Selling Online - do you do inventory?

frankhardy

The simple question is - do you (personally) keep track of inventory for cost of goods sold and carry over to next year for taxes...or do you just add sales and minus purchases and expenses to get your proft? How do you guys do it?



It seems as though I am getting conflicting answers from 2 different CPA's on this. I think it maybe because my business/hobby is such a small time operation. So, I thought I would bring this to the boards to see what you guys do and what your opinion is.

I have a full time job with a W2, which is my main (and nearly only) source of income (by far). I have always done my taxes myself and never had a CPA do them. However, recently, I have talked to 2 different CPA's about doing my taxes.

This is going to be kind of a 2 part discussion.

The first part is this - should I file my cards income as a hobby or as a business? I do realize that if you show a loss, you cannot offset hobby losses against other income. In other words, since I have a good full time job, I cannot reduce my tax burden by offsetting any hobby losses. The reason that I ask this question is because my running profit total is so close to being a wash and I could simply purchase a few more items to make it exactly a wash if I wanted to. I have sold a $17,191 this year and my purchases/expenses are $16,355 this year. I show a running total as we speak of a profit of $836.73. I keep up with everything on Quicken, so it is easy to see a running total.

Now, you might say that if I keep up with everything, why not just file as a business (which I have done in the past)? That way, if there is ever a loss, then I could offset the loss against other income to reduce my tax or increase my tax refund. The reason why I have a dilemma is because of the question that is next....it has to do with inventory.

The second part -

Do you guys keep up with inventory? In other words, the value of your inventory to start the year and the value of your inventory at the end of the year. I have filed my ball cards income as a business in the past, but I have never kept up with inventory. It looks as though I MAY have been doing it wrong.

What I have done in the past is figured what my sales were, then subtracted my purchases, selling fees, shipping, etc. For example, if I purchased a collection for $5,000, and that collection was a mix of things (complete sets, partial sets, singles, autographs, misc), and if I sold off the sets for $5,500, that is a $500 profit that I would pay taxes on, and I still have all of the other items still left to sell. Well, let's say the new year rolls around....anything left over that I would sell the next year, those items would go towards my profit line 100% because I already factored in the $5,000 purchase of the collection in the previous year. Then, any new purchase for the new year would offset new sales.

That is what I have done in the past.

Well, one CPA said that it was ok to do it that way because mine was such a small-time operation. Another CPA that I talked to said that I was doing it wrong....he said that my purchases could not be counted as an expense until it is sold. That is why inventory is key. If I was selling scented candles where you purchase all of them at one price, and sell at a profit, inventory would be simple. However, when you purchase a large collection for a certain price, and you have thousands of cards, sets, memorabilia, autographs, etc, keeping inventory would be a nightmare beyond belief!

THAT IS WHY I AM CONSIDERING claiming this as hobby income so that I would not have to do inventory. The downside to doing it as a hobby is that you can't claim a loss against your other income (no big deal with me), but also you cannot claim expenses on the amount equal to the first 2% of your Adjusted Gross Income (AGI). That means I would have to pay approximately $200 or $300 in taxes IF I BROKE EVEN in my hobby. To me, $200 or $300 is worth it NOT TO HAVE TO DO INVENTORY.

I'm know I am lengthy here, but I could really use some advice and I would really love to know what you guys do. Your thoughts would be appreciated.

So, question #1 - should I file my card sales as hobby income (and should I show a slight profit or should I show a slight loss)?

Question #2 - if I file as a business do I have to track inventory with inventory numbers and all of that garbage (AND DO YOU DO INVENTORY)?

mrmint23

IRS website

Question: How do you distinguish between a business and a hobby?

Answer:

In making the distinction between a hobby or business activity, all facts and circumstances with respect to the activity are taken into account. No one factor alone is decisive. The most common factors which should normally be considered to establish that the activity is a business engaged in making a profit are the following:
•Whether you carry on the activity in a businesslike manner.
•Whether the time and effort you put into the activity indicate you intend to make it profitable.
•Whether you depend on income from the activity for your livelihood.
•Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
•Whether you change your methods of operation in an attempt to improve profitability.
•Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business.
•Whether you were successful in making a profit in similar activities in the past.
•Whether the activity makes a profit in some years, and how much profit it makes.
•Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Additional information on this topic is available in section 1.183-2 (b) of the Federal Tax Regulations.

Additional Information:
•Publication 535, Business Expenses
•Publication 17, Your Federal Income Tax for Individuals

Category: Small Business, Self-Employed, Other Business
Subcategory: Income & Expenses

frankhardy

Thanks for the informative post. I could argue my situation either way. I purchase cards for my collection. I only sell the left overs to recoup the money spent. I just happen to make money at my hobby (sometimes).

Either way, the U.S. is getting their taxes, whether it is a hobby or a business or if I keep inventory or not. If I carry over items to the next year and I sell it the next year, then all of those sales goes to profit.

mrmint23

Key question...do you make a profit 3 out of 5 years and could be 4/5...if yes then business. Just don't start trying to write off your kitchen as office space.

esquiresports

I am not a CPA. However, I do know that you don't have to value your inventory to determine gains. It does not matter if you buy a card for $100 January 1 and it is worth $200 at year's end. So long as you hold the card, you recognize no gain for tax purposes. (Larger businesses using accrual accounting will test for impiarment, but that's off topic). When you sell, you record the difference as gain. Your accounting could actually be even easier. Because you have sales under $1 million per year, you are allowed to use the cash method of accounting and to account for inventory as nonincidental materials and supplies - basically expenses. This means if you spend $10,000 on inventory during the year and only recoup $5,000 during that year, you record a $5,000 loss. All sales from this inventory going forward would be treated as gain, so it evens out. It just makes the accounting simpler. Cash out is an expense. Cash in is revenue. You don't have to worry about allocating values to each item in a bulk purchase this way. It's simply a running total. That said, I was told by my CPA that using the cash method for a large inventory build-up and little sales during the year could be a red flag, even though legitimate. That is, he wouldn't want me to expense $100K in inventory and report $5K in sales. This doesn't apply here. Assuming you meet the requirements to hold yourself out as a business, that is how I would break. This enables you to deduct a percentage of expenses related to office equipment, your mobile phone, internet service, accounting fees, etc. Your CPA can guide you on how allocate deductions, etc. They can really add up.

frankhardy

<< <i>Key question...do you make a profit 3 out of 5 years and could be 4/5...if yes then business. Just don't start trying to write off your kitchen as office space. >>



Absolutely right. Home office deduction is a red flag. Thanks.

frankhardy

<< <i>I am not a CPA. However, I do know that you don't have to value your inventory to determine gains. It does not matter if you buy a card for $100 January 1 and it is worth $200 at year's end. So long as you hold the card, you recognize no gain for tax purposes. (Larger businesses using accrual accounting will test for impiarment, but that's off topic). When you sell, you record the difference as gain. Your accounting could actually be even easier. Because you have sales under $1 million per year, you are allowed to use the cash method of accounting and to account for inventory as nonincidental materials and supplies - basically expenses. This means if you spend $10,000 on inventory during the year and only recoup $5,000 during that year, you record a $5,000 loss. All sales from this inventory going forward would be treated as gain, so it evens out. It just makes the accounting simpler. Cash out is an expense. Cash in is revenue. You don't have to worry about allocating values to each item in a bulk purchase this way. It's simply a running total. That said, I was told by my CPA that using the cash method for a large inventory build-up and little sales during the year could be a red flag, even though legitimate. That is, he wouldn't want me to expense $100K in inventory and report $5K in sales. This doesn't apply here. Assuming you meet the requirements to hold yourself out as a business, that is how I would break. This enables you to deduct a percentage of expenses related to office equipment, your mobile phone, internet service, accounting fees, etc. Your CPA can guide you on how allocate deductions, etc. They can really add up. >>



I think this is exactly what I was looking for and hoping for.

So, it looks like I HAVE been doing it right.

frankhardy

I would like for others to chime in as to whether or not you keep inventory, or if you do it like I have been doing it.