my wife loves ebay, how can i turn this home based business of online sales in my favor come tax time?

Question

She's sold about $30 worth of items in 2006, (none in the state of NY where we live, so she doesn't even have to pay tax on those sales..right?) Yet we have lots of expenses we go through for this "home business" that she's started, (heat, electric, phone, etc..)
she keeps all the transactions seperate by using (paypal). so i shouldn't have a problem filing a schedule C right?? My buddies keep telling me that the law doesn't state that you "have to make money", but i feel weird stating that we only made 30 bucks and yet deduct a couple hundred in expenses...

what do you think??

I just called the IRS and the lady yelled at me! said i had to have re-occuring sales every couple of weeks and can't go around selling my junk instead i'd have to purchase items and sell for profit. I told her i did purchase but sold at a loss...then she said she was transfering my call to investigations and i hung up quick! now the phone won't stop ringing and i'm scared!!!

You think they'll come for me?????

Answer 1

You have to have an intent to make money and you must show a profit in 3 of every 5 years or else you have a "hobby". Losses from a hobby are not deductable. Go to IRS.gov and search for Hobby Losses and their is list of how the they distinguish between an Hobby and a Business.

Hobby vs. Business is going to be a major point of emphasis for the IRS in the next few years.

Answer 2

You can deduct expenses of a business, not of a hobby. The IRS might look at this as a hobby, with only $30 in sales.
And you might be kind of hard pressed to prove a couple hundred dollars in expenses directly attributable to those sales.

As far as taxes, the tax she doesn't have to worry about if all her selling was across state lines is SALES tax, not income tax. Technically, all net income from sales would be taxable, but if she sells something for $5 that she originally bought for $5, then there's no net income.