Even if you file your eBay business as such for income tax purposes, the Internal Revenue Service might refuse to recognize it as anything other than a hobby, also refusing business deductions and losses, as well.

You are in business if your business makes a profit for three consecutive years, including this year.  For more recent businesses or businesses that cannot seem to string together three consecutive years of profit, the Internal Revenue Service uses a specific test to determine the status of the business.  This test is called fact and circumstances.

To qualify as a business under the fact and circumstances test you need to keep very professional and organized business records.  It is good to have formed your business as an entity like an LLC, and to abide by all of the rules pertaining to that entity.  To qualify, you should work a regular amount of hours at your business.  They will not consider you a business if they believe that the nature of your business is overly pleasurable or fun.  They may also audit you to determine if you are operating a business or enjoying a hobby.

If the Internal Revenue Service determines that your eBay buying does not constitute a business, they will reject any and all business deductions, credits, exemptions, or losses you have filed as a business.

Even if you made a profit on your eBay selling last year, you might want to report it as a hobby.  To do that, you will need to fill out the Other Income information on your 1040 tax form.  You will have to pay taxes on the income your hobby made you, unless you can prove hobby related losses on your income tax return.

If you really believe that your eBay selling has a strong potential to be considered a business, and you want to treat it as such, you should talk to a CPA or tax consultant.  A CPA or tax consultant will be familiar with all the legalities of turning your eBay selling hobby into a business.  They will know whether or not you have a hope of qualifying your business as such.  In addition, a CPA can help you to develop all of your business records in a manner to correctly indicate that you are operating your eBay selling hobby as a proper business entity.  The CPA can then help you file your income tax return accordingly.

Chintamani Abhyankar, is a well known expert in the field of finance and taxation for last 25 years. His famous Tax eBook “Stop donating your money to IRS” which is now running in its second edition, provides intricate knowledge and valuable tips on personal finance and income tax. Just visit his website http://www.planningyourtax.com/ and claim your FREE eBook.

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