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IvanP
Level 2

E-commerce startup filing

Hi everyone,

I hope you are all doing well in these tough times.

 

I started an E-Commerce business in 2019 and spent for merchandise, online ads, online store fees while I only sold very few items. My total expenses are ~$7,000. My earnings from sales are $200. I plan to try selling whatever I can and stop with this business.

Will the IRS accept this as a business or as a hobby? I don't know if I'll be able to sell a lot, but already reduced my expenses as much as I could.

What is the best way to file my return for this business?

Thank you much

Best regards

Ivan

1 Best answer

Accepted Solutions
RobertG
Expert Alumni

E-commerce startup filing

The Internal Revenue Service allows you to take a tax deduction for legitimate losses incurred in the operation of your business. 

 

An online sales business that results in genuine economic losses would almost never be classified as a hobby.  Who would do that for fun? If you have an honest profit motive, you are entitled to claim your losses.

 

You should report your business losses on your 2019 return, sell off what you can in 2020, and end the business.

 

Remember, though, you can't deduct inventory until you sell it.  You can't deduct inventory in 2019 unless you sell it in 2019. Any unsold inventory carries over to 2020 as ending inventory.

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4 Replies
RobertG
Expert Alumni

E-commerce startup filing

The Internal Revenue Service allows you to take a tax deduction for legitimate losses incurred in the operation of your business. 

 

An online sales business that results in genuine economic losses would almost never be classified as a hobby.  Who would do that for fun? If you have an honest profit motive, you are entitled to claim your losses.

 

You should report your business losses on your 2019 return, sell off what you can in 2020, and end the business.

 

Remember, though, you can't deduct inventory until you sell it.  You can't deduct inventory in 2019 unless you sell it in 2019. Any unsold inventory carries over to 2020 as ending inventory.

**Say "Thanks" by clicking the thumb icon in a post
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IvanP
Level 2

E-commerce startup filing

Thank you so much for your reply!

I'm sorry for dummy questions, but this is very new to me. I don't fully get how inventory works. If I have paid lets say $6,000 for t-shirts in 2019, and I have sold $200, I will have $5,800 inventory to begin 2020 with. Then If I sell $1000 in 2020, I will not pay income taxes on these, and my inventory will be $4,800 in the beginning of 2021. Am I getting this right?

 

I just don't want to sell all t-shirts for $500 and get a 1099 from Amazon on which I pay income tax while I actually paid $6,000 to earn the $500. 

 

Thank you much

Sincerely

Ivan

RobertG
Expert Alumni

E-commerce startup filing

Here is how you treat inventory.

 

If you purchase $6,000 worth of t-shirts in 2019, sell $200 worth for $300, you have made a profit of $100 before other expenses. 

 

You will have $5,800 inventory to begin 2020 with. Then If you sell $1000 worth in 2020 for $1,500, you have made a profit of  $500 in 2020 before other expenses. Your inventory will be $4,800 in the beginning of 2021. 

 

You can't deduct the cost of inventory until you sell it.

 

If you sell off all of your $5,800 worth of inventory in 2020 for $1,000, you have a loss of $4,800 before other expenses.

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IvanP
Level 2

E-commerce startup filing

Thank you again for your reply Robert,

I got it! Just one last thing.

If we take your example above, if I sell $5,800 of inventory in 2020 for a $1,000. How do I report that? When filing 2020 tax return I report ending inventory as 0 and sales $1,000 ?

Thanks again

Regards

Ivan

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