I’m yet to resell, and I’m not an accountant.. so I feel very confident that this one is in my wheelhouse! But I wanted to address the topic anyway, with some basic concepts.
Getting a 1099 doesn’t mean you owe taxes.
Not getting a 1099 doesn’t mean you don’t owe taxes.
Avoiding getting a 1099 by swapping your FBA account to your significant other, child, or pet to avoid taxes is illegal or illogical, because you know you have to report your income regardless, so get the 1099. If you are avoiding notifying the IRS so they don’t wonder why you aren’t reporting income… that’s the illegal part.
You need to pay taxes on your income. The 1099 you get is informational, and tells YOU that someone else mailed in your sales/income to the IRS. If they don’t send one in, or you skirt around it somehow, that doesn’t change the fact that you owe taxes on your income.
Tax Evasion vs Tax Avoidance
Tax evasion is what they got Al Capone on. It comes with prison time. Tax evasion is what most people who resell do. By not declaring your profit, you are evading taxes. Tax avoidance is for people who don’t want to pay their taxes either, but do so legally. Truth be told, some of the tax laws are so screwed up that they should be illegal, but who are we, the people, to judge?
To Pay or Avoid?
Avoiding taxes costs money and time. If you elect to pay taxes, you save those valuable commodities. It is a price equation. When I make price decisions I start broadly and work down from there, the idea is to look at how much juice is in the gig.
You can deduct many expenses in business. In order to know what to do next, you should start with the ‘easy wins’ and build up a ballpark figure. Here’s how:
- Total sales on FBA $20,000
- Total cost to acquire products $18,000
- Maximum juice $2,000
Simply put, you could take the $2000*your effective tax rate and that would be what you’d owe, if you are paying at 25% then you could just put those numbers on your Schedule C (added to your 1040 tax return) and you’d have to pay $500 more taxes for the year.
For this case, why would you want to hire a CPA? Well, if you have an LLC or sole prop with pass through losses, you might be able to build up an abundance of losses, which takes the ‘juice’ not to $2,000, but beyond that. However, you can only do that for 2 years due to the hobby loss rules. So you enter my world of ‘is it worth it?’
However, if you had scaled up your FBA and you had these figures:
- Total sales on FBA $200,000
- Total cost to acquire products $180,000
- Maximum juice $20,000
You have $20,000 of juice. $1K for a CPA might be savvy, as he can start recommending things like retirement accounts, deducting home office expenses, running healthcare through the business, etc.
Don’t want a CPA?
Frankly, if you are smart enough, and confident enough, a simple business return can be often done via Turbotax, or other vendors. If you wanted to go this route note that you often need two software solutions:
- One tracks cost basis (cost of goods sold, packaging, other valid expenses) and sales. This is a granular, micro view.
- The other takes the total numbers from the tracker and creates your tax reports, this is the tax software, macro view.
Even with a CPA, you need the first product, a “tracker”. It can be as simple as Excel (or free google docs) or as sophisticated as quickbooks, which can integrate directly with tax software. The reality is that when tax time comes, you’re going to be asked (by a human or by tax software) for the details of your capers over the year.
Track hard, and don’t forget efficiency
Resellers when starting out will often use whatever card pays them the most – that is a real PITA at tax time.. when you collate cost of goods sold, you’ll have some on an Ink, some on Discover with Applepay, some on some cousins card who you used to help meet min spend, and some using a gift card that you bought with another giftcard.
The more you think you are being ‘efficient’ on the buy end, the less you are on the reporting end. You should price that in. Personally, I hold an Ink, but I never use it at office supply stores for my business, its too ugly. I have 1 card for each business I own, and they earn 1x. Come reporting time, I connect the accounts to my tracking software, reconcile, and send it off for tax reporting.
I do lose out on some points doing this, but I don’t have to lose time. It is critical to remember who is playing the points game, and not let it play you.
Rebates… reduce basis or not?
Rebates, coupons, portals, points, cashback.. which ones reduce your basis? This is what everyone asks… the reason: in your mind/math/BLOG! you tell people how much your real basis is. But you want to report a different basis to the IRS. We’re all tax evaders at heart it seems.
The reality is that some of the rebates that you think of should reduce basis, and perhaps all of them should. There just isn’t enough evidence out there to be totally conclusive. Remember, I am not a tax professional, but also remember that tax professionals often make educated guesses also, so even they don’t know it all.
What you declare as a basis reduction should line up with your risk tolerance:
- Low risk of trouble: report everything from airline miles to portals, coupons, rebates.
- Higher risk of trouble: report coupons that change the receipt price, but pretend the other stuff ‘doesn’t count’.
- Highest risk of trouble: pretend it never happened, and don’t report any income.
One approach is safer than the other, simply due to uncertainty. You need to only take on things where you are happy with the risk. Don’t forget that you could also, with a good tax plan, reduce the basis by absolutely everything, and still owe no taxes.
The post was inspired by a recent discussion in Level 2, Reselling. Please feel free to continue the conversation there, or ask me tax advice here, knowing that I am not a tax professional, and therefore its about as much use as a chocolate fire guard.