You haven't mentioned your state of residence, so I can't comment on the state aspect. Usually, you are best served by forming an LLC, a Limited Liability Corporation. This serves to separate your personal assets from your business assets with regard to liability. Any income will simply be reported on Schedule C of your Federal return and added to personal income; losses can be used to offset other income. Even though you're not renting Jet Skis, limiting your personal liability is a good thing. Any search engine will yield the process and it's not that difficult, time consuming or expensive. You can pick a cool business name going this route too.
On the Federal tax side, technically, by law, you must keep track of and report all sales. Whether you do so or not is your call. You can "write off' any legitimate business expense. That would include cost of goods sold, supplies, postage, business auto use,
ebay fees, computer expense, domain name fees, hosting fees, advertising, LLC fees, anything truly business related. You could even claim home office expense for dedicated space, but that is an IRS hot button for triggering an audit. You should definitely keep track of all expenses, even if it results in a loss, because as I mentioned, your business loss can offset your other income and your taxable income goes down. As long as you are running your business with a profit motive, your expenses will be allowed. If you report a loss for 20 straight years, the IRS could declare your "business" is really a hobby and disallow losses. Even 5 straight years of losses shouldn't be an issue if you really have a profit motive.
Get in the habit of entering things on a spreadsheet or even in a notebook as they happen, rather than batching them later. It will help tremendously at tax time. Keep documentation of everything. As part of the LLC process, you will receive Federal and State Tax IDs. If your state requires collection of sales tax, your will be required to remit that to the state.
To some, all the above is a piece of cake. To others, it's overwhelming. It's really not that bad at all. The real challenge is turning a profit. Good luck. If I can ever help in any way, let me know.
Posted 06/24/2011 07:21 am
