QUESTION: I’m following up on your previous post explaining how to file your taxes if you’ve earned money selling books on the Internet. Am I supposed to deduct my expenses such as mailers, postage, and Amazon’s commission? And what if my expenses were more than my revenue? Would everything be deductible?
ANSWER: You pay tax only on your net profit. Your expenses incurred in selling books will be deductible expenses that you’ll list on your Schedule C when you file your taxes, assuming you’re an unincorporated sole proprietorship.
For example, let’s say you sold $500 of books in 2005. The $500 is your gross self-employed income from bookselling. Meanwhile during 2005 you spent $200 in postage, mailing containers, commissions paid to Amazon, plus other bookselling-related costs you may have. Your net profit is $300; you’ll pay tax on that. If you normally pay 18 percent tax on your income, you’ll pay about 18 percent tax on that $300.
Certain other expenses are deductible. If you drove to book sales, you’ll be able to deduct your mileage (make sure you keep a log of your mileage in case you’re ever audited by the IRS). And if you use a specific portion of your home exclusively to store your inventory, you’re entitled to a tax deduction for the business use of your home.
If you failed to make a profit for 2005, you could still deduct your bookselling expenses. Let’s pick up with the example from above. Let’s say you had $500 in sales during 2005. But your expenses were $750. You had a loss of $250 from your bookselling during 2005. In this case, the loss of $250 would be deductible from other income you may have.
But you can’t continue deducting losses year after year. As far as the IRS is concerned, your business must become profitable (and thus paying taxes) within three years or it will be considered a hobby, and from that point forward none of your bookselling-related expenses will be deductible on your tax return.
Q&A: Do I owe taxes if I lose money selling books online?
QUESTION: I’m following up on your previous post explaining how to file your taxes if you’ve earned money selling books on the Internet. Am I supposed to deduct my expenses such as mailers, postage, and Amazon’s commission? And what if my expenses were more than my revenue? Would everything be deductible?
ANSWER: You pay tax only on your net profit. Your expenses incurred in selling books will be deductible expenses that you’ll list on your Schedule C when you file your taxes, assuming you’re an unincorporated sole proprietorship.
For example, let’s say you sold $500 of books in 2005. The $500 is your gross self-employed income from bookselling. Meanwhile during 2005 you spent $200 in postage, mailing containers, commissions paid to Amazon, plus other bookselling-related costs you may have. Your net profit is $300; you’ll pay tax on that. If you normally pay 18 percent tax on your income, you’ll pay about 18 percent tax on that $300.
Certain other expenses are deductible. If you drove to book sales, you’ll be able to deduct your mileage (make sure you keep a log of your mileage in case you’re ever audited by the IRS). And if you use a specific portion of your home exclusively to store your inventory, you’re entitled to a tax deduction for the business use of your home.
If you failed to make a profit for 2005, you could still deduct your bookselling expenses. Let’s pick up with the example from above. Let’s say you had $500 in
sales during 2005. But your expenses were $750. You had a loss of $250 from your bookselling during 2005. In this case, the loss of $250 would be deductible from other income you may have.
But you can’t continue deducting losses year after year. As far as the IRS is concerned, your business must become profitable (and thus paying taxes) within three years or it will be considered a hobby, and from that point forward none of your bookselling-related expenses will be deductible on your tax return.