May 7, 2010
Deducting Your "Peanuts" And "Bubbles"
Deducting Your "Peanuts" And "Bubbles" Cliff Ennico www.creators.com "I just began selling stuff on eBay last year, and am in the process of filling out my first tax return (ugh). I have a question about whether or not I can deduct the cost of postage, duct tape, packaging materials such as 'plastic peanuts' and Bubblewrap, and other supplies. I pay for these items out of my own pocket, but I don't pass the actual cost on to the buyer because they're too difficult to track. Instead, I charge each buyer a 'shipping and handling fee' of $10 for each auction, regardless of the amount involved. Does the $10 'shipping and handling fee' wipe out any deduction I might have for my packaging and shipping materials?" When selling on eBay, it's often hard to come up with deductible business expenses when tax time rolls around. You probably have a computer or laptop that you use in your business (and which you probably share with your videogame-playing teenagers), a couple of eBay "how to" books, and maybe some paper clips. But that's about it. Unless you are selling so much on eBay that you need to rent a warehouse, buy forklifts and hire guys with tattoos to run them, you really don't have a lot of expenses in a selling business on eBay. The one exception, of course, is "postage, packing and shipping". Whenever someone buys something from you on eBay, you've got to get it into their hands somehow. How should you deal with these on your tax return? Well, believe it or not, there are two ways. The first (and better) method - and what the IRS really wants you to do - is to "inventory" your postage, packing and shipping costs by adding them to your "cost of goods sold" or "COGS". "Cost of goods sold" (COGS for short) is basically the total of everything you spent to acquire your inventory -- the stuff you sell on eBay. Whatever you paid for your inventory is part of the COGS of your inventory, but COGS also includes such things as postage and packaging materials. The COGS method requires you to keep track of the COGS of each item of inventory you sell on eBay, because you cannot deduct your COGS for inventory until it is actually sold. When you sell an item on eBay, you record the winning bid amount as income, and deduct the COGS for that item to offset the income. The COGS method works well when you are selling only a relatively few high-priced items on eBay. But what if you are like the vast majority of eBay sellers, who are selling lots and lots of low-priced items? In that situation it is difficult, if not impossible, to track the COGS of each item you sell unless you have lots of discipline and patience, too much time on your hands, and some sophisticated accounting software. You probably will not get into too much hot water with the IRS if you take the total cost of your postage, packaging and shipping materials as a current deduction on Schedule C of your federal tax return (that's the Schedule on which you report your income and deductions from a "trade or business"), especially if the total amount of these expenses is relatively small such that it would be "too much of a pain" to track them precisely. What complicates the situation here is the "shipping and handling fee" you charge your eBay buyers. You will have to keep close track of the amount you actually spend on postage, packaging and shipping materials, total them all at the end of the year, and then compare them to the total "shipping and handling fees" your charged your eBay buyers during the year. If your total shipping and handling expenses exceeded the total shipping and handling fees you received from eBay buyers, you can deduct the excess expenses on your tax return. If the total shipping and handling fees you charged your eBay buyers exceeded your actual shipping and handling costs, you must report the excess as income on your tax return. Keep in mind that charging a flat shipping and handling fee regardless of your actual costs, while legal, may violate certain eBay policies (see pages.ebay.com/help/policies/listing-shipping.html). If your eBay buyers find out you are making money on your shipping and handling fees, they will feel cheated, and will find a way to let the eBay community know about it, either by giving you "negative feedback" on eBay's Feedback Forum, or by "flaming" you on the many chat rooms, bulletin boards and other "community" features on eBay's Website. If you value your reputation as an eBay seller, you will find a way to make sure your shipping and handling fees reflect your actual postage, shipping and packaging costs. And while you're at it, start using the COGS method, which will help you keep track of what these actual costs are. You will make both your customers, and the IRS, very happy indeed. Cliff Ennico ( cennico@legalcareer.com ) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is 'Small Business Survival Guide' (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com . COPYRIGHT 2006 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.

Posted by Staff at 1:49 AM