Difference b/n Hobby Income and Other reportable income for eBay 1099-K in TurboTax?

[bcqa33]

First of all, I got an eBay 1099-K for $21k total, the first time I passed the $20k mark.  From what I read online and on TurboTax, I would say this is all hobby and not a business.  The $21k from eBay is the transaction total and they don't subtract eBay fees, shipping costs etc, so the actual amount I got was less than that.  Also, there is some cost of goods for the items I sold.   I read that if it's a hobby, you cannot deduct your expenses but I'm not sure if that includes the cost of goods, eBay fees, or something else?  

The second question is, assuming I can deduct those fees/costs from the $21k total, where do I enter that?  Under the Misc Income -> Hobby Income?  There it asks Total Income and Total Expenses, do I put $21k in total income or do I put the actual income minus fees/costs in that?  Can I put the fees/costs in Total Expense?

Or do I enter it in Misc Income -> Other reportable income and just manually enter $21k from 1099-K and then COGS/fees as another line with a negative value?  What would be the difference or are the two methods the same?

Using TurboTax Home & Business.  Thanks!

[bosso3]

I am only providing some links that address the Hobby vs Business aspect of this question. 

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business 

https://www.irs.gov/pub/irs-news/fs-07-18.pdf

https://www.irs.gov/newsroom/heres-what-taxpayers-need-to-[product key removed]g-taxes-on-t[product ...

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a... 

[bcqa33]

Thanks, I read those already but still am confused.  Hoping someone with some expertise can answer directly.

[RaifH · Accepted solution]

If your sales on E-bay are classified as a hobby, the only deductible expense is the cost of the goods that you sold. E-bay fees, shipping, home office deductions, and anything else are not deductible expenses. Enter it into TurboTax this way:

1. Open your TurboTax software and continue your return
2. Select the Personal tab 
3. In the Wages & Income section, select I’ll choose what I work on
4. Scroll down to Less Common Income. Select Start next to Miscellaneous Income, 1099-A, 1099-C
5. Select Start next to Hobby income and expenses
6. Answer Yes on Do you have hobby income or expenses?
7. On the next screen, enter the Total income reported on your Form 1099-K. Don't enter any expenses.
8. Select Done
9. To deduct the cost of items sold: while still in Miscellaneous Income, select Start next to Other reportable income
10. Answer Yes on Any Other Taxable Income?
11. Enter Form 1099-K in the Description field. Enter the total cost of the items sold in the Amount field as a negative number. Note that the amount can’t exceed the income reported on Form 1099-K.

@bosso3 gave several links for determining whether your E-bay activities should be classified as a business or hobby. That is something you will have to determine and be able to provide justification for if the IRS should disagree. 

If you determine it is self-employment, you will be subject to self-employment taxes, but all ordinary and necessary expenses would be deductible. Both Form 1099-K and the expenses would be reported in the self-employment section of your return:

1. Type Schedule C in the Search box
2. Select the Jump to link
3. Answer Yes to Did you have any self-employment income or expenses? and answer the questions until you get the What kind of expenses did you have for your business? screen. Select your expenses, then Continue

[bcqa33]

@RaifH ok thanks!  interesting that eBay fees/shipping/refunds are not deductible since I never collected them as they were automatically deduced by eBay from the total I got.  I guess to IRS, if you are doing it as a hobby, if you don't intend to do a business then you don't care about the fees either? 

[RaifH]

In prior years, they allowed other expenses to be deductible for hobbies, but it was done away with as part of the Tax Cuts and Jobs Act of 2017. As for why the cost of goods sold survived but not other expenses, I would guess it's because of how the IRS has come to define the term "gross income" to be net of the cost of goods sold. If you look at Schedule C, the cost of goods sold is subtracted to derive gross income, from which your other expenses are deducted. 

[bosso3]

Since the difference between Hobby Income and Business Income can be a bit of a gray area, you may want to see which way results in the least taxes for you.  Only do this if you can justify the income being in the category that is most advantageous to you.

[GeorgeM777]

Question 1 - Gross hobby income equals gross receipts minus the cost of goods sold.  You are correct, in that in the past, taxpayers could deduct certain allowable “ordinary and necessary” hobby-related expenses.   Now, as a result of the Tax Cut and Jobs Act, hobby expenses are no longer deductible.

The cost of goods sold (COGS) is the sum of all direct costs associated with manufacturing a product.  According to the IRS, the following are types of expenses that go into figuring cost of goods sold:

• The cost of products or raw materials, including freight.
• Storage.
• Direct labor (including contributions to pension or annuity plans) for workers who produce the products.
• Factory overhead. 

It does not include costs associated with marketing, sales or distribution or shipping fees.  Thus, your Ebay fees would not likely be included in cost of goods sold.

Question 2 - If the $21,000 your earned through Ebay was indeed a hobby,  report it as such.  You can use the first option you referenced in your post.  To keep matters simple, calculate your hobby income minus the cost of goods sold, and then enter that net amount as hobby income.  You will need to keep records to prove your cost of goods sold because the IRS will get a copy of your 1099-K, and you are correct in that the 1099-K just shows the gross amount without any expenses.  

Here is a link to an IRS webpage that discusses hobbies which you might find helpful.  It also explains the factors the IRS will use to determine whether an activity is a hobby or a business.

Here’s what taxpayers need to know about paying taxes on their hobby activities

@bcqa33