Year-End Tax Tips for Online Sellers
By Barbara Weltman
How has 2005 been for your online business? Good? Bad? The answer to this question will determine the steps to take before the end of the year in order to minimize tax on your profits or make the best use of your losses.
If You've Had a Good Year
If you've had a good year, take advantage of every deduction in order to reduce the profits you'll pay taxes on. Consider:
- Buying new equipment (e.g., a computer, office furniture). You can position yourself to do more business next year while deducting the cost of the equipment up to $105,000 if you put it to use before the end of this year. Bonus: If you're short on cash, you can finance the purchase (e.g., charge it on a credit card); the deduction applies no matter how you pay for the item or items.
- Deducting your business travel expenses. If you use your personal car to go to the Post Office to mail out the items you've sold or to pick up inventory at vendors, yard sales or other places, you can deduct the cost of this car use. You can write off your actual costs, including the gas you've put into your tank for business driving, or use an IRS-set standard mileage rate. This rate is 48.5 cents per mile for driving from September 1, 2005, through the end of the year; it was 40.5 cents for driving earlier in the year. For details on deducting car expenses, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, at (http://www.irs.gov).
- Stocking up on supplies. Buy what you think you'll need in the coming year for packing materials and other supplies in order to deduct the cost now.
- Setting up a retirement plan. Even if your eBay business is a sideline and you are already covered by an employer's retirement plan, you can still fund a retirement plan with your eBay profits. The money you put into the plan can grow tax-deferred for use in later years, avoiding current tax on those contributions. For details on your retirement plan options, see IRS Publication 560, Retirement Plans for Small Business.
If You've Had a Bad Year
If you've spent more money that you earned in profits, you probably have a tax loss for the year. To make the best of a bad situation, consider:
- Adjusting your estimated taxes. If, for example, you are self-employed and have been paying estimated taxes for your business, you can reduce your payment for the fourth quarter of 2005, due on January 17, 2006. This will give you more cash to run your business.
- Planning to use your loss. If you expect to have a net operating loss from your business in 2005, prepare to file for a quick refund produced by a carryback. You can apply the loss to 2003 and possibly 2004, generating a refund of taxes paid in those years. Individuals file IRS Form 1045, Application for Tentative Refund, to receive a check from the government, usually within 90 days - but you must file your 2005 income tax return before you file for the quick refund. Alternatively, you can file amended returns for those years on IRS Form 1040X.
If you did have a bad year, it's important to make sure to understand the reason for the loss so that you can correct any problems and, hopefully, become profitable in 2006. For example, maybe you're selling your items too cheaply and need to raise prices. Maybe you're paying too much for your inventory items and should become a better buyer.
Improve your recordkeeping systems. Whether business is good or bad, it is vital that you keep good books and records in order to optimize tax write-offs. For example, track your inventory carefully so that you pay tax only on your profits (the difference between the sales proceeds and what you paid for an item) and not on the full sales proceeds. Keep a log of your business driving so you can deduct all of your mileage costs.
Editor's Note: Consult with your accountant or tax advisor to ensure you make the right decisions for your unique situation, and visit the IRS website at (http://www.irs.gov).
About the author:
Barbara Weltman is an attorney, prolific author with such titles as "J.K. Lasser's Small Business Taxes and The Complete Idiot's Guide to Starting a Home-Based Business," and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of "Idea of the Day(R)" and monthly e-newsletter "Big Ideas for Small Business(R)" at http://www.barbaraweltman.com and host of "Build Your Business" radio. Follow her on Twitter: @BarbaraWeltman.
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