It's hard to believe it's already tax time. We checked in with tax guru and small-business expert Barbara Weltman, author of The Complete Idiot's Guide to Starting an eBay Business, about some of the most important items to deduct, some common misconceptions, and what record-keeping solution she recommends.
EcommerceBytes: Do you help online sellers with their tax issues? What kind of advice do you have for them?
Barbara Weltman:Well, I did write the "The Complete Idiot's Guide to Starting an eBay Business." The second edition I did with my husband. It's pretty much out of date, I would say, because of all the changes in the eBay rules. But the concepts of running a business haven't changed.
I would say to anybody who's running an online business, look at all of your expenses. Likely you are going to be able to write them off in some way, although there may be limitations on some you can deduct, or when you can deduct things.
Some of the key things I would look at are, did you buy any what we call "capital items"? Did you buy a new computer? Did you buy a digital camera?
If you did, this year, on your 2012 return, you can opt to expense the cost rather than having to depreciate it over a number of years.
(Editor's note: see IRS Publication 946, How To Depreciate Property.)
EcommerceBytes: So that's a change for 2012?
Barbara Weltman: Well it's not a change; the numbers are a little different. You might be able to use what's known as bonus depreciation. But that's only 50%. So usually the expensing will do. The dollar limit for spending is up to $500,000, but it's also limited by, you have to be profitable. So there are limits, but generally, you're going to be able to write off the cost of your equipment.
EcommerceBytes: Do you find that's one of the things people tend to overlook?
Barbara Weltman:I don't think that's so. First of all, almost every small business owner either uses software, or a cloud solution, or a paid professional to do taxes. So it's not likely it's overlooked, it's just a question of having this discussion about it. Because a computer will prompt you, did you do this, did you do that?
Very few people prepare returns by hand, so it's not likely to be overlooked. For example, TurboTax asks you, did you buy any equipment?
The Home Office Deduction
EcommerceBytes: What about the home office deduction? Is that a red flag for the IRS?
Barbara Weltman: That's a very common perception, but I don't think that's true. You're supposed to use it regularly and exclusively for business. I would say if you're sending an occasional personal email from a business computer, that's not a problem. The problem comes where you're using the kitchen table. You know, you have meals there and then you wrap up your eBay sales there. That's not going to work.
And just an fyi, starting in 2013, there's going to be a standard home office deduction. So you won't have to sift through all the expenses; you can just take the standard. But not this year.
Cell Phone for Business
Barbara Weltman:Another (perception): people wouldn't know they can deduct their cell phone. And again, how much can you deduct? You're also making personal calls, and I would say that it's a case-by-case; you have to look at the situation.
If you're using your cell to make a occasional business call, I do not think it's a business phone. But if you're using it primarily for business but once in a while your children call; you're using it for personal reasons as well, it's probably a business phone. It's a facts and circumstances situation; you have to really state how it's being used.
Clearly if you only have one cell phone, you can't say it's a business phone, because you have to have personal calls too.
Vehicle and Travel Expenses
EcommerceBytes: What about vehicle deductions?
Barbara Weltman: I think you want to check, if you use your car or truck for business, you can deduct the cost. And you can use the standard mileage rate. It's 55.5 cents a mile for 2012.
One of the critical things about deducting any travel or entertainment expenses is you must have records to back up your deduction. You can't just guesstimate.
EcommerceBytes: When the IRS says records, what do they mean; can you keep a logbook for mileage, for example?
Barbara Weltman: You can keep a logbook. There are apps to do it; anything that keeps a good record.
Changes for 2012 Tax Year
EcommerceBytes: Is there much that has changed as far as tax laws for this filing year?
Barbara Weltman: Actually, probably not, because what happened was many things had expired, and Jan. 2, when everything got extended, it was extended retroactively for 2012. So basically, it's kind of invisible; you didn't know that things weren't there if you weren't paying attention the rest of the year.
What's new is some numbers have changed, the standard mileage is different; the expensing limit was increased. If people have their own health coverage, they may be able to make a health savings contribution. They have to have a high deductible plan, meaning there has to be a minimum that comes out of your pocket before the insurance kicks in. And you can put money in a savings account, called the health savings account, and you get to deduct the contributions there.
You're getting to deduct your health insurance, if you're self employed; you're getting to deduct it from gross income, not as an itemized deduction. The premiums are page one of Form 1040.
Also there are higher contribution limits for retirement plans. So if the businesses have been profitable and the owners want to save for retirement - take a deduction for their contributions - they can put money into a retirement plan.
Those limits are a little higher in 2012 than they were in 2011.
EcommerceBytes: Is there a dollar threshold for these small eBay businesses to file taxes; you have to make x amount of money, for example?
Barbara Weltman: No. that's the biggest misconception on any online business. It's a perception that unless you make a certain amount, you don't have to file a return. That's not true. As long as you're in business, it doesn't matter if you're making or losing money, you have to file a return.
The threshold you're referring to has to do with whether financial institutions like PayPal have to issue 1099 forms to merchants to report their transactions for the year. So there's a small seller exception to put the financial institution off the hook from having to issue the 1099. But that has nothing to do with whether the merchant has to report the sales.
EcommerceBytes: Are sellers confused about the 1099K and what they have to do differently this year?
Barbara Weltman: There is no reconciliation required on 2012 returns. In fact, the line that appeared on 2011 returns for reporting 1099K amounts has been deleted on 2012 returns.
(Editor's note: see IRS website, General FAQs on Payment Card and Third Party Network Transactions.)
Best Recordkeeping Solutions
EcommerceBytes: In terms of recordkeeping, when you deal with eBay sellers, is there a type of software you recommend?
Barbara Weltman: Well every business is required to keep books and records; it's not like general expenses where you can choose to do it or not. For businesses, you are required by law to do it, and there are so many choices. Again, software or online...but things like Quickbooks Pro and things like that, I think, because it's easy to use, it's not that expensive, and it takes care of all of your needs. It's not only for tracking your income and expenses, but it also enables you to issue invoices and make financial statements and everything else. It's really easy.
Barbara Weltman is the author of several books, including J.K. Lasser's Small Business Taxes; The Complete Idiot's Guide to Starting a Home-Based Business; and The Rational Guide to Building Small Business Credit. She's been a speaker at numerous conferences, including the Financial Planners Association Spring Forum and eBay Live. She's the radio host of Build Your Business, a regular guest on eBay Radio, and publisher of a monthly newsletter, Big Ideas for Small Business. You can find Barbara tweeting about taxes and small-business issues on Twitter.