I started a small online retail store early last year. It happened largely on accident, spurred from the selling of hobby items on online auction sites. Eventually it grew to a full-fledged company, but only after first branching in a completely different direction.
I had a large stock of old hobby items in my closet that I was looking to sell. I was also trying to buy and sell new hobby items at the same time, but that didn't take off very well. I did actually take a loss on some of the new items, but I don't really have any documentation to prove it. What documentation I do have is the purchase of multiple items against the sale of single items. I still have some of the items, and their value is kind of hard to ascertain. I suppose I could sell them at bargain prices to complete the loss circle to fully write off any losses, but I doubt its worth the effort.
After a very short period, I realized that the hobby sales were not working. The margins were small, and the bookkeeping was enormous. I discovered in the meanwhile, however, some products that were selling quite well. I had bought some accessories that surrounded the hobby, and was selling them online as well. These were easier to manage and had higher margins. I built my business around these instead, and grew from there.
I liquidated almost all of my hobby stock (everything that had any real value), and used it for capital in the new business. It was at almost exactly this time that I actually registered as an actual business, obtained a tax id and a sales tax license, and got a separate bank account and credit card for the business. Unfortunately, records before that point are somewhat mixed between personal and business transactions happening against the same accounts.
My question pertains to the sale of the hobby assets and taxation. Almost all of these sales occurred on the same eBay/PayPal account as all of my other business sales. PayPal will report those numbers to the IRS, and I will be expected to declare them. Some of those sales, however, have no COGS because I owned the items previous to starting a business. Paying taxes on items that are 98% profit will not only be especially costly, it doesn't paint a picture of really what happened.
Through QuickBooks, I believe I've managed to create a pretty accurate picture of what happened. Although it may not be correct, I've set those sales to hit Owner Equity directly, and an expenses against those sales (shipping, etc) to also hit Owner Equity. There may be a better way to do it, but essentially I'm saying that these items were sold by me personally and the cash was added to owner equity.
Once the business really started to take hold on its own, I set up separate PayPal accounts and sold the remaining hobby items on my personal PayPal account then transferred the money to the businesses PayPal. The transfer is credited to owner equity. It's a much cleaner transaction over all.
I would then of course need to declare the hobby item sale on my personal taxes
I've done my own taxes before, but this will be my first experience with business taxes. I will be seeking the advice of a professional, but I wanted to prepare and educate myself nonetheless.
I don't know if there's actually a benefit to doing this. The company is a sole proprietorship, so I'm not sure how the taxes work. Are my taxes and the company's one-and-the-same? If so, this will have no impact whatsoever. (That's not true. I really didn't want company reports to contain sales of the hobby items, which I have achieved). If they are separate, adding these items to my company would over have a significant impact on last years "profits" (I use quotes because sales from the hobby items aren't really profit). It's unlikely the company could pay for taxes on these items, while I could. I'm not sure if the tax burden would be any smaller for me, however. If I can keep within the same tax bracket, perhaps, but if it bumps me it could it possibly be more painful? Or, I suppose the worst case scenario is it's considered capital gains from sale of collectibles, taxable at 28%, and I have no documentation to prove how much I paid for it, therefore the entire amount could presumably be taxable. In that case, it might be easier to push it onto my company and pay standard taxes for it.
The numbers are pretty small, really. We're talking about $1,500 in hobby items sold over the course of about 4 months. My company made about $800 in net income last year (not including these sales). I made over $70,000 last year.
Again, I'd like to reiterate that I will be seeking the advice of an accounting professional. Any additional information I can get, however, would be very helpful.
I had a large stock of old hobby items in my closet that I was looking to sell. I was also trying to buy and sell new hobby items at the same time, but that didn't take off very well. I did actually take a loss on some of the new items, but I don't really have any documentation to prove it. What documentation I do have is the purchase of multiple items against the sale of single items. I still have some of the items, and their value is kind of hard to ascertain. I suppose I could sell them at bargain prices to complete the loss circle to fully write off any losses, but I doubt its worth the effort.
After a very short period, I realized that the hobby sales were not working. The margins were small, and the bookkeeping was enormous. I discovered in the meanwhile, however, some products that were selling quite well. I had bought some accessories that surrounded the hobby, and was selling them online as well. These were easier to manage and had higher margins. I built my business around these instead, and grew from there.
I liquidated almost all of my hobby stock (everything that had any real value), and used it for capital in the new business. It was at almost exactly this time that I actually registered as an actual business, obtained a tax id and a sales tax license, and got a separate bank account and credit card for the business. Unfortunately, records before that point are somewhat mixed between personal and business transactions happening against the same accounts.
My question pertains to the sale of the hobby assets and taxation. Almost all of these sales occurred on the same eBay/PayPal account as all of my other business sales. PayPal will report those numbers to the IRS, and I will be expected to declare them. Some of those sales, however, have no COGS because I owned the items previous to starting a business. Paying taxes on items that are 98% profit will not only be especially costly, it doesn't paint a picture of really what happened.
Through QuickBooks, I believe I've managed to create a pretty accurate picture of what happened. Although it may not be correct, I've set those sales to hit Owner Equity directly, and an expenses against those sales (shipping, etc) to also hit Owner Equity. There may be a better way to do it, but essentially I'm saying that these items were sold by me personally and the cash was added to owner equity.
Once the business really started to take hold on its own, I set up separate PayPal accounts and sold the remaining hobby items on my personal PayPal account then transferred the money to the businesses PayPal. The transfer is credited to owner equity. It's a much cleaner transaction over all.
I would then of course need to declare the hobby item sale on my personal taxes
I've done my own taxes before, but this will be my first experience with business taxes. I will be seeking the advice of a professional, but I wanted to prepare and educate myself nonetheless.
I don't know if there's actually a benefit to doing this. The company is a sole proprietorship, so I'm not sure how the taxes work. Are my taxes and the company's one-and-the-same? If so, this will have no impact whatsoever. (That's not true. I really didn't want company reports to contain sales of the hobby items, which I have achieved). If they are separate, adding these items to my company would over have a significant impact on last years "profits" (I use quotes because sales from the hobby items aren't really profit). It's unlikely the company could pay for taxes on these items, while I could. I'm not sure if the tax burden would be any smaller for me, however. If I can keep within the same tax bracket, perhaps, but if it bumps me it could it possibly be more painful? Or, I suppose the worst case scenario is it's considered capital gains from sale of collectibles, taxable at 28%, and I have no documentation to prove how much I paid for it, therefore the entire amount could presumably be taxable. In that case, it might be easier to push it onto my company and pay standard taxes for it.
The numbers are pretty small, really. We're talking about $1,500 in hobby items sold over the course of about 4 months. My company made about $800 in net income last year (not including these sales). I made over $70,000 last year.
Again, I'd like to reiterate that I will be seeking the advice of an accounting professional. Any additional information I can get, however, would be very helpful.