PayPal Tax Forms Question for the vets

[Darth_Raichu]

1 hour ago, BillyBricks said:

$12,000 was what I kept after deducting fees, shipping, etc. from the prices people paid, but that's not what I report since IRS wants to know the overall sales (right?), which means I reported my total of about $14,000 for income. From the $12,000, about half was profit over the prices I paid for the items (after removing costs for materials, too), so profit in 2019 was a bit under the $6,000 mark. Take away the roughly $3700 from my profit and I am down to a bit over $2300 in profit on the year, which is hundreds of dollars less than I was about to receive from the Federal government if I hadn't been selling LEGO. 

This is going to be an oversimplification so do not take tax advice from some random guy on internet   

IRS want to see your total revenue and costs on Schedule C but ultimately they tax the profit (revenue - costs).  Inventory & eBay fees are part of costs.

 

I have been using the Turbotax Home & Business version.  It is more expensive but it essentially splits the calculation between business and personal income (but combine everything to 1 package at the end).  Plus, it outlines the specific deductions for each income stream.  To me, that makes a big difference on how to calculate the taxes.  I know some will disagree and say this is a waste of money, but I never give a **** what people say when the tool works for me  
If you like the way Turbotax asks for input you might want to check it out since it is more extensive version of the tool.   Or try other similar tax software that goes beyond the standard wage based income. 

[Alpinemaps]

So, question - are you looking at cost of inventory in a calendar year or when it was purchased?

In other words, if I buy a set in 2014 and sell it this week, should the cost of the good have been calculated as an expense back in 2014? So it’s only 2014 gross income minus 2014 cost in 2014.

Or, do I use the cost of the good I bought in 2014 as an expense against the 2020 income since that’s when I sold the good?

I guess the first way would mean I only deduct 2020 cost of goods against 2020 income vs the second way being subtracting the expense of an item only when it is sold.

Does that make sense?

[keymomachine]

10 hours ago, Alpinemaps said:

So, question - are you looking at cost of inventory in a calendar year or when it was purchased?

In other words, if I buy a set in 2014 and sell it this week, should the cost of the good have been calculated as an expense back in 2014? So it’s only 2014 gross income minus 2014 cost in 2014.

Or, do I use the cost of the good I bought in 2014 as an expense against the 2020 income since that’s when I sold the good?

I guess the first way would mean I only deduct 2020 cost of goods against 2020 income vs the second way being subtracting the expense of an item only when it is sold.

Does that make sense?

This is where bringing your total inventory number from year to year helps, because of course you count the cost of that 2014 inventory against the 2020 sale, it's just part of that number you bring from last year. I've only done this one year, and having done a better inventory at the beginning of 2020 I found I missed some sets, so I'll add those in as additions in 2020. You can also adjust for converting inventory to personal use in that number, because you're never deducting inventory, just cost of the inventory you sold.

[Alpinemaps]

This is where bringing your total inventory number from year to year helps, because of course you count the cost of that 2014 inventory against the 2020 sale, it's just part of that number you bring from last year. I've only done this one year, and having done a better inventory at the beginning of 2020 I found I missed some sets, so I'll add those in as additions in 2020. You can also adjust for converting inventory to personal use in that number, because you're never deducting inventory, just cost of the inventory you sold.

There are plenty of sets I converted from personal use to goods sold this year (so the opposite of what you mentioned). But if I’ve got you right, it’s taking the cost of the good when you sell it. That does help a lot.

Fortunately, I’ve kept a very good inventory for a very long time, with all my receipts, etc. So this shouldn’t be a problem.

[Phil B]

With my accountant’s blessing, I just do “total revenue for 2019” minus “all fees and expenses incurred in 2019” minus “total purchases for 2019”. Seems to work fine, but as I have shifted from buying more to selling more, I expect to have to pay more taxes in future years.

[Darth_Raichu]

12 hours ago, Alpinemaps said:

So, question - are you looking at cost of inventory in a calendar year or when it was purchased?

In other words, if I buy a set in 2014 and sell it this week, should the cost of the good have been calculated as an expense back in 2014? So it’s only 2014 gross income minus 2014 cost in 2014.

Or, do I use the cost of the good I bought in 2014 as an expense against the 2020 income since that’s when I sold the good?

I guess the first way would mean I only deduct 2020 cost of goods against 2020 income vs the second way being subtracting the expense of an item only when it is sold.

Does that make sense?

I am not an expert, but if you ask this to an accountant, most likely they would say either one is fine as long as you are consistent year to year

[Alpinemaps]

I am not an expert, but if you ask this to an accountant, most likely they would say either one is fine as long as you are consistent year to year

Back almost 30 years ago, I dreamed of being an accountant. And somewhere in the cobwebs way back in the back of my brain, the last couple of posts dusted off a fleeting memory of that. I think I was confusing them until I put words to post and bounced it off of you guys. So thank you.

[odysea11]

With my accountant’s blessing, I just do “total revenue for 2019” minus “all fees and expenses incurred in 2019” minus “total purchases for 2019”. Seems to work fine, but as I have shifted from buying more to selling more, I expect to have to pay more taxes in future years.

Careful Phil....that could catch up to you. My wife is an accountant and very familiar with this.....she just got a new client who tried the same thing (different industry), and is now helping him with the IRS audits and determining how much back tax and penalty he will owe. I am not a professional number-cruncher....but she knows her business quite well....

[KShine]

I was an accountant in a previous life (before I gave myself to LEGO) - many of these methods being discussed are wrong.

[brickvoyeur]

9 minutes ago, KShine said:

I was an accountant in a previous life (before I gave myself to LEGO) - many of these methods being discussed are wrong.

Clearly... the correct answer is to avoid it all together.

 

I also thought the other day how much emazers would have loved the invention of Mercari. Another entire separate payment system that doesn't report you until that 20k/200 transaction mark. 398 total transactions between Mercari and PayPal, plus unlimited cash transactions. Tax emazion is emazing.

[Darth_Raichu]

1 hour ago, KShine said:

I was an accountant in a previous life (before I gave myself to LEGO) - many of these methods being discussed are wrong.

So good thing I can place the blame on Turbotax ??? 

[SLL]

so for the following transaction, when I calculate the total payment received amount for tax reporting, should it be $30, or $33?

Purchase details

xxx

$30.00

Item #111111

Tax

$3

Purchase total

$33

Fee

-negative $1.26

Tax collected by eBay

-negative $3

Total

$28.74

[SpaceFan9]

1 minute ago, SLL said:

so for the following transaction, when I calculate the total payment received amount for tax reporting, should it be $30, or $33?

 

Do you submit the sales tax, or does the platform submit on your behalf?

[SLL]

Just now, SpaceFan9 said:

Do you submit the sales tax, or does the platform submit on your behalf?

ebay collects the tax. I don't collect tax for my sale.

[SpaceFan9]

TTBOMK, there is no earnings tax levied on collected sales tax money.  So I would say your income for that sale is $30.  You should keep a record of it, but it's a pass-through cost, and doesn't show up on your Sch C unless you are the one submitting the tax payments. In my previous life in retail, that's how it worked.

But, I'm not an accountant.  So this advice isn't any better than some Rando internet guy's advice. 

[Alpinemaps]

1 hour ago, brickvoyeur said:

Clearly... the correct answer is to avoid it all together.

 

I also thought the other day how much emazers would have loved the invention of Mercari. Another entire separate payment system that doesn't report you until that 20k/200 transaction mark. 398 total transactions between Mercari and PayPal, plus unlimited cash transactions. Tax emazion is emazing.

Just to make this official:

https://www.paypal.com/us/smarthelp/article/how-does-paypal-report-my-sales-to-the-irs-will-i-receive-a-1099-tax-statement-faq729

Quote

How does PayPal report my sales to the IRS? Will I receive a tax Form 1099-K?

PayPal will track the payment volume of your account(s) to check whether your payment volume exceeds both of these levels in a calendar year:

• $20,000 USD in gross payment volume from sales of goods or services in a single calendar year
• 200 payments for goods or services in the same year*

 

[Bricklectic]

I know its early and all, but a friend pointed out to me that lego gains should be reported as capital gains as opposed to schedule C. 

How does everyone here report their earnings? Ive been doing sch C but since I have capital losses id switch over to capital gains if thats acceptable.

[RightDwigt]

5 minutes ago, Bricklectic said:

I know its early and all, but a friend pointed out to me that lego gains should be reported as capital gains as opposed to schedule C. 

How does everyone here report their earnings? Ive been doing sch C but since I have capital losses id switch over to capital gains if thats acceptable.

Most people do schedule C I think.

[Brystheguy]

On 7/8/2020 at 3:59 PM, Alpinemaps said:

Just to make this official:

https://www.paypal.com/us/smarthelp/article/how-does-paypal-report-my-sales-to-the-irs-will-i-receive-a-1099-tax-statement-faq729

 

I wonder how this will work with Managed Payments?

[Bricklectic]

45 minutes ago, RightDwigt said:

Most people do schedule C I think.

Thanks my friend is a CPA and claims that since we sell LEGO as an investment it's not like regular inventory that people buy to sell right away and profit on the bid ask spread or the wholesale/retail spread rather more akin to buying a stock and waiting for it to appreciate, basically an investment so it should be capital gains (as collectibles, which would be a high %).

If someone had capital losses lets say from stocks in prior years, that would be advantageous as it would net against the profits. another potential gain is avoiding to pay self employment tax

I seem to recall though that the amount of time you spend on it is also a determining factor as to whether its a capital investment or schedule c.

I know its real early for this type of talk but I'd be very interested in hearing insight form anyone thats researched this before. Personally I have been reporting this as sch c. in previous years.

[RedBaron]

You could theoretically consider Lego purchases as investments instead of inventory, but you could not include any expenses (shipping, supplies, etc.) as part of the cost.  It would be only what you paid for the set including sales tax.  Selling fees can be deducted from the sales price though.  The problem would be if you used a Schedule C in previous years, then reporting as a capital gain this year to offset your capital losses would probably be considered tax evasion, which is illegal.  However, If you have not filed a schedule C in prior years, then you would probably be ok considering it as an investment, and you could change it to a business reported on schedule C next year.

[Bricklectic]

30 minutes ago, RedBaron said:

You could theoretically consider Lego purchases as investments instead of inventory, but you could not include any expenses (shipping, supplies, etc.) as part of the cost.  It would be only what you paid for the set including sales tax.  Selling fees can be deducted from the sales price though.  The problem would be if you used a Schedule C in previous years, then reporting as a capital gain this year to offset your capital losses would probably be considered tax evasion, which is illegal.  However, If you have not filed a schedule C in prior years, then you would probably be ok considering it as an investment, and you could change it to a business reported on schedule C next year.

Why would switching from sch c to capital gains be evasion? I do agree it would invite scrutiny and perhaps an audit, but its just correcting a mistake. In theory I could amend prior years as well, although that DEF would be inviting an audit

[RedBaron]

Because the change would be considered by the IRS as only for the purpose to avoid paying tax on the income.  There is no economic reason for making the change.  You could amend prior years, but it would be risky, and a red flag as you mentioned.  Of course, the chance of being audited is really small.

Edited November 16, 2020 by RedBaron

[LegoMan1212]

When I started out, I thought about going the capital gains route, however, I decided against it for a few reasons.  

1) I don't believe you can take a mileage deduction, this can be quite large in some years (not so much 2020, but definitely other years)

2) As mentioned above, you can't deduct other expenses such as supplies, bags, boxes, tape, cell phone, internet, etc... (these two add up fast and are quite large). 

3) And the final reason I didn't want to go the capital gains route... I didn't want to track everything as short-term vs long-term.  This just seemed like such a pain in the rear and I didn't want my decisions on when to sell something to possibly come down to "days" or "weeks" between buying and selling to take advantage of a short-term sale vs a long-term sale and the tax % of each.

The above decision is also based on my inventory level.  I'm sure if I was playing around with $500,000 + a year of sales, then the expenses above might be pennies compared to the tax savings.

[redcell]

9 hours ago, Bricklectic said:

Why would switching from sch c to capital gains be evasion? I do agree it would invite scrutiny and perhaps an audit, but its just correcting a mistake. In theory I could amend prior years as well, although that DEF would be inviting an audit

It's been years since I researched the issue, but, as I recall, there was something in the IRS rules that limited the definition of the types of transactions that qualify for the capital gains in a way that does not mesh with the sale of Lego.  At the end of the day, it doesn't matter how you view or characterize the transaction...it only matters how the IRS categorizes it.