Updated: Jun 27, 2020
When it comes to side hustles, eBay is top notch. eBay Inc. has more than 174 million buyers and a market value greater than $20 billion. While many use the site as a hobby to get rid of "junk," a select group of sellers sustain some or all of their livelihood with eBay. My husband, Mr. Williams, is one of those sellers. In 2019, he sold more than 500 items and reported a five-figure net income, all while having a full time job, being a father and a husband.
For those interested in building an eBay business, Mr. Williams and I answered a few common questions to help get you started. For those with an up and running eBay store, we have also provided information to consider regarding tax deductions, business entity structure, and more.
What is an eBay business and how do you start one?
Directions on how to set up an eBay store can be found on their website by clicking here.
For tax purposes, an eBay store is only considered a business if the goal is to make a profit. The IRS uses the following facts and circumstances to determine if an activity qualifies as a business:
Do you carry on the activity in a businesslike manner and maintain complete and accurate books and records?
Does the time and effort you put into the activity indicate you intend to make it profitable?
Do you depend on income from the activity for your livelihood?
Are your losses due to circumstances beyond your control (or are normal in the startup phase of your type of business)?
Do you change your methods of operation in an attempt to improve profitability?
Do you or your advisors have the knowledge needed to carry on the activity as a successful business?
Were you successful in making a profit from similar activities in the past?
Does the activity make a profit in some years and how much profit does it make?
Can you can expect to make a future profit from the appreciation of the assets used in the activity?
Keep in mind that taxpayers who set up an eBay store for hobby purposes cannot deduct hobby expenses on their federal Form 1040 under the 2017 Tax Cuts and Jobs Act.
What steps should you take to create a successful eBay business?
According to Mr. Williams, a successful eBay business has 1) Good Cash Flow and 2) Profitability.
Good Cash Flow
To keep eBay funds flowing into your account, you have to be consistent. Every night, Mr. Williams lists new inventory items, packages new purchases, and ships them out the next morning.
Every. Single. Night.
He also carefully inspects each item for defects that might cause a buyer to request a refund. Refunds can hinder cash flow and it is important to maintain systems and protocols that protect your store from frequent refunds.
Since most eBay buyers pay for items upon purchase, other factors that can hinder cash flow normally do not apply to eBay businesses such as invoice collection, and installment payments.
To be profitable, you have to keep gross revenue higher than your cost of goods sold, travel, shipping and postage, and other expenses.
You can keep your cost of goods low by using eBay to research the going price for a potential inventory item. If similar items sell for significantly more than the amount you will pay for it, then it will most likely produce a profit.
To keep other costs low, use discernment. If you have to travel 100 miles for an item that will only make $2, then it might not be worth the cost of gas. Or, if an item is worth $30 but costs $25 to ship, it might not be worth adding to your eBay store.
Where is the best place to find inventory for an eBay store?
This varies per location. Since we live in the Los Angeles region, Mr. Williams is able to find rare DVDs and other Hollywood Memorabilia from local garage and estate sales. In general, these sites and apps can offer new and used inventory items with good resale value:
Thrift stores can also be a great source for inventory items, depending on location and season of purchase.
What are the challenges of starting an eBay business?
According to Mr. Williams, building a successful eBay store takes time. To optimize your product relevance, you have to list your items daily. This does not happen overnight. This is why it is best to start an eBay store as a side hustle and then, if it is your goal, work your way up to making it your sole source of income.
Products also have to be listed in the right category, be complete, and fulfill other requirements to be considered a Best Match during a product search. Learning all of this takes time. Building an eBay store is not a get-rich-quick income stream. It takes time, practice and patience.
How do you become an eBay Top Seller?
First of all, let's give a quick shout out to Mr. Williams who is a Top Rated Seller! Top Rated Sellers receive enhanced visibility in eBay search results and exclusive seller protections. To qualify for eBay's Top Seller Program, you must have:
An eBay account that’s been active for at least 90 days.
100 or more transactions and $1,000 in sales during the last 12 months with US buyers.
A defect rate less than or equal to 0.5%, with three or fewer defects from unique buyers.
Cases closed without seller resolution less than or equal to 0.3%, and two or fewer cases.
A late shipment rate less than or equal to 3%, and five or fewer late shipments.
Tracking uploaded within your stated handling time, and carrier validation for 95% of transactions to US buyers.
What type of entity should you set up for your eBay business?
The chart below briefly summarizes several business entity options. Review it, weigh the pros and cons, and talk to your financial/tax advisor to ensure your entity structure will provide the best benefit for your eBay business.
What forms, receipts, and other records do you need to report eBay sales on your income tax return?
You must keep records, such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit appearing on a return as long as they may become material in the administration of any provision of the Internal Revenue Code, which generally will be until the period of limitations expires for that return. IRS Topic 305 lists the statute of limitations for various types of records.
Common forms, documents and records for eBay sellers include:
Forms 1099K, Payment Card and Third Party Network Transactions
Inventory tracking reports
Physical receipts from garage sale, estate sale, and thrift store purchases
What tax deductions can you take against your eBay business?
Almost any expense incurred for purposes of business can be deducted on your tax return. Although the type of expense will vary per entity structure, here are a few common expenses that can be deducted against taxable income:
Startup costs - incorporation costs, licensing fees, computer and software expenses, etc.
Cost of Goods Sold - cost of parts and raw materials, packaging, etc.
Basis - the value of the asset when contributed to your business.
Travel - the actual cost of travel expenses or business mileage used for business purposes.
Postage and Shipping - packing tape, boxes, stamps, postage meter, etc.
Home Office - rent, mortgage, utilities, mortgage interest, home improvements, depreciation (be mindful of depreciation recapture) and other expenses allocated to your home office.
Qualified Business Income Deduction - Certain businesses qualify for a deduction of up to 20% of their qualified business income.
eBay fees, business education courses, business-related lease payments, business meals, bookkeeping and other professional services expenses can also be deducted against taxable income.
You might also be able to hire your child as an employee and deduct their salary against your taxable income. Form more information, click here.
What other tax items should I consider before starting my eBay business?
eBay sellers also need to consider sales and use tax. Sellers are required to keep their address up to date so that, when applicable, sales tax will be applied at checkout. To learn more about sales and use tax, see eBay's comprehensive sales and use tax chart organized by state.
Also, keep in mind that taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. The IRS website provides a thorough explanation of who is required to pay estimated tax, when payments are due, and penalties for underpayment.
Finally, eBay sellers should review local filing and income tax requirements to maintain business compliance within their state.
For more accounting and tax information about selling eBay, please contact The Little CPA.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. This information is not endorsed by eBay. You should consult your own tax, legal and accounting advisers before engaging in any transaction.