Considering Creating an LLC to Sell Coins on eBay
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When coin sales now reach the amount of $600 on eBay, the seller will receive a 1099 that is reported to the IRS.
Creating an LLC would create a lot of tax advantages for selling coins. My eBay coin sales would be in the range of 10K to 20K per year. This year I have only sold $500 because I stopped selling because of the 1099. If I create a business for selling on eBay, are coin submissions to NGC and PCGS deductible as a business expense?
I guess that I would also lose my collector status at CAC and would need to pay for all submissions. What other down sides besides the increase in paper work am I overlooking by creating a business for selling on eBay?
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I don't understand all the angst over 1099s. Unless one was planning on hiding one's profits from the IRS in the hopes one won't have to pay the taxes owed, 1099s are a non-issue.
You don't need an LLC to sell coins as a business.
I sell $200k in coins per year and I don't have an LLC. I report all sales (even without a 1099), and deduct legitimate expenses. In 25 years of doing this, I had one IRS request for information and settled it with a phone call and a letter... and they sent me 64 cents for overpayment.
People are just nutty about the 1099s. It is no big deal. And the coin Karens have been spewing disinformation on this forum and scaring people off.
For the (tax) record, about 40% of my business is wholesale. I get NO 1099s on those sales. I report the income, deduct expenses on Schedule C and the IRS is fine with it.
For $10k to $20k in sales of coins which will not easily create any tort liability for injuries, an LLC seems like overkill. But I'm not a lawyer or an accountant.
Yes if you are submitting your inventory.
This is not so clear. The LLC is a different legal entity. If you started submitting everyone else’s coins and a large volume of commercial stuff, JA might say something. If you’re submitting your own coins as you always have, JA might not care. As a courtesy, I would email CAC to see what its official policy is.
The only thing I hate about the 1099's is the wait in January to get them and even February. Doesn't matter what the law says, you get them when you get them.
Jim
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How do people still not understand that you owe taxes on your sales, whether or not you get a stupid 1099?
I'm not trying to be rude, but if your first question is whether grading fees are a deductible business expense, perhaps you should be consulting with a tax professional to understand the big picture and details of taxes before declaring 1099s bad and shutting down your sales, and discussing how how an LLC will create lots of tax advantages.
It's annoying, isn't it? I schedule the appointment with my tax guy at the end of March because of this.
Why do you have to wait for your 1099's? If your reporting all your sales you don't need it! I just check mine to make sure there are no errors.
I will point 1 thing out people may not realize. If you are moving money back and forth into Paypal. You are 1099'd on every deposit that goes into paypal. I was using 2 ebay and 2 paypal accounts. 1 of the paypal accounts I didn't have linked to a bank, I would just move the funds into my other paypal account. What this caused was me getting double the income from that ebay account being reported on my 1099's.
Sounds like you are trying to break the first law of economic: "Don't let the tax tail wag the dog"
Have you considered the following?
Does your state have a minimum corporate income tax?
Does your town require a business permit and if so, will they issue it to a residential address?
Are you going to draw a salary if so, you will need to file withholding taxes?
You will have to file two sets of income taxes: one for the LLC and a personal one.
There are probably more things I haven't mentioned.
As @jmlanzaf stated above you get all the same deductions as a sole proprietorship as you do as a corporation.
I went LLC and filed as S-Corp. Do you NEED it? No. Is it a good practice? Yes. Especially if you anticipate any kind of scaling.
Tracking for about $500k in sales this year, myself.
"It's like God, Family, Country, except Sticker, Plastic, Coin."
If i was considering an important legal/tax decision, i would seek advice from an attorney or accountant and not make a decision based upon a forum.
You can't check for errors on your 1099s until you get them.
That's fun.
I don't understand the scaling argument.
The only advantage of an LLC over a sole proprietorship is personal liability. It's hard to imagine how liability for a coin would exceed the value of the coin itself. I mean I suppose someone could trip over my package and break something, but could they really sue me for the damages?
But even if you feel the liability protection is warranted, I'm not sure how that is a scaling issue.
True.
On the other hand, there are a whole lot of people making business decisions based on the existence of a 1099. That is equally mad.
What is your expected margin for the 500K?
I check them after the fact. If there's a discrepancy then I can be prepared. I have enough trouble forcing myself to do all the work to figure how much money I have to give away, so I don't wait if I get on a roll doing my accounting!
If the LLC was set up as a S Corp, you are correct that two set of taxes are needed. If the LLC is set up as a single member, It can be done with one set of taxes.
An LLC can open more doors than just liability protection. For example, you can elect as an S-Corp, like DelawareDoons mentioned, and can potentially avoid self-employment tax. Often it is abused, but also legitimate. That is one way that scaling would be relevant.
To the OP, and to echo other comments, because you hit $600 of sales on eBay is a terrible reason to form an LLC. Fundamentally with an LLC you are getting liability protection in the form of separation of personal assets. There are other potential benefits but unlikely to be of any use if the scope of the business is selling $600 on eBay. If you are afraid that an online sale on eBay could result in a lawsuit putting personal assets at risk, then maybe an LLC is a prudent choice. Most do not have that concern.
@djm had very good comments about additional costs. Even in low tax, business friendly state/county/city, you are probably paying at least $100 per year.
Fair points.
I agree the LLC is a overkill for selling coins on eBay, but the LLC is inexpensive and easy to set up. If the business did grow, there could be be a value in the future.
While it won't hurt to setup an LLC (except your wallet) there is no significant benefit. An LLC is about protecting your personal assets in the event someone is hurt or injured and you are found to be at fault. An LLC will not shield you or your assets in any way from the IRS. I have setup an LLC before, was not much to it here in my state, could be different state to state.
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Not intended as accounting advice, but the IRS treats single member LLCs as disregarded entities by default. The managing member can elect to file as a corporation, however, which may have tax advantages on larger amounts. It is probably overkill for the low value mentioned in this thread.
Many are quick to judge the OP’s motives, but I see nothing wrong with wanting to create a separate entity for bookkeeping purposes. The legal and financial ramifications are beyond the scope of this thread (as are discussions about LLC v. Other business entities). Each state has different laws governing its business entities. The OP would be better off seeking financial advice from a CPA and an attorney that is admitted to practice in the state where the business is formed.
+1
I have an LLC in California for rental property. The franchise tax board charges $800/year and my CPA has to file every year for me and it becomes a royal PIA upon the sale of property.
That's what I thought too. My brother set up an LLC to sell on eBay, and I never understood why. Wouldn't setting up a businesses as an S-corp or getting a wholesale license be more beneficial for taxes?
I am not an accountant or a tax attorney, but based on my own research and experience I think the primary benefit of forming an LLC is that it allows you to offset losses.
As a collector without a coin business, I need to pay tax on any gain on the sale of collectibles, but I can't deduct losses to offset gains.
With an LLC you only pay tax on the net income.
Now why would anyone sell coins at a loss, such that this is actually a benefit? Maybe I'm in the minority here but I routinely lose $$ on the coins I sell, and I am always in the red at the end of the year. When I actually make a few bucks on something it feels like a supreme insult to have to give 35% back to the govt.
E.g I sell some coins at a $2k loss, and others for a $1k gain. Without an LLC I have to pay ~350 in taxes for the coins I made $1k profit on. With an LLC I pay less taxes not more - it reduces my total taxable income by $1k. ($2k loss - $1k gain = net $1k loss passed through as a sole proprietor llc).
Now how long can you operate a business that loses $$ is another question...
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LLC not needed to take advantage of tax breaks on expenses. Just file a Schedule C for business income. You don't even need a business license to sell on ebay. Keep it simple.
This is not true. You can operate as a sole proprietorship. You do not need an LLC to deduct expenses.
A dealer (however you and the IRS define it) gets to deduct various kinds of expenses.
A collector or hobbyist can only deduct costs associated with a specific coin. Make a profit on coin A and a loss on coin B, and all the IRS is interested in is the profit. You can't offset the profit with the loss.
This is what a lot of the dealers on the Forum don't seem to sympathize with. There is a lot more to it than someone simply trying to avoid paying taxes.
For the OP, if the "business" is small enough to be potentially considered a hobby, and if the LLC helps the thing to be recognized as a business, then that in itself might be a reason to do it.
I see a lot of small businesses where the owner runs all sorts of expenses through the business, but collectors/hobbyists can't do any of that.
P.S. - On top if that, the federal tax rate on "collectables" is 28%. I don't l don't know what business.tax rates are but I believe they are far less than that.
You can offset the profit on one coin with the loss on another as a business without an LLC. You should also be able to offset a capital gain with a capital loss as a non-business. You may not be able to deduct losses against regular income, I don't know, but why are you not entitled to capital losses as offsets to gains? If you sold a whole pile of coins at once rather than individually, the gains and losses would be aggregated.
If the business is to make a profit it does not matter how large or small it is. Schedule C (business income) does not require an LLC or even a business license to deduct expenses.
Only when income from collectibles is declared on Schedule D (investment income). I can tell you from experience that if you are receiving paypal payments (and a 1099K) for anything claimed on Schedule D you are in for a fight (that you can win) with the IRS. It took a lot of effort to prove to them that I in fact did claim the income on my return, they normally expect to see it reported on a Schedule C.
Business (Schedule C) tax rates are determined by the filers overall income/tax rate after all income and expenses have been declared. Schedule C filers also get hit with self-employment tax rate of 15.3% of net earnings, something those paying the 28% Schedule D collectible rate do not face. The self employment tax is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net business earnings claimed on Schedule C. The filer receives credit with Social Security for the payments. In my particular case when I retired from federal civil service I only had 38 of the required 40 quarters to be eligible for social security and medicaire. My ebay "business" with its Schedule C filings gave me my needed 40 quarters and eligibility for social security and medicaire.
I really don't think this is correct for anything declared as a "collectable". Gains are taxed, losses are ignored.
And I have always understood that the IRS is perpetually on the lookout for collectors/hobbyists posing as businesses for tax purposes.
Schedule D investment gains (and not Schedule C business gains) can be offset by capital losses up to $3K per tax year. Rremaining losses are applied to the same limit in subsequent years until all accumulated losses have been applied against gains. A "running total" of losses is kept until used up. this applies to gains/losses on all capital assets. Collectibles are just one class of these assets.
Business gains receive an unlimited offset by higher business losses each tax year simply by filing income and expenses. If expenses are greater than sales then the business shows no profit and a loss for the year.
That is the key: "investment" vs "collectables". The latter have their own form with no accommodation for losses. At least that's the way it went down when I had to full out the form.
There is no "investment vs. collectibles." What matters is "business income (Schedule C) vs. investment income (Schedule D)." A seller of collectibles determines if they were a capital investment, like stocks and real estate, or simply business inventory. My experience with both has shown me the Schedule C is the most simple way to file.
The higher 28% tax rates for "collectibles" only applies if they are treated as a capital asset and reported on Schedule D as an investment. When collectibles such as coins are reported on a business's Schedule C they are treated as normal inventory and do not get hit with the 28% tax rate.
Disclaimer: Tax decisions should be made after consulting a tax professional are doing your own IRS.gov research where all the rules are published.
That’s fixed as simply as opening a new bank account and, if you want, having a separate file in Quicken/Quickbooks or the like.
I really don't think anyone questioned his motives, just the necessity of it.
I believe the IRS lets you run a loss for 3 out of 5 years...
At that point, it's time to fold up the business name and go by another name and refresh the 3/5 year business loss clock again.
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For me, several things.
1, I don't want to pay self-employment taxes, and given this isn't my main job, I shouldn't.
2, I intended to open a physical location prior to... recent developments I am not getting into right now. There are a multitude of additional potential liabilities therein...
3, I didn't want to subject myself to the personal liability if I were to buy stolen coins off eBay or locally, both of which have happened before despite my best efforts to avoid it. The more I scale(d) the greater the risk of this reoccurring no matter how much due diligence I could reasonably do on a collection buy.
4, The CPA I spoke with said just go with an LLC given the volume I'm doing. Running that kind of money through personal accounts with 1099's and additional complexities, then trying to justify 6 figures of expenses to offset 6 figures of income is a dicey proposition during an audit, and those activities greatly increase your odds being audited. In his words, "If you're going to do this and you're handling the dollar volume you are projecting, do it right." At the time I was projecting about $300k in revs, not $500k.
5, There are tons of grants and other kinds of financial aid you simply do not qualify for as a sole prop.
"It's like God, Family, Country, except Sticker, Plastic, Coin."
As a point of clarification for anyone reading this, an individual's desire to not pay self-employment/payroll taxes or whether or not it is that individual's primary income source doesn't have any legal bearing on whether or not these taxes are due. Rather you must pay yourself a "reasonable" salary for the job duties/work performed.
Note: second post questioned motives.
I read that a more generic and not aimed at the OP. Further, that was about 1099s not LLCs
The self employment tax is due and collected for income reported on a Schedule C, not for investment income reported on a Schedule D. Self employment tax is not calculated on what you pay yourself in salary but is based on the net gain from sales reported on the Schedule C even if you don't pay yourself a salary. If you show business profit you will pay the tax.
This is not true for an LLC which is what they are discussing.
LLC income is reported on the Schedule C as is sole proprietor income. Schedule C numbers determine the self employment tax amount for sole proprietors, not for employees of an LLC.
The LLC is is own entity, I believe. You would only pay SE tax on salary paid out of it.
But see your accountant to be sure.
Edited for correctness: it depends on whether the LLC reports as a corporation or sole proprietorship (disregarded LLC?)
If you have to pay yourself as an officer a "reasonable salary" payroll tax similar to SE tax is paid. Dividend distributions may be at a lower rate, but the IRS is pretty quick to address people like Dr's and Lawyers filing as S corps paying themselves minimum wage and taking all of the rest of the income as dividend distribution.
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Income taxes, including social security, are withheld by the employer from the paycheck for ALL LLC employees.
For the sole proprietor, income taxes, including self employment tax are determined by the gain reported on the Schedule C and added to the overall tax bill. Note that sole proprietors are responsible for reporting and paying taxes at least quarterly to avoid potential penalties. The IRS does not wait until the end of the year to get its share. This is why taxes are collected from paychecks throughout the year and then reconciled at the end of the year by the tax filer.
For most sole proprietors quarterly taxes are just a ballpark estimate to avoid a large tax bill due at the end of the year. Such a large tax bill indicates, to the IRS, underpayment of taxes, thus the penalty. I always estimate and pay quarterly taxes on the high end to get a larger year end refund that can be used to purchase high interest paying Treasury Direct I bonds that are otherwise limited to a $10K annual purchase limit. I bonds can be easily bought on line with current purchases paying 9.62%.
I live in the state of Texas and the fees for filing an LLC single member is $300 plus some assorted fees that amount to another $100, and for federal tax purposes the business would be set up as a sole proprietor.
If I set up the business as a Texas sole proprietor, I would need to register the business name with the county and a filing fee of $10.
There is no difference in state or federal taxes between the two business structures. I have a decision to make. Do I go with the lability protection of the LLC, or save some money and set the business up as a Texas sole proprietor.
Thanks for forum input.
As a CPA for nearly 30 years, I can tell you all, this was a painful read. So much inaccurate "tax advice" nearly each seasoned with a hint of accuracy to cause the reader to think "That must be right, I heard that somewhere before." My list of short answers correcting/clarifying topics broached in this thread:
You don't need an LLC to deduct business expenses or losses against your income if you report your business activity on a Schedule C as a sole proprietorship.
The 28% collectibles capital gain rate is only applicable if you're in a marginal tax bracket higher than 28%. Any gains up to that point will be taxed at the regular capital gains rates (0%, 15%, or 20%) and can be offset by capital losses from any source. Can only get to a net loss of $3,000 each year if losses exceed your gains, they can be carried forward indefinitely, but do you no good if you die without using them.
An S-corporation MAY save you self-employment tax, but you need to have a reasonable basis for not paying all of your gain out as officer's compensation. Valid reasons for not paying all as salary would be to give shareholder a return on capital investment or to offset earnings generated by the labor of others (employees); there may be other reasons but these would be the ones I'd start with.)
Added costs to consider if you elect to be taxed as an S-Corporation: Legal cost to set up, annual registration fees, need to prepare an annual income tax return for the entity, and you need to prepare annual and quarterly state and Federal payroll tax returns, and may owe state annual fees based on size/sales volume of your company. My fees for the tax related filings if I had to prepare them for you would probably be a minimum of $1,500 (YMMV). If your tax savings didn't exceed those fees, you'd actually go backwards. In most cases, I'll tell a client not to seriously consider an S-corp until your net income approaches $100,000 a year.
The 3 of 5 years rule for hobby losses is a real thing; but doesn't apply if you can show you had a true profit motive. Did you operate it like a business (keep records, etc)? Do you operate your business as if you truly intend to make money? You can be bad at your business and lose money (or generate losses with capital purchases, etc.) in the short-run for more than 3 years if you can prove your profit motive.
Just having a business (LLC or not) doesn't entitle you to "run all sorts of stuff" through the business; unless you can support it as an "ordinary and necessary business expense."
As a starting point, all income from any source is taxable unless specifically excluded by IRS code/regulations. This is true regardless of whether it's reported on a 1099 or not. Anything that's not taxable is specifically excluded by law (tax-exempt interest, gifts, casual sales (think garage sale), sale of a primary residence, etc.).
Consult your tax advisor, and never accept tax advice from someone on the internet, even if they start their post with "As a CPA for nearly 30 years..."
Do you know what we call people who get tax advice from the internet?
The Defendant...
I'm specifically thinking of those people who decided to withdraw their physical gold and silver from their IRA and store it in their home safe based on "advise" from some radio show.
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