Can I just subtract personal items sold through my husbands business?

[dukeblue07]

I've been selling all kinds of used items (clothes, dirt bike, lawn mower, etc ) over the years and ran the sale of items through my husband's little fireworks business because  people wanted to used their credit card.  Anyway, I've always deducted what I sold from his firework sales so not to be taxed.  Got a letter from the IRS stating we owed a lot of money  because they went by what the bank sent out which unfortunately included my yard sale items (non taxable items).  What do I need to do.  I don't have any records, my husband just gives me cash for the items sold.  I can guess on many items but I've been doing this for a while.  We have changed the type of account it is and I'll no longer continue to do it.  But how do I prove this to the IRS?

[Carl]

"...included my yard sale items (non taxable items).?
So what makes the income from the sale of personal items not taxable? With rare exception (such as disability income) all income from all sources is reportable and taxable on your tax return, or the business tax return if separate from the personal tax return.

" I don't have any records"
Then unfortunately, you lose and have to pay the IRS whatever they say you owe. Three rules to remember when dealing with the IRS.
1 - You are guilty until proven innocent
2 - The burden of proof is on the accused (that's you), and not the accuser
3 - If it's not in writing, then it did not occur.

I'm sorry you had to learn this the hard (and probably expensive) way, but based on the content of your post the IRS is 100% in their rights and you have nothing to prove otherwise. This is exactly why you keep business stuff physically separate from personal stuff *no* *matter* *what*.   Now in addition to the regular income tax the business pays on profits, the business also has to pay the additional 15.3% self-employment tax on that income. Convenience is not free. They need to pay with cash for personal or "garage sale" items, or don't make the sale.

[Opus 17 · Accepted solution]

 When you sell personal property, you owe capital gains tax if you sell the items for more than you paid for them.  If you do this more than casually, you need to keep accurate business records of all the items that you sell, their original purchase price, the original date of purchase, the date you sold, and the price you received when you sold them. All of these records need to be available to show the IRS in case you are audited.

 Going forward, I can't see any good way for you to put the sales on your husband's business account. You really should have a separate account with PayPal, or square, or someone else to handle the transaction.  Selling personal property is not really compatible with other kinds of business activities. For example, if you entered your personal property in your husband's business records, you might end up showing a higher cost of goods sold if you put in the price you paid, and this would create a business loss that is not allowable or real. 

 Looking backwards, the IRS does not have to give you any deductions or cost basis that you can't prove with accurate records. There is at least one tax court case involving a woman who claimed to  have sold used personal property on eBay,  making many thousands of dollars. She claimed everything she sold was used and sold at a loss, but she couldn't prove it and the IRS assessed tax and the tax court ruled in favor of the IRS.  

You will need to reconstruct your records as best you can. For example, you might be able to show that if your husband's business is Monday through Friday, that all the Saturday sales transactions were from a garage sale.   Do the best you can to document the identity of the items sold, the price you originally paid, the selling date, and the sales price that you received. A spreadsheet would be helpful. But understand that anything that you can't prove with your own records, is likely going to result in a higher tax assessment for your husband's business. 

[Carl]

Still, don't sell personal items through a business or business account. Very, very bad practice that can come back to haunt one, as has happened in this case.

[VolvoGirl]

Could he give her a 1099Misc and then she fills out her own schedule C and show her Profit or loss?  If she sells more than occasionally she probably also needs to show it as a business.

[Carl]

MY bet is, the letter from the IRS which is basically a bill, already has the taxes and SE taxes included. So unless the letter directs otherwise, I'd just pay the bill and be done with it. Why create additional paperwork for myself, when the IRS has done it for me and just sent me a bill?

[VolvoGirl]

Why?  To reduce the bill.  If he amends to add the income and offset it as an expense to her there won't be an increase in profit and no self employment tax.  Then they include a schedule C for her which I'm guessing should show a loss unless she sold something for more than she paid for it.  But even then her Net Profit would be less than 100% of her income going on his C.

[Opus 17]

That is theoretically possible for the past year that is being questioned.  He can add a business expense for her transactions, then she can add a schedule C in her name and show a break even (showing a loss on personal capital property would be very dangerous).   They would also have to write a letter explaining what they did.  However, if the IRS comes back and asks to see her records, they're back where they started.

[Opus 17]

One compromise approach here might be for the taxpayer to concede that they did not keep proper records of the cost basis of these household items, assign a cost basis of zero, and pay long-term capital gains tax on the proceeds from the sale of these household items. That would be 15% capital gains tax, instead of  15% or 25% or 28% income tax +15% self-employment tax.  It might be easier to get that past the examiner than to say that all these sales were household items below original cost basis without having the records.