~ 7 Steps to Less Tax for eBay Sellers (May 2010) ~

www.USTaxAid.com www.SmartBusinessStupidBusinessOnline.com

www.USTaxAidServices.com www.BusinessFirstFormations.com

~ Presented By ~

Megan HughesAuthor, Business Owner

Megan@USTaxAid.com

Diane Kennedy, CPAAuthor, Tax Strategist,Business Owner, Educator

Diane@USTaxAid.com

Tax Law Changes Coming Your Way

• January 2011 – Paypal & Merchant Reporting requirements begin. Paypal & other merchant account providers will report to the IRS when you accumulate $20,000 in gross sales and have 200+ transactions. Paypal & Merchant Reporting services wil send out special 1099-K with income. You must report income on your business or personal tax return

• 1099s for Vendors expansion. Not just independent contractors making $600+ per year. Now anyone or any company you pay more than $600 per year to may have to have a 1099.

• Increased sales tax nexus. States are looking to increase tax revenues. eBiz owners in the crosshairs!

What Can You Do?

• Step #1 Recognize you are a Business• Step #2 Learn your Sales Tax Obligations• Step #3 Good Record-Keeping• Step #4 Find Hidden Tax Deductions• Step #5 Tax Loopholes for Family Home-based

Business• Step #6 Set up a Business Structure• Step #7 Quarterly and Annual Requirements

Step #1 – Recognize You are a Business

• Don’t have to be incorporated to be in business (but incorporating IS a good idea)

• Know the difference between hobby and real business. A hobby business makes no effort to make a profit, keeps no records, does not distinguish between company money and personal money.

• A hobby business can’t take losses against other income. It can only take losses to zero out income made.

• A real business has a profit motive. It can run at a loss and owners can take that loss against other (W-2) income

9 Steps to Business Test

• Take the test at www.USTaxAid.com/7steps

• The more Yes answers the better

• How can you change your business to create more yes answers?

• It’s okay to have a loss! But it’s not okay to never try to improve

Step #2 Learn your Sales Tax Obligations

• Doesn’t generally impact you unless you are selling to in-state buyers

• Watch Trading Post/eBay Store sales where goods are shipping from another location to buyer in the same location. Could be taxable.

• Different states have different rules over what’s taxable and what isn’t

• Many states are moving to tax software and digital downloads

• 23 states tax shipping• If you don’t collect from buyers, state doesn’t care. You

are responsible for paying sales tax to them

Step #2 Learn your Sales Tax Obligations

• Understand nexus – it means connection for sales or income tax.

• Accidental ways to create nexus:– Warehouse goods in a state that considers warehousing to create

nexus– Go across state lines to deliver something or fix something– Have your kids on the payroll when they live in another state (i.e.,

go off to college• If you discover you have nexus, register and start paying.• Check out our product State Nexus: The Big Issue for

Business Owners in 2010 at http://bit.ly/cViXUO• Review the nexus questionnaire you’ll find at

www.ustaxaid.com/7steps

Step #3 Good Record Keeping

• If you don’t have the paperwork to back up a deduction you will lose it

• IRS knows unincorporated businesses and very small businesses are casual about record keeping

• Something is better than nothing. For example, at garage sales, keep handwritten notes of what you bought and why

• Things to keep: computerized record of sales, checks written, financial statements, payroll journals, Forms W-2 and 1099s, copies of invoices, proof of payment, bank statements, bank reconciliations, inventory purchases & proof of valuation, asset purchases, corporate documents, annual reports, annual minutes, tax returns

Step #4 Find Hidden Tax Deductions

• To take a deduction it has to be ordinary and necessary to the production of income

• You can deduct just about anything if you can show legitimate business purpose

• Home Office: needs to be separate room, used just for business

• Travel: you can combine business and pleasure, but need to have a business purpose and do business every day you write off expenses

• Meals: when you are on the run and grab a meal or a drink you get a 50% deduction. If you bring in meal for you and workers because it’s more convenient, you can take 100% of the cost as a deduction

Step #4 Find Hidden Tax Deductions

• Auto: You can deduct either a cents-per-mile or an overall percentage

• Cents per mile is good with older cars & very gas-efficient cars.

• Percentage can be good with very new vehicles• Either way, track your mileage and keep a written

record!• Always be thinking, “Where do I spend my

money?” Look for ways to turn those expenses into business-related deductions instead

Step #5 Tax Loopholes for Family Business

• Pay your kids: make sure they track their hours, have a written job description, don’t pay too much (although okay to pay what you would hire an adult) and don’t give them job over their head

• Bonus to paying kids salary is you pay in pre-tax dollars, so lowers your tax bill. Their tax rate is lower, so income is taxed lower

• Inventory storage space can also be tax deduction and doesn’t have to be in the home office.

• One client kept eBay inventory in his garage. Figured the garage was 15% of overall square footage of his home. Took 15% of all home-related expenses as a deduction

Step #6 Set up a Business Structure

• 2 factors to think about when answering this question. What is best for you legally, and what is best for you for taxes.

• Legally, we think the limited liability company (LLC) is best.

1. Easy to set up. All 50 states have LLC laws in place

2. Easy to maintain. Either a 1-page annual filing, or no annual report at all

3. Economic. LLCs are often cheaper to file than Corporations

4. Better asset protection. Asset protection comes in two ways: protecting yourself from your business, and protecting the business from you. An LLC gives you 2-way protection. A Corporation does not

5. Flexible. You can operate the LLC pretty much as you choose, as long as everyone agrees.

Step #6 Set up a Business Structure

• We like LLCs the best from a tax angle, too.

1. LLCs can choose how they want to be taxed. You can start off with basic taxation and change to better tax treatment as the LLC grows and earns more money

2. It’s easy to get money out of LLCs

3. It’s easy to get assets out of LLCs without negative tax consequences

4. More deductions than Schedule C/Sole Proprietorships

5. Can lower your audit risk if your LLC chooses S Corporation taxation

Step #7 Quarterly and Annual Requirements

• Depending on your payroll you will file payroll reports & pay payroll taxes either quarterly or annually.

• Sales tax reports are done either quarterly or monthly, depending on volume

• Income taxes are typically done annually. If you keep Schedule C tax status, you will do estimated payments quarterly.

• If you move up to S Corp tax status you can usually get rid of estimated tax payments

• Hold annual meeting once a year and prepare Minutes. Not filed anywhere and not required by law but excellent evidence you are operating as a real business

• File Annual Report in states that require filing• Keep Resident Agent service up to date if you aren’t acting as

LLC’s personal resident agent• If you have sales tax license, keep an eye on renewal status in

states that require renewals

Conclusion

• Incorporating looks like work, but isn’t that much harder than what you do now. Much better tax savings to be had

• Learn about your sales tax and nexus responsibilities

• Get a team on your side to ask questions and get answers

• eBay tonight – Less Tax Tomorrow!

Available at USTaxAid.com

Learn what the best tax-advantaged business structures are for your type of eBay business

Get the free “The 9 Steps to Business Test” to see if your business measures up against IRS guidelines

Identify and take advantage of hundreds of legal deductions for eBay business owners

Get tips for building, watching, and protecting your buyer feedback

Determine how often you will prepare a “sales and use” tax report based on volume

Set up a payroll system with the proper withholding deductions for all employees including yourself

Create an accounting system to pay bills, input transactions, record sales, keep track of PayPal fees, and balance your business checkbook

Find out how your children and other dependents can benefit from the same tax deductions and write-offs that you do

Available at SmartBusinessStupidBusinessOnline.com

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