in the first year; you have to take it as Cost of Goods in the year in which you sell an item.

Nate, I'll PM you with more info. General discussions about tax matters are fine on the board, I think, but talking about specific circumstances calls for privacy.

Originally Posted by Jantz

It may be possible to write of your internet bill as an expense too.

Jantz:
Once you get into taking things like part of your Internet and phone bills, travel, etc, you're looking more and more like a business rather than a hobby. A big tax advantage of a business is that you can deduct all your expenses, without regard for the 2% floor. A big tax disadvantage is that any income is now considered earned income the same as wages, and that means paying FICA and Medicare taxes in addition to income tax. For 2013 that's 15.3% on marginal income up to $113,700 and 2.9% on income above that--but you get to claim half that amount as an expense. (I didn't write the tax code, I just explain it.)

Originally Posted by Val

Hi Bill,
Thanks for the comprehensive info you presented in Post #8. Do I correctly understand that this info applies only to sports collectibles "dealers" (selling at shows, on-line, and/or via brick-&-mortar shops)? If you are "dealing" with a profit intent, then it's Form 1040-Line 12, supported by Schedule C. If you are "dealing" without expecting to make a profit, the IRS considers you a hobbyist, and your net sales (gross sales less cost of sports collectibles sold) go on Form 1040-Line 21, and your operating expenses are deductible on Schedule A (if you itemize, and subject to the limitation you described).

But, I believe most of us Net 54 members are merely "collectors" whose do sell some of our sports collectibles from time to time as we upgrade items in our collections, change our collecting focuses, etc. Is my understanding correct that when "collectors" do this, we come under the IRS's rules for gains on the sales of "collectibles" which I believe are taxed at 28%? Since sports collectibles are considered capital assets, this involves reporting capital gains on Form 1040-Line 13, supported by Schedule D, supported by Form 8949 (for most folks, I think), along with using the 28% Rate Gain Worksheet and the Schedule D Tax Worksheet in the Form 1040 Instructions book - right?

Val:
You are correct about the occasional sale of a collectible item. In general a sale is treated the same as any other investment item, and so should be reported on Schedule D. You can't take a net loss for the year on collectibles held for personal use. But my understanding is that you can use losses to offset gains for the same year. So if you sell a card for a $1000 gain in June and another for a $600 loss in September, you report a gain of $400.

It becomes a question of pattern, scale, and intent. I've been part of an auction lot purchase, in which each of us put in money to equal the total cost. No profit there, so no hobby income. But if you buy a lot on your own, with the intent of breaking up (and keeping some for yourself, or not) then that's at least hobby income. In the OP's example, he's looking for good deals to resell, so the intent is clearly to make a little money out of it. For the weekend dealer who sets up once a month at a mall show, that's probably a hobby and goes on 1040 and Sched A. Set up a couple times a month including larger regional shows, offer your cards for sale on the Internet, and travel to set up at a couple large shows a year, and it's probably a business. There are no bright lines between.

All for now,

Bill

[npa589]

Bill:

Even though I didn't start this thread, these were all questions I've had for a few years. Thank you for making available your expertise with such willing generosity.

I think you hinted at this in this answer, but I wanted to ask specifically if it was okay to: assign value to a card within a lot for the calendar year it was purchased, and if not sold that year, I carry it over to the next year as a value/cost/expense of "0$", and kept the expenses in the year they were purchased during. The way I see it is that it evens out in the end, because, in that year I sell it in, I am recording it as pure profit. I've done that 2010-2012, and it was not an LLC at that time. It became an LLC in October of this year though, so I may need to do something different. Is the way I've done it from 2010-2012 moronic?

Originally Posted by birdman42

Lance,

Yes it's unnecessarily complicated, but that's not your doing. Pin this one on our tax code.

It's true that you don't always know what you'll get for an item until it actually sells, but you know what you figured it at when you bought the group, so that's an acceptable valuation.

Hobby purchases are treated differently from business purchases.

Hobby:
How to handle a lot breakup depends on what you're doing with the lot. If you buy it with the intent of breaking it up and selling it all, there probably isn't much difference between assigning individual values and simply splitting the cost evenly among all the pieces. But if you're buying a lot for one or two items and selling off the rest, then it does make a difference.

Say you buy a lot of 12 T207s for $600. There's a Johnson (which you want to keep) and 11 commons. You sell off the commons for $40 each ($440), so in your mind you now have $160 in a nice WaJo. Can you show a tax loss of $10 each on the commons? Probably not a good idea, because that leaves you with a basis of only $50 in the WaJo. When it comes time (in a few years) to sell off your collection, the IRS would frown on that valuation, saying that you were improperly offsetting current income with long-term capital gains. (Not looking for a response here, but a board member recently faced a similar decision. He posted an extremely rare card that he bought in with a group of commons.)

Business:
If you're talking about inventory and cost of goods sold, that's a business. Then it doesn't matter how long you hold onto something before you sell it; inventory is an asset rather than an investment, so it's all profit taken now or later and all taxed the same. You do need to assign a value to your inventory, but as long as you're consistent in how you assign values it all comes out even in the end.

Leon's way of dividing price by # of pieces will work in a general sense, but if, say, you bought a 520 set of T206 for $26,000, it wouldn't make sense (or be supportable if it came to that) to value the Cobbs and the Schaefers all at $50 each.

Bill