posted on August 6, 2001 12:36:02 AM
I have a couple of questions regarding Schedule C - Profit or Loss From Business and Home Office deductions. Thanks in advance!
First question is for postage costs to ship items. Is it best to include this as part of 1) Cost of Goods Sold - it could go under Materials and Supplies or Other Costs or 2) Supplies (line 22 in the Expense Section) or 3) Other Expenses (line 27 which would be separately explained). I would personally lean toward Cost of Goods Sold since these costs are directly related to the products sold.
Second question is how to account for ebay listing and final value fees. 1) Fully or partly under Advertising (line 8). 2) Fully or partly under Commissions and Fees (line 11). I think it would be all under Commision and Fees.
Lastly, for Home Office Deductions not only can you deduct your home office but you can deduct expenses allocated to space regularly used for inventory storage if the space is separately identifiable and suitable for storage. Needless to say I unfortunately have stuff in almost every room. I will for sure deduct my office and a portion of a room which is clearly identifiable. I am considering deducting my garage since it is used and is also identifiable and suitable for storage. Has anyone deducted their garage before?
posted on August 6, 2001 04:59:51 AM
The BEST advice that I can give you is to find a retired accountant who does taxes as a homebased business. Many of these people put signs up during the tax season and take them down the rest of the year. It should cost you less than $100 and be well worth it.
T
posted on August 6, 2001 08:16:28 AM
First, by all means invest in a few hours with a tax comsultant...but choose one that is open all year in case you have questions after the tax season. I use an Enrolled Agent. The cost has been well worth it to me, and it is tax deductible.
Second, postage stamps, like all other office supplies, etc., are NOT part of "cost of goods sold." They are listed separately in the "other expenses" area. Cost of goods sold is where you put the cost of your inventory, or the costs of manufacturing (if you actually make your items).
Ebay fees should go under commissions and fees.
Home office deduction: If you qualify, take it, and don't concern yourself with it being a red flag to audits. If the rest of your return is in order, and you are not claiming outrageous deductions, you should be fine. Up until last year, we took TWO in-home office deductions because both of us worked at home. We've never been audited, but if we were, we have all the backup information required to substantiate our deductions.
Get yourself a copy of one of the good tax manuals such as Lasser or H&R Block and study the secion on home offices carefully. Also, this is where your investment in a tax advisor will be important (and it is also tax deductible). Storage space is deductible, but only if you follow the rules. This is a complex issue, and you need to fully understand it before taking any deductions. But they can be worth quite a bit of money to you if done right. Good luck!
posted on August 6, 2001 08:46:24 AM
#3 - (A) Home Office: CPA, #3 - (B) Storage: (A) Red Flag to St. Dept. Revenue, not on Home Office and Income so much, but on "Inventory Tax" and "Property Tax". Solution, if possible, no inventory. (Vendor or Sub has most Inventory, Equipment, Tools) Same Day Shipping. Drop Ship. Good Examples: Japanese (Non US SDS/Inventory), Dell Computers, Texas. (Sorry, enjoy your Poetry quotes, Computer skills, Composition, Quips, but SOC imbedded) - PJ187 - L&T&(cU's)?
posted on August 6, 2001 08:50:26 AM
You ever read "Finnigan's Wake" by James Joyce? Yowse guys have sooooo much in common -- literature wise speaking thingy!
posted on August 6, 2001 09:11:04 AM
Definately watch out about the home office. Not only is it a red flag, nearly doubling your chances of getting an audit, but it is not that much of a deduction. What you are doing is depreciating the value of your home by depreciating the value of the office. When you sell your home, you have to recapture the value of the depreciation, which means you will have to pay tax on it at that time (this is how it as explained to me by my tax dude). All in all, for me it was about $100 a year in money that I would have to pay back when we sold our house. It was just not worth the risk of getting the audit and all of the expenses of that audit.
posted on August 6, 2001 09:41:48 AM
It's true that you will need to recapture your depreciation when you sell your house, and I've taken that into account in my own calculations. But if you rent, you do not have that problem.
Additionally, you can deduct the cost of utilities, property tax, home repairs, etc., in proportion to the size of your home office. That amounts to a great deal more than $100 for most of us. More like $100 a month or more, and those expenses are not subject to recapture provisions. I figure that my in-home office deduction was worth about $3000 to me in 2000, and I'm only claiming something like 17% of my home's area as my office.
We all need to do what feels comfortable. If fear of an audit is so strong that you're unwilling to take a legitimate deduction, then that's how you feel and that's what you should do. While I don't look forward to the possibility, I know I have the proper records to back up my deductions should the IRS ever ask for proof. And I know that the audit rates are extremely low as it is (well under 1% for general filers and under 2% for those with a Schedule C).
posted on August 6, 2001 10:25:22 AM
All those in Congress who sponsored, voted for, and passed the IRS "Burden of Proof" Legistlation deserve our thanks. Thanks! -PJ187- (PS - Seen any WH Furniture and/or Art on eBay yet?)
posted on August 6, 2001 10:27:42 AM
Audit rates are extremely low and with some of the recent liberalization of the home office deduction perhaps this will not be as big as a focus.
I am definitely going to take the home office deduction since I am entitled to it. My question centers around if others not only took the home office deduction but also as part of it claimed storage space such as part of another room or the garage.
For postage stamps, I agree they are generally supplies or other expenses. But we are a mail order company essentially as an ebay seller so it does make some sense that this is a Cost of Goods Sold. I definitely know that packaging materials are part of Cost of Goods Sold so why not stamps since they are also a direct cost. I think of the other expense line more for general postage not postage related to ship the products of an ebay business. Anyone agree with me or had some tax accountant advice on this?
posted on August 6, 2001 11:20:34 AM
I think as long as you have all the #'s in there and its reasonable to put it on the line, the IRS won't care which line you put it on...
I'd have to go back to mine from last year to remember where I put my postage.. I think I put my Mailing supplies & postage all under office supplies, but I"m not 100% sure.
I don't include postage, mailing supplies, packing materials, etc. in the cost of good sold. Cost of goods sold is the price I paid for the item, or the cost to produce the item - and I don't include packaging and delivery as being part of the "item" but as part of the expense of delivering the item - and thus goes in the expense section...
posted on August 6, 2001 11:55:14 AM
Be careful on taking a home office deduction for the simple reason that over the long term you may lose more by taking the deduction as opposed to taking it which was my case. It really just depends on your personal situation. Rather than write about it, here's a link:
posted on August 9, 2001 08:18:45 PM
I spoke to the IRS today. They stated that auction fees should be shown as part of commissions and fees. They stated that shipping costs such as postage and packing materials should be listed as an other expense in Costs of Goods Sold; general postage not related to the shipment of goods would be an offcie expense. They also stated internet fees would be direct utilities. If anyone is interested, I do have publication numbers.
posted on August 9, 2001 08:59:57 PM
I have been told by my accountant that all shipping and ebay costs are considered costs of good sold because I simply cannot run my business without those expenses. All packing material that I buy such as peanuts, boxes, tape etc are also put under cogs. Other fees incurred such as paypal fees, credit card processing fees, etc are not considered cogs because they are not an essential part of my business like ebay is. That's just what I have been told by my accountant. I think that this area of business is so new, people often receive different information. I'm just keeping all of my records and invoices to cover my butt just in case....
posted on August 9, 2001 11:30:17 PM
I have had a part-time antiques business for 10 years now. Due to slow sales in the antiques mall I'm in, I am cutting back on the space I use.
I currently claim a storage unit (which is totally full). However, with all the merchandise I am having to bring home, I feel I should be able to claim a home storage deduction. Can I do this? Antiques are literally filling our entire apartment. (We rent.) Our closets are full of boxes, the dining room has no area to "dine in", per se; neither does the living room... We are a short step away from having paths to and from rooms. Can we claim any sort of "home/office" deduction?
I've resisted in the past because I know this is an audit trigger -- but the fact is -- we can barely live in our apartment because of all the merchandise. Can't we claim some sort of deduction?
posted on August 10, 2001 12:32:51 AM
As a CPA myself who does not specialize in taxes I agree with you that both would be in COGS after further thought on this matter. I actually received conflicting advice from two different IRS agents on the shipping charges which is a very material amount in my business and then escalted the matter to a third agent who spent a good 30 minutes researching the issues and provided a detail explanation of the decision including publication numbers. The logic that was explained to me would be in line with your accountant's opinion for ebay fees. The answer on ebay fees was given to me by another agent who in my opinion was not as experienced. I personally will probably transfer them to COGS. My ebay fees under commissions are material and raise a red flag since commissions are often associated as expenses paid to third party individuals which require filing additional tax forms.
posted on August 10, 2001 12:41:06 AM
In regards to the home office deduction, it is definitely a wise deuction - more so for a renter because there would be no issues regarding the sale of your home such as depreciation recapture. There are many people who try to scare people from taking this deduction, they are off base. If you are entitled to it, you should definitley take it. My brother works for Deloitte & Touche and he always says that the smartest tax filers are agressive filers. Some tax law is grey and there is nothing wrong with being aggressive within the law substantiated by proper documentation. Don't let people scare you away with high audits for home office deductions. Audit rates are low and the rules for home office have been loosened.
posted on August 10, 2001 07:14:06 AM
Call me cynical, but does it REALLY make any difference which line you put these things on? The bottom line won't change at all whether you expense your Ebay fees as a commission/fees or as part of your COGS. My advisor said that as long as your line choice is reasonable, the IRS would be highly unlikely to care where you report. I have documentation for all the expenses I've incurred. I also know that at my place of employment shipping costs for mailing items to buyers are NOT included in our cost of goods sold, but expensed as postage.
posted on August 10, 2001 07:48:59 AM
The problem with considering ebay fees as a COGS, is when you have an auction that doesn't sell, or a deadbeat. You still have fees, but no sale associated with them. I don't know if anyone is crazy enough to individually enter each ebay fee into their accounting system, but how else would you differentiate between fees associated with a sale and those that are not. I just put one entry per month, what ebay charges my card, and consider it advertising.
Same with shipping costs. If the only things you EVER mail are packages with stuff you're selling enclosed, then it's clearly COGS. If you use postage, envelopes, or whatever else you include in the category, for other things like paying bills, promotional mailings, or ordering more supplies, then it may be easier for you to just lump it all into an expense category.
posted on August 10, 2001 09:31:28 AM
Ok, on the tax subject, you can claim the amount paid for internet service, but can you claim it all? Or only part?
posted on August 10, 2001 11:59:26 AM
Similar to other utilities related to a home office, I think you can take the % used for business purposes. So if you use the internet service for 25% ebay and 75% personal, you'd take 25% of the total internet costs...
BTW - in researching COGS some more, it appears to be based on the cost of ACQUIRING inventory not DELIVERING inventory - so I think the Ebay fees should be down in the expense categories.. not that it'd change the bottom line much, but I still think that's the proper way to handle it.
posted on August 10, 2001 12:12:55 PM
After researching this by reading the publications and speaking to an additional agent, ebay fees should not be in COGS. They should be placed in Commissions and Fees or separately listed as an Other Expense. I will include postage costs as COGS in the Other category as previously discussed. Internet fees as any expense should be broken out between business and pleasure. Full-time sellers should have no problem deducting the entire amount of any internet fees since it is an ordinary and necessary business expense for selling on the internet.
For our business, COGS is the materials and sublet labor to get the item to FOB our terminal. We choose to include freight and, in our case, crating, as part of our outbound freight expense. As I only sell on eBay part time, auction fees go into our advertising expenses and shipping (of the USPS variety) goes into our outbound freight expense.
Internet fees are allocated to our dues and subscriptions expense.
The paperwork end of auctions if correspondence is required, (say an express mail letter)goes to our office expense account along with other office postage.
Re: Home office and inventory...hmmm.... a fair amount of bookkeeping, my wife tells me... (I do the business accounting and taxes)She always thinks I spend too much time on accurately tracking inventory and apportioning home office expense...*G*
The references in other posts about recapture of depreciation are accurate...there is no free lunch...my opinion is that, if I can maximize my deductions now, I don't mind paying tax later with inflated dollars...the same philosophy which applies to business (SEP-IRA and KEOUGH) retirement plans.
And, since the IRS requires that maintenance, insurance and repair expenses to the home office be apportioned in accordance with the percentage of business use, additional, non-recaptured deductions can be realized. When a large percentage (over 50%, in our case) of space is devoted to business, this can be substantial. To be honest, I preferred the old method of seperating the business space and depreciating and expensing it seperately; with the advent of Form 8829, that option was discouraged, even though, in my case, it may be more accurate.
The advice to consult a tax advisor is sound...I spent many years as a young man at the elbow of my dear old dad, who was a CPA, and learned volumes about accounting and business practice. I'm sure glad, with the advent of tax preparation software, some of the tedious work has been eased, although, especially when a home office and inventory are involved, extra care must be taken to conform to current accounting norms and tax code. When I get stuck, I call my mom's CPA (dad is now departed)for advice...
Interesting and timely topic...now is definitely not too early to consider these issues for the current tax year...In our business, we tend to project out about a year to 18 months in advance and adjust for code changes as they are implemented...
posted on August 10, 2001 01:21:07 PM
Pat - These are all issues you should be thinking about all year long, I agree. Are you making money on your sales? You might be needing to file quarterly income tax returns and pay Uncle Sam a little upfront now in taxes - I didn't last year, but had enough taken out from my RL job to cover the self-employment and taxable income from my auctioning. This year I got married, which REALLY will mess you up tax-wise - so I started filing quarterly income taxes - VERY easy to do with good records.
I'm also one of those who is tracking inventory carefully and reconciling each month or every other month in a real pinch. I have a significant amount of $ tied up in inventory - although it is shrinking considerably now. Which is probably a good thing since my SALES are shrinking considerably now... 8)
Unfortunately (or fortunately, depending on your POV *G*), I've been paying quarterly taxes and that yearly FICA (SET) nut for most of my adult life. I've been in business in the B/M world since my early 20's...
Most business owners these days will likely agree that inventory is a liability, not an asset...Hence the move by many manufacturers to "just in time" inventory where parts/materials arrive just in time to be assembled into products and shipped.
Inventory rarely appreciates and usually cannot be deducted on a tax return unless it is obsoleted and scrapped. Ergo, the business owner spends valuable cash to stock inventory but realizes no benefit, taxable or otherwise, until it is sold (or scrapped, which would leave the "benefit" somewhat in doubt)
I've had some business colleagues even have to report certain types of inventory as liabilities on their financial statement.... "extended liability" was the term they used IIRC...
We now brag how little inventory we floor and what the turnover rate is...
BTW, last year was my first time as a joint filer (you're never too old to get married, right? )...To top it off, my new wife has her own business....a marriage of Sced C's, to coin a phrase...*G*
Congratulations to you...just in time for the end of the marriage penalty...
)...To top it off, my new wife has her own business....a marriage of Sced C's, to coin a phrase...*G*