eBay 1099-k, over $20k/200 - how to report?

[gpeace08]

I received my 1099-k from PayPal for eBay sales. My gross receipts were over $40,000 and # of transactions were over 250.

This is my first year reporting this and from my research, it is unclear how I should handle this situation. Taking into account COGS, overall profit is negative (loss).

FYI-I can provide records of all transactions and original purchase price as well as supply purchases.

1) Based on the amount of receipts, will the IRS be expecting me to report this on Schedule C vs considering it a hobby due to no profit and reporting it with Schedule 1?

2) If I report it on Schedule C this tax year but do not continue with this activity next year or significantly reduce this activity, how will this impact my future tax situation? Will the IRS go back and adjust my 2019 taxes in future years?

Thanks in advance

[Irene2805]

Report the business income and expenses on Schedule C, since you are running it as a business with a profit motive.  If your business continues to lose money after several years, the IRS might decide the business is really a hobby.

If you report it as a business, you can show a loss to offset any other income you have.  If you report it as a hobby, your losses will be limited to the amount of income.

If you decide to scale back your business--or end it--in the future, it is highly unlikely that the IRS will go back and adjust your 2019 taxes in the future.

You might find this IRS article helpful:  Business or Hobby? Answer Has Implications for Deductions

[gpeace08]

Thank you for your advice @Irene2805 

I reviewed the link provided and have a couple of follow-up questions.

What is the likelihood that the IRS would challenge hobby vs business due to the loss (particularly in the first year)? 

How would I justify it as a “business” and satisfy the guidelines in the IRS link beyond having sales/transaction records? 

[Irene2805]

The likelihood that the IRS would challenge the "business" status is extremely slim, particularly in the first year (when many businesses show a loss).

Just keep records of your income and expenses.  There are a lot of intangible items that the IRS will look at in the unlikely event that the IRS questions the business status down the road.  Here are some examples taken from the IRS website [https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses]:    

Question

How do you distinguish between a business and a hobby?

Answer

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

• Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
• Whether the time and effort you put into the activity indicate you intend to make it profitable.
• Whether you depend on income from the activity for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether the activity makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

You might want to jot some notes down on the above items and keep with our business documents.