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Is Your EBay Activity a
Business or a Hobby?
By - Kristine McKinley
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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About The Author:
Kristine McKinley is a CPA and Certified Financial Planner. For more information on eBay taxes, sign up for our free special report 'Tax Tips for eBay Sellers'. http://beaconfinancialtips.typepad.com/ebaytaxtips/2007/02/free_special_re.html
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