Posted by : Daniel Stoica in (Blog, Federal Income Tax, Income Taxes, Tax Deductions, Tax Forms, Tax Return, Tax Tips) On: June 5th, 2011
According to most tax professionals, people often don’t realize that the income they earn from auctions and consignment sales are taxable. The Tax Gap is the amount of tax that goes unpaid every year and this blog will help taxpayers understand what income they need to report and the deductions they might be able to take.
The Tax Gap results from taxpayers under-reporting their taxable income. Most people know they have to pay their taxes, but most need a better understanding of their full obligations.
What Is Taxable?
Income from all auctions and consignment sales are taxable. But there are certain exceptions to this. The income is generally categorized as either business or ordinary income. This income may qualify for capital gain treatment. There are also some situations in which income is excluded from taxable income.
Business income earned from an auction or consignment is taxed just like earned income from any other retail or service business. This includes income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner has to include this income as business income.
A person must report money received from a sale whether it’s income from a business or not. Reportable income is the income received that is above the original cost of the item. This money can be business income or capital gains.
Income resulting from auctions similar to a garage or yard sale is not required to be reported. However, there might be exceptions to this. If an online garage sale turns into a business with recurring sales and the purchase of items for resale, it is considered an online auction business.
Some people do sell products or services online as a hobby. This income must be reported, but expenses are limited in deductions. The deductions must not be more than the income and can only be taken if the deductions are itemized on your 1040, Schedule A, Itemized Deductions.
What’s a Deductible Expense?
Auction and consignment sellers are in the business of making a profit and can deduct expenses that are claimed as ordinary and necessary. An ordinary expense is one that is common in a business. A necessary expense is one that is helpful for a business. Auction and consignment fees and commissions that are verifiable are allowable business expenses.
Expenses related to personal, living, or family matters are not deductible. There are, however, expenses that are partly personal and partly business-related. The business portion of these expenses are the only ones that are deductible.
A common expense issue is a home that is also used for business. A person might be able to deduct expenses for the business use in their home if they use one part of their home exclusively for the business, generally referred to as an exclusive use requirement.
Auction and consignment sellers, however, may figure their deduction to the expenses that relates to the space in the residence that is used on a regular basis to store inventory and/or product samples if the residence is the only location of their auction or consignment business. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
These rules can get tricky, so it’s a good idea to seek the advice of a tax professional to find out what you must claim as income and what you can and can’t deduct as an expense.