cost of goods sold Archives

Accounting for personal item sales that are included in your 1099-K

Seller Ledger on November 1, 2023

By now, most small eCommerce sellers are aware that the annual sales threshold for receiving a 1099-K from online payment platforms is dropping to $600. There is a lot of content out there about what is included in the 1099-K amount, how that can vary from one platform to the next, and ways to make sure you’re capturing the right deductions.

But a very interesting question that we’ve heard from customers is: how do you handle sales of personal items?

When most new sellers are getting started, they begin by listing some (or many) personal items. It’s a great way to learn the ropes. Over time, they start making their own products for sale or sourcing items for resale from other places. But there’s still a good chance that, even among sellers who have been doing this for years, some personal items are bound to get listed.

Personal vs Business items

The most important difference between selling personal items versus those you’ve purchased for the purposes of resale is this: you cannot claim a loss on the sale of personal items.

The IRS is happy to tax the profit on both personal and business items, but you can only declare a loss on items you specifically built or purchased with the intent to resell (e.g. your inventory.) Items used for personal reasons, even if they are sold for less than the amount you originally paid, do not create a loss.

Let’s talk about a few examples:

Personal item sold for a profit

You have a copy of a now out-of-print vinyl album that you bought WAY back in the day for maybe $10. After listening to it a few times, you socked it away and didn’t think much about it. However, you one day discover it’s a bit of a collectors item, so sell it online for $17.50. In this case, you would owe tax on the $7.50 in profit.

Revenue: $17.50

Cost of goods sold: $10.00

Profit: $7.50

Business item sold for a profit

Let’s take that same scenario, but instead say you found an out-of-print vinyl record at a yard sale for $10. You also sold it for $17.50. The scenario would be identical:

Revenue: $17.50

Cost of goods sold: $10.00

Profit: $7.50

Business item sold for a loss

Now let’s say, in your sourcing, you find another out-of-print vinyl album that costs $10 and are sure you can sell it for a profit. But when the time comes, you can’t get more than $5 for it. So, you take your $5 and call it a day. Here, the scenario would differ:

Revenue: $5.00

Cost of goods sold: $10.00

Loss: $5.00

Because you purchased that album with the intent to resell it, and didn’t use it for personal enjoyment, you can write off that loss against other profitable sales.

Personal item sold for a loss

Going back to that original example, let’s say that that old vinyl record you only listened to a few times turned out to be worth only $5. You take the money and free up some space in the house. Now, you might think that accounting for it might be the same as the preceding example – but that would be incorrect.

Revenue: $5.00

Cost of goods sold: $10.00?

Loss: NOT ALLOWED

The IRS states very clearly, in it’s Understanding your 1099-K guidance: “A loss on the sale of a personal item isn’t deductible.”

Ok, so what should you do?

Disclaimer

Before proceeding it’s important to mention that we at Seller Ledger are not tax experts and are not trying to provide tax advice. It is critical that you as a reader make your own decisions on how to handle your specific tax situation, which may include hiring a professional.

Calculating the cost of personal items sold at a loss

The IRS, in their 1099-K Frequently Asked Questions, also states:

“Report your costs, up to but not more than the proceeds amount“

This would imply the following way of recording that sale:

Revenue: $5.00

Cost of goods sold: $5.00 (no more than the proceeds amount)

Profit/Loss: $0.00

In fact, the IRS provides specific examples and how to file them. From their 1099-K guidance:

Schedule 1 (form 1040)

Enter the Form 1099-K gross payment amount (Box 1a) on Part I – Line 8z – Other Income: “Form 1099-K Personal Item Sold at a Loss, $700”

Offset the Form 1099-K gross payment amount (Box 1a) on Part II – Line 24z – Other Adjustments: “Form 1099-K Personal Item Sold at a Loss $700”

You can view the full Schedule 1 here.

They also describe how you could file these amounts as a $0.00 capital gain on Form 8949.

Notice that neither option mentions Schedule C. This is a big part of why this all gets so confusing. These examples provided by the IRS assume that your 1099-K came ONLY from the sale of personal items. But, more commonly for online sellers, the sale of personal items is just a small part of their broader business inventory sales. So how should you file?

Form options and their bookkeeping requirements

Option 1: Track the personal item sales separately and include them on Schedule 1 (or Form 8949) of your 1040.

If you want to follow the IRS instructions precisely, you can track the sale of your personal items separately. However, this will require additional record keeping effort, and could result in amounts that don’t match the 1099-K totals received.

Option 2: Include the sale of personal items in your Schedule C

This option likely keeps the 1099-K totals consistent, and requires less record keeping complexity, but you will need to make sure to identify those personal item sales and make sure the cost is “up to but not more than the proceeds amount“

There may be other options available to you, so it’s important to talk with a tax professional about your desired choice.

How Seller Ledger can make this easier

Now, not to persuade you one way or another, but Seller Ledger actually makes Option 2 above pretty easy.

As part of our rollout of support for inventory and cost of goods tracking earlier this year, we introduced a view of your Sold items that allows you to enter the cost information even after an item has sold. While this provides the opportunity to match that sale to prior inventory purchases, it also allows you to enter items that were never in your business inventory. For example, personal items that you sold. And since we show you the item subtotal right there (what that item sold for,) you can just add your personal item and enter the subtotal amount as the cost. When you click save, your “Gross profit” on that item will show $0.00 – just like in the IRS guidance.

Click “Add costs” from the Sold view:

Enter the cost for that item that matches the Item Subtotal

See your Gross Profit show $0.00.

If you want help automating your eCommerce bookkeeping, we do offer a free 30-day trial, no credit card required. We automatically import your sales and expense history from Amazon, eBay, Etsy and Poshmark, as well as bank and credit card transactions.

Try it free

Stay tuned for more posts as we head into tax season. We’ll do our best to provide more research into ways to make tax season less stressful.

5 Things Online Sellers can do this fall to prepare for Filing 2023 Taxes

Seller Ledger on October 18, 2023

So often we find ourselves in the springtime questioning why didn’t we do more to prepare,
and tax season ends up being a time-pressured, stressful undertaking. It doesn’t have to be
that way though, as there are many things you can do now to make the process much easier
after the end of the calendar year.

1. Ensure you have a consistent means of tracking your finances, including both your sales and expenses, every month.

There are many different ways to do this, and you should select the method that is right for
you. Some sellers track these manually in a spreadsheet and others use automated
bookkeeping software such as Seller Ledger to make the process faster and easier with
automated imports from sales channels and bank/credit card accounts. The key is to ensure
you are tracking every sale and every expense, and it’s a good idea to summarize this data
monthly to see how your business is doing.

2. Learn about the changes coming for 1099K regulations in 2023.

In 2022, the IRS had planned to require sales channels like eBay, Amazon, and Etsy to issue
a 1099K to anyone selling over $600 (vs $20,000 previously), only to announce at the last
minute that the change would be delayed to 2023. Many organizations continue to lobby for a
higher dollar threshold, but as of the time of this article, the IRS states that it will require 1099K
forms for anyone selling $600 or higher in 2023. Note that different companies may calculate
their 1099K’s differently and you’ll want to be aware of how they do it.

3. Develop your strategy to know how much inventory you have on hand.

There are many ways to manage inventory. Some sellers count their inventory monthly,
quarterly or annually to assess its value, and this is ideal, but it is too huge a task for others. It’s
important to document the purchase price of your items when you buy them so you know how
much you’ve spent on Inventory. You can do this in a spreadsheet, or Seller Ledger makes it
easy to categorize inventory purchased through your connected bank/credit card accounts.
When an item sells and you ship it off, the value of your inventory goes down by the value of
that item, and that amount becomes Cost of Goods Sold for your taxes. Seller Ledger can
manage this process automatically for you so you’ll always know how much inventory you have
on hand and you’ll know your Cost of Goods Sold amount for tax time.

4. Make sure you are tracking things like mileage expenses and home office expenses so you’ll remember to include these in your 2023 tax filing.

Every time you drive to a store to purchase inventory, or drive to the post office to ship
products, you are using your vehicle for your business. You can either deduct vehicle expenses
individually (such as buying a business vehicle, or car insurance), or you can use the mileage
deduction every time you take a trip on behalf of the business. If you’re using Seller Ledger,
you can just enter the number of miles you traveled for work and Seller Ledger automatically
uses the IRS standard mileage rates to track the expense for you. Your home office and things
like your storage spaces are deductible too. Make a list of all the areas in your home that are
dedicated to your business and you’ll have it handy when needed for taxes.

5. Consider investing in accounting/bookkeeping software that can automate much of this process for your business.

Seller Ledger currently supports eBay, Etsy, Poshmark (through CSV uploads) and Amazon (in
beta) with additional channels coming soon. There is a 30-day free trial and pricing is
$10/month for up to 250 transactions/month. There are no additional fees for selling through
multiple sales channels or for using advanced features such as inventory management. You can
connect your sales channels as well as Paypal and your bank and credit card accounts for
automated data imports. Drop down menus make it easy to categorize expenses. Monthly,
quarterly and annual financial reports help you to understand how your business is performing,
and make it easy to prepare for estimated quarterly tax payments. For annual taxes, a pre-
populated schedule C form is prepared for you.

If you’re going to begin using an automated software platform, the sooner you start on it the
better. Some banks have limitations on how far back they’ll allow you to go in directly
importing transactions (many restrict it to 90 days), so to capture the most data possible, don’t
wait before signing up. You can start your free 30-day trial at SellerLedger.com.

Are Sales Tax, Shipping and other fees part of Cost of Goods Sold?

Seller Ledger on September 5, 2023

We recently received a question about whether sales tax should be included when calculating cost of goods sold. Because this is a very common scenario, we decided that this would make an interesting blog topic.

There are actually a couple of key questions here:

When you buy items for resale, what gets included in Cost of Goods?
If you buy multiple different items in a single transaction, how do you allocate any sales tax, shipping or other extra costs across those items?

What is included in Cost of Goods?

When you purchase items for resale, all of the direct costs you incur should be included in Cost of Goods. This can include the following:

Sales tax
Shipping costs (to deliver the items to you)
Extra fees (e.g. extra charges for paying by credit card)
Handling fees

So, if you buy an item for $100 and get charged $7.75 in sales tax, your Cost of Goods for that item should be $107.75.

How do I handle extra costs for purchases of multiple items?

The same rules apply in terms of including sales tax, shipping and other fees. However, when these extra costs apply to multiple different products, you need to allocate them based on the relative values.

Let’s take a look at an example. Imagine you have a receipt that looks something like this:

You spent $309.60 to acquire 600 items (500 of Widget 1 and 100 of Widget 2.) But the items themselves only cost $250. So what do you do with the other $59.60? Here, a little math is involved. Take the amount spent on the first item (Widget 1: $200) and divide it by the total spent on all items ($250.) Widget 1 represents 80% of your item costs. As such, Widget 1 should have 80% of the sales tax and shipping costs allocated to it. So, multiply the $59.60 in extra costs by 80%, and you’ll get $47.68 in extra costs that should apply to Widget 1. The remaining $11.92 in extra costs should be allocated to Widget 2.

The net result of these allocations gives you total Cost of Goods of:

Widget 1: $247.68 (for 500 items) or a per-item cost of $0.50
Widget 2: $61.92 (for 100 items) or a per-item cost of $0.62

You may notice there’s a potential rounding issue here, which we’ll address in a future blog post. Stay tuned:)

In Seller Ledger, once you categorize the purchase of $309.60 as “Inventory”, you might see a screen like this:

Just click “Add Details” and enter your newly allocated cost information like this:

Please note: this is only possible if you’re choosing to use item-level tracking in Seller Ledger. You can learn more about it by reading our support article.

We also have it on our list to automatically allocate costs based on the underlying receipt, so stay tuned for that too.

In summary – yes, sales tax, shipping and other fees should be included in Cost of Goods Sold. Hopefully this makes the subject a bit easier to understand.

As always, we’d love to hear any feedback you might have on the product, as well as any other critical questions you have about eCommerce accounting, bookkeeping, inventory and Cost of Goods Sold. Please reach out to us at [email protected].

Tracking cost of goods sold with eBay

Seller Ledger on June 29, 2023

eBay cost of goods sold tracking has been a challenge for years (as we have heard from both customers and members of the eBay management team.)

Not too long ago, Seller Ledger rolled out inventory tracking, complete with some nifty automated cost of goods sold calculations. But for eBay sellers, that functionality depends on the use of an optional listing field called “Custom label (SKU).” And it turns out, that field is not shown by default when creating listing templates. So, we thought we’d help folks learn how to find and use that field, and what magic it can potentially unlock.

When you start to create a listing, one of the first things you’ll do is create a title for your item. By default, you will see two fields: Item title and Subtitle. However, if you click on the link to the upper right, called “See title options“, you will see a few more options pop up. One of those options is “Custom label (SKU)”.

Click on the selector to turn that field on, and you should see an updated form that looks like this:

Now, you have the ability to enter information about this item in the Custom label (SKU) field. But what should you put there, and why is it important?

You can choose to put anything you’d like in there, but, if you follow this guidance in conjunction with Seller Ledger, you will see two major benefits:

Have your inventory reduced and your cost of goods sold automatically calculated when an item sells
See how much money you make on each sale

The key concept here is to have a unique identifier (SKU) for each item you sell on eBay. How you create that identifier is up to you. Some people put a combination of letters and numbers, with some parts relating to the product name, or the bin number in which they are are currently stored. Others simply choose ever-increasing numbers. What matters most is that each SKU value is unique to that eBay item.

In Seller Ledger, when you purchase items for resale, you now have the ability to create a product/item, complete with a Product SKU field.

If you enter the same value in your eBay listing under “Custom label (SKU)” that you enter in Selller Ledger under “Product SKU”, you can sit back and watch the magic happen. When one of those items sells on eBay, Seller Ledger will match the order to your inventory, reduce the number of “in stock” units in inventory, and automatically calculate the cost of goods sold for that item, and show you the gross profit for that sale, as seen below.

Feel free to dig in for a more in-depth look at how Seller Ledger helps automate inventory and cost of goods tracking.

Interested in giving this a try? Seller Ledger offers a 30-day free trial, no credit card required.

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Seller Ledger adds easy inventory tracking for eCommerce sellers

Seller Ledger on June 20, 2023

eCommerce sellers, large and small, now have the ability to track inventory with Seller Ledger. Until now, customers could only write off inventory as “cost of goods sold” when purchased. But no longer!

Why track inventory in Seller Ledger?

There are a number of reasons to track inventory:

For most eCommerce sellers, the IRS requires that you do so.
It better aligns costs with your sale.
If done properly at the item level, it can help automate accurate stock levels (avoid stockouts,) as well as tell you how much money you make on individual orders and items.

So what does Seller Ledger offer in terms of eCommerce inventory tracking?

There are now 2 main ways to track inventory in Seller Ledger: what we call “balance-level” and “item-level” tracking.

Option 1: Balance level tracking (a.k.a. “periodic inventory”)

For those sellers who don’t want to track every item of inventory, the IRS uses a simple formula to help you calculate “cost of goods sold”:

Cost of Goods Sold = Beginning balance + Purchases – Ending balance

We’ve modeled our new inventory view after this simple formula:

Using this approach is pretty straightforward – you only have to do a few things:

Count/estimate the cost of all of your unsold inventory once per year (or quarter, or month – you choose)
Track purchased goods/materials for resale throughout the year
Do some simple math (or let Seller Ledger do it for you)

Read a more detailed explanation of exactly how this works in practice.

Option 2: Item level tracking (a.k.a. “continuous inventory”)

Do you already keep a spreadsheet of all of your inventory, including how much you paid for each item? When an item sells, do you have to go back and update it? Have you tried to figure out how much money you make on each sale? If you can answer “yes” to any of these questions, then this option is for you.

While a bit more effort is required, the steps are quite simple:

When you purchase goods for resale, categorize them as Inventory purchases
Within each purchase, enter each item, including a unique SKU value, and the item’s cost. This process works very similar to splitting transactions.
Alternatively, you can start from your list of sold items (the order history we’ve already imported for you) and just tell us which purchase transaction included the item sold.

If you provide Seller Ledger with this level of detail, we do a few things for you automatically when an item sells (matching first based on SKU first, then by name):

We reduce the stock level for that item in your inventory
We calculate and generate the cost of goods for that item
We show you your gross profit for that order

Learn more about how to use “item level” inventory tracking.

Do I have to track inventory in Seller Ledger?

You do not. If you would prefer to just categorize inventory purchases as “cost of goods sold,” you are free to do so. But, you might want to make sure you understand the risks with that approach. We’ll be writing another post about that option soon.

How do I try this out?

Just discovering Seller Ledger? Start a 30 day free trial right now – no credit card required.

Try it free

For existing customers, just log into Seller Ledger, and you will see two new changes to the website. First, on the left of your Dashboard, we have added and made visible a new “Inventory” asset account. Second, there is a new top-level navigation link for Inventory. For those who previously categorized inventory purchases as “cost of goods sold,” you can elect to switch to properly tracking inventory. We explain more about how that works here.

Is there an additional charge for tracking inventory in Seller Ledger?

No – this feature is available to all customers at no additional charge. Unlike other accounting/bookkeeping platforms, we think even the smallest sellers should be able to see how much money they make on each item and keep on top of their inventory stock levels.

Please tell us what you think

This is a pretty big release, and represents weeks of work and planning. It’s also something we never got to tackle with Outright/GoDaddy Bookkeeping. As such, we’d love to hear from you as you try this new functionality – the good, the bad and the ugly.

Thanks from the Seller Ledger Team