There are two separate issues here.
First, if this is a “ongoing trade or business” that you do for the purpose of earning a profit, even if the profit is not in cash, then you can report this as a schedule C business. With a schedule C business, you report your gross income and you can deduct your legitimate expenses. You pay income tax +15% self-employment tax on the net profit.
However, it’s not clear to me what your legitimate business expenses would be, except maybe car mileage to drive to Best Buy to pick up anything that is not delivered to you. At best, you could only deduct a percentage of your home Internet costs as it relates to the percentage of time that you use the Internet for business, and if audited, you would need to have some kind of documents or records to prove what that percentage was.
If you are not engaged in an ongoing trade or business for profit, then this would be a hobby and you would report this as other miscellaneous income. You don’t have to pay the extra 15% self-employment tax, but you can’t deduct your expenses. If you don’t have any legitimate business expenses to deduct, the hobby other income method will result in lower tax.
The IRS takes a dim view of claiming to be a business in order to deduct expenses when you are really a hobby, but they take an equally dim view of claiming to be a hobby so that you can avoid self-employment tax. This is an area of audit risk either way, so make sure that you have a legitimate basis on which to report this as either self-employment.
Second, you are only responsible for income tax on the fair market value of the goods you receive, even if the official price and the 1099 value are higher. This was decided in a tax court case many years ago, in which a gentleman won a piece of jewelry from a department store. The department store valued the jewelry at $5000, but it only appraised for $1200, and the department store eventually admitted that $5000 was a “comparison price“, and the item was always “on sale“ for $1499 or less.
If you are issued a 1099 for what you believe is an incorrect value, the IRS instructs you to report the actual fair market value of the item on your tax return. File by mail, and include a copy of the 1099 in a written explanation of why you reported a lower value. You will also want to keep records such as advertisements from Best Buy or print outs of their website showing the actual price they charge for the item.
It would not be appropriate to report the full value of the 1099 and then subtract the difference as a “business expense.”
