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Do I just present to my tax preparer one single dollar amount of my profit or am I required to provide a line by line item of everything I have sold, what I paid for it and what I sold it for? I have these records but just want to make sure I know what to provide come tax time.
Instructions and the forum are right there.
Line item needs to be kept in case of an audit.
(I am NOT a tax professional by any means)
It is listed as "Retired Product", so it won't come back. If it was marked as "sold out", then it could.
It just annoys me to no end how many people I read complaining about taxes, of all forms. Here and on the eBay/Amazon seller forums, people complain about taxes.
I do very well and pay more in income taxes than the average person makes, so when anyone comes out and says, "I am not paying taxes", I get annoyed.
If people do not like the tax rates, then elect politicians who will lower them. Of course, no one then wants to hear that they will get fewer government services in return.
It just feels like everyone wants to have their cake and eat it too.
Of course, I could be wrong on that. I was once. In 1995, I think. ;)
As an example: let's say I buy set A for $50 and sell it for $100. I make a $50 profit. Then I use that $100 of revenue (original investment + profit) to buy two Set B's at $50 each. Do I owe taxes on the $50 profit?
I ask because I just end up rolling all of my profits into additional inventory, so I don't really net any cash, my inventory just grows.
All online sellers, even if you sold a single minifig for $1, are expected to report their sellings. And there is a fine line between being a hobbyist and a business.
As a small seller (with the spectrum, IMO, being the person who sells one item to the person who sells $20,000) its pretty easy to show loss considering the many, easy deductions. You are able to show a loss for a few years (again, the line is gray) until you have to a) stop selling or b) show a profit. If you show a loss for multiple years, then you are considered a hobbyist and have to go back and repay the deductions from all the years you sold.
Also, if you are selling items consistently (say one a week), then you are required to collect sales tax in the state in which the item resides.
Under $20,000 and 200 items sold, its the honor system. When the government eventually turns into a mandatory and policed requirement, eBay is dead.
Also, the IRS has access to any accounts that earn interest. So if you sold $15,000 on ebay, didnt report it, but magically had some cash entering your savings account, you could get flagged (possible drug dealer?).
Now, if you later lose money on a set and sell it for $10 less than you paid, you can subtract that $10 loss against the $50 profit for a net $40 profit.
Also, you can generally deduct legimiate expenses such as selling fees, gas to drive to the post office, boxes and shipping supplies, etc. If you pay yourself an actual salary (complete with payroll taxes and everything), you can deduct that as well).
If you don't know anything about accounting, it is worth spending a few hours on the Internet doing some reading, there is a lot of free information out there to teach you the basics.
For example, buying a $50 set is generally not an expense, it is an asset. It becomes a "cost of goods sold" (COGS) once you sell the item, but until then it is an asset.
Knowing what an asset, expense, liablity, etc. are all key to proper accounting.
Now, if you're just selling 5 or 10 sets a year, honestly no one cares, that is garage sale stuff. If you're selling 5 or 10 sets a week, you need to be keeping track.
Against that, I can subtract sales tax I do pay on items that should be exempt. For example, my local LEGO store refuses to sell to me tax exempt, for whatever reason makes sense to them.
So the sales tax I pay to them counters the sales tax I'm not paying online.
Every 3 months I file a sales tax return with the State of Texas, all the tax I've collected in sales, plus all the sales tax I owe for personal purchases, less the sales tax I've paid on items that shouldn't have been taxed.
It is well worth your time to read that.
Paying $50 for a set that you plan to resell later is not a deduction. It does not become one until you actually sell the set, until then it is an asset.
Lets say you start your online business with $50. That $50 becomes a capital equity investment into your business. It can be taken out later tax free since it was an investment in the business.
For example, if you buy a red doodad for $50 and 1 day later sell it for $100, you earned $50 gross profit (before actual expenses like selling fees.
Lets say you turn around that same day and buy a blue doodad for $50. This does not cancel out the $50 profit, it becomes an asset you carry on the books (Quicken Business and Quickbooks will do this for you easily) until you sell it.
Lets say you sell that blue doodad the following day for $100. You subtract the $50 COGS (cost of good sold) against the $100 and you have another $50 gross profit.
So you now have $200 of reportable income and $100 of gross profit. Lets say you have $50 in selling expenses (fees, gas, etc.). So you actually owe income taxes on $50.
This is what accounting software does for you, but you can do it on paper with a pencil if you really wanted to. The software will keep track of your inventory, your profits, and all your expenses. This is by far easier if you open a separate bank account and keep all business expenses in another bank account.
That does not require a "company or LLC", you can just open another personal bank account and report it all as personal income as a "sole-proprietor".
Do keep in mind that any profit is self-employed income so on your personal tax return you likely will owe self-employment tax. This is where you get to discover that you were paid more than you thought you were by your prior employer because they were covering half of your FICA taxes for you. :) (15.3% of your profit goes to this before regular income taxes come out)
Please note, I'm not a CPA nor do I play one on TV, but I have spent a lot of money on them over the years and have owned a business for 15+ years and paid a whole pile of taxes in the process. Fun stuff indeed! :)
But that is their choice I suppose, I can't find anything in the law that says they have to take it.
I just keep my receipts and deduct it, so in the end I'm not paying it anyway.
On topic, are we serious ds is retiring! It's not on my radar at the moment due to the fact I thought it had another twelve months...
Thanks in advance
I.e. If you made $1000 in sales and had $750 in purchases and expenses you would net $250. Say you have $200 in inventory left over. Add that to your netted $250 and you will owe taxes based on $450 -- not $250.
This is why LFT has properly called your inventory of Lego an asset. They do not become expenses until they are sold.
My guess would be take a $50 set, divide it by the number of parts, say 500. Cost per part is $0.10.
Any recommendation on accounting and/or inventory management software ?
Lets say a set cost £50, and you sold 17% of the set for £20, what would you treat as profit?
This complication is one of the main reasons I have never set up a bricklink store to sell off the huge amount of spare parts I have knocking about. It's a total minefield.
To make it more interesting. Say you buy 2 blue widgets. One cost you $90 and one $120. Then, you sell one of them for $200. You just stacked them in the corner, so you don't know if you sold the first one or second one. That's where your method of inventory comes in. LIFO or FIFO. Last In First Out or First In First Out. :-) Oh yeah, and that is just 2 methods of inventory, there are more.
You get in to the big leagues and you accure and depreciate too. Like depreciate the cost of your computer over 3 years, instead of absorbing the cost in the year you bought it. All those debits and credits.
I fancy having a bricklink store one day, but there is no way I would do it already being a higher rate tax payer. Maybe its a back up bit of fun if ever I change jobs.
Having said all that, I get the impression that a huge amount of UK bricklink stores are not registered as businesses with HMRC, even though it is a legal requirement to do so within 90 days of starting a business, which is exactly what an online shop is, no matter what size.