mcgees.org

Not actually any clearer than the source documents.  The IRS speaks a completely different dialect of English than I do.  Could someone try to parse the following “explanation”?

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Your Question Was:
I purchased a jacket for $40 in the year 2000.  I wore it but kept it in good condition.  In 2007, I sold it through my eBay business, as a used item, for $20.  How do I calculate basis and profit/loss on the jacket?

The Answer To Your Question Is:
Thank you for your inquiry. I apologize for any delay in this response. I understand you purchased a jacket for $40 in the year 2000.  You explained that you wore it but kept it in good condition.  In 2007, you sold it through your online auction business, as a used item, for $20.  I understand you want to know how to calculate your profit or loss and basis and on the jacket.

I assume you were a United States citizen as of the last day of 2007. I assume your business is a Sole Proprietorship. I assume you are not a minister. I assume you do not belong to a religion that is opposed to Insurance or Social Security. I assume you did not earn any Form W-2 wages in tax year 2007. I assume you would have a net profit of at least $400 from your online business. I assume this jacket is not a collectible. I assume your business regularly purchases items for resale and you want to include your sale of personal items in that business. I assume you do not take an expense for inventory. I assume you did not make Estimated Tax payments.

The basis of property you buy is usually its cost. The cost is the amount you pay for it in cash, debt obligations, other property or services. Cost includes sales tax and other expenses connected with the purchase.

Before calculating gain or loss on a sale, you must usually determine the adjusted basis of that property. Certain events that occur during your period of ownership may increase or decrease your basis, resulting in an “adjusted basis”. Increase your basis by items such as the cost of improvements that add to the value of the property, and decrease it by items such as insurance reimbursements for casualty and theft losses. When personal property is converted to business property, the basis for depreciation is the lesser of the following amounts; the FMV of the property on the date of the change or your adjusted basis on the date of the change. For more information on basis and adjusted basis, refer to Publication 551, Basis of Assets.

When reporting this income you may download the Form 1040 Schedule C, Profit or Loss from Business (Sole Proprietorship), Form 1040, Schedule SE, Self-Employment Tax and the Publication 334, Tax Guide for Small Business.

The net Form 1040 Schedule C profit is reported for income and self-employment social security tax purposes regardless of any draw. A sole proprietor files Form 1040, Schedule C and possibly Form Schedule SE. Include the $40 sale price of this jacket with your gross income and your basis as an “Other Expense” with a written explanation on the dotted lines of the Schedule C. The Schedule C is a profit and loss statement. If the net profit from self-employment is $400 or more, then you need to calculate Social Security/Medicare self-employment tax on Schedule SE. Use the Schedule C net profit and complete Schedule SE. Basically, sole proprietors file Schedule C only for years they have income and expenses from a business. In the future you may be able to participate in the optional method. This method allows you to claim more earnings as they are reported to the Social Security Administration. To participate in the optional method you must have net earnings of at least $400 in at least two out of the last three years. If you will meet these conditions and you are interested in the optional method, you will have to fill out the back of the Schedule SE. You may have to pay your tax liability through the payment of estimated taxes. If the increase in your income and increase in your tax causes you to owe more than $1,000 with your tax return, you could be liable for an estimated tax penalty, unless your withholdings and payment amounts are within certain percentages. If you do owe more than $1,000, check Form 1040ES, Estimated Tax For Individuals and Publication 505, Tax Withholding and Estimated Tax, to determine if Estimated Taxes would apply to you. You may also need to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates & Trusts, if you do not make estimated tax payments. Please contact your state for sales tax information and state filing requirements. I hope this information assists you. References; *Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) *Publication 505, Tax Withholding and Estimated Tax
*Publication 551, Basis of Assets

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EMPLOYEE ID: 25-04346      Mrs. Rockwell    Tel.:(800)829-1040    msg#: 1771100

Specifically:

1. Is it in fact a typo when she writes “Include the $40 sale price of this jacket with your gross income…”?  Did she mean $20?
2. Didn’t I determine the Fair Market Value (FMV) by posting the item for auction?  Isn’t the FMV then exactly the sale price plus the shipping charge?  Since postage is an expense for me, am I actually marking a loss on this sale?
3. Everything non-perishable is collectible (The Onion had a funny bit on this, but it’s true.)  How does/would being “collectible” change the answer?  Who makes this decision?

Wed, 20 Feb 2008 23:06:18 -0600
Under finance
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