I recently registered my Etsy shop as a business (originally it was just a hobby) and am keeping record of what I make and what I pay for materials. However, I’ve hit a dilemma as I’m unsure how to file them on my Sched C for next year.
Let’s say I bought a chain, some charms, a mold and a bow. The bow is for personal use while the other stuff I use for my business. Do I simply have to write down the base price I paid for the items I use for my business, or do I have to add up the base price with what I paid for shipping and taxes and put that on the Sched C?
I don’t make very much at the moment and am not sure if it’s something I should be overly worried about, but I want to have all my ducks in a row before next tax season. I appreciate any help with this
I would suggest getting familiar with the instructions for the Schedule C. If you still have specific questions, you may want to consider working directly with a CPA or tax professional.
Go to a local credit union and open a separate account just for the business activity. Only make purchases from that account that will be used in your business. Don’t commingle personal and business purchases.
Save the receipts for the purchases too. That will help you classify the expenses, which you can do on a spreadsheet. Total expenses on the spreadsheet should match withdrawals from the bank account.
Hi SeaBastion, there is no requirement to “document” your business expenses on Schedule C of your Form 1040. There is a record-keeping requirement for income and expenses. Original receipts are the best form of business expense records, however in instances of cash purchases from vendors that don’t give receipts, or when you lose original receipts, written records created contemporaneous to the business expense, whether by pen and paper, or a computer spreadsheet are acceptable methods of documenting/supporting business expenses. As you are preparing your Schedule C, most Tax software programs will ask you what accounting method you use for inventory/cost of goods sold. Be ready for that. Also, you will need to account for business use of your car and the portion of your house used for the business. Lastly, if you had business travel overnight more than 35 miles from your residence, you need lodging receipts but you can use the GSA Meals & Incident Expense schedule, without receipts, as your business travel deduction. If you need FREE help with filings contact your local Volunteer Income Tax Assistance (VITA) office. If you’re in Florida, see United Way of South Sarasota County to make an appointment. May you have many Happy Returns!!
The chain, the charms, and the mold are inventory. It’s a balance sheet item and you can deduct as an expense in the period that you sold the product. The bow is not a balance sheet or expense item if you use it for personal use. Shipping and taxes are booked to inventory as well, also expensed on the P&L and deducted on the tax return in the period the inventory was sold. If none of this makes sense, hire an accountant.
@Briar
CPA here – your comment is leaving out very important context. Small business taxpayers aren’t required to track inventory and expense the various components of inventory in the period the product was sold. Rather, they can do the usual cash basis books and expense things in the period purchased.
To qualify as a “small business” taxpayer, the average annual gross receipts must be less than $29 million for the last 3 years. I’m pretty OP has nowhere near $29 million in annual sales – they wouldn’t be asking questions on Reddit if they did.
Meaning: OP can simply expense everything immediately, there is zero need for inventory tracking. That would be an administrative nightmare and huge burden to put on the backs of micro-businesses across the US (which is why the requirement doesn’t kick in until a huge amount of annual sales).
Try to not mix personal and business expenses in one purchase. For one thing it’s a lot of work. For another it looks sketchy if you ever get audited.
You would need to figure out the portion of shipping and tax that’s attributable to the business items, and include that in your Supplies category expense. For sales tax that would be a percentage of the items you bought for your Etsy shop; for shipping it would be proportional, like 3/4 of the shipping cost since one item was for personal use.
As a very small business you don’t need to use Inventory or Cost of Goods Sold on the Schedule C. You can enter your purchases under the Supplies category if you sell the items you make in the same tax year; you may not be able to expense everything if you buy a lot of materials but don’t sell that much.
It’s kind of complicated and the information in Publication 334 isn’t that user-friendly:
Exception for small business taxpayers. If you are a small business taxpayer, you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. If you choose not to keep an inventory, you won’t be treated as failing to clearly reflect income if your method of accounting for inventory treats inventory as non-incidental material or supplies, or conforms to your financial accounting treatment of inventories. If, however, you choose to keep an inventory, you must generally use an accrual method of accounting and value the inventory each year to determine your cost of goods sold in Part III of Schedule C.
Anyways check out these tax guides - they are for 2022 but the basic information is still good. Unfortunately the section on how to calculate estimated taxes is wrong, but it’s very helpful for new Schedule C filers.
You might want to consult with a tax professional (CPA or Enrolled Agent) for the first year just to make sure you are doing everything correctly. For example you might need to report your business sales to the state even if Etsy is collecting any sales tax from your customers.
Thank you everyone who has responded so far. To address something y’all are constantly bringing up: I can’t currently afford to open a brand new account for business expenses. HOWEVER, I do have a regular credit card I can turn into my business account from now on. That way, I can separate my expenses without worrying about having to manage more accounts than I can handle. Would that work at all?
@Kai
“I can’t currently afford to open a brand new account for business expenses.”
There are many options for FREE business bank accounts. So yes, you can afford opening one.
Also: if you’re not operating under an LLC, you really don’t even need specifically a business bank account. Banks won’t allow an LLC to open a personal account. But if you’re doing business in your own name, you can just open a FREE separate personal account and strictly use it only for your Etsy stuff. Given how small your operation is, chances are that the bank won’t flag the activity. You could be doing Etsy as a personal hobby anyway, not a business – what do they know.
But like I said, there are free business bank account options – so that is always available for you to take advantage of.
Arlo said: @Kai
At this stage, it’s just to make your bookkeeping easier, so: yes.
Good thing I’m still in the super early stages of being a business, so I caught myself before I was too far to separate the expenses I already made and future ones
You’ll want to keep track of all business-related income and expenses separately. In your example, the BEST case would be to have 2 transactions:
Buying the bow and paying with a personal debit or credit card, or cash
Buying the rest and paying with your business credit card or debit card.
Then it would be easy to add up all the business-related transactions coming from your business accounts.
NOTE: They don’t have to be “Business” accounts as far as the bank is concerned, they just need to be separate from your personal accounts, and only used for your business. A regular personal checking account or personal credit card will be fine, as long as you don’t have personal expenses in that account.
But that’s for the future… In the case of this example, you would need to add up the amount on the invoice that is related to business, and that can include the portion of taxes and shipping. But also, you don’t HAVE to claim all of your business expenses… you just can’t claim MORE than you’re allowed to. So if it’s too much hassle to figure the portion of taxes and shipping, you’re free to leave that out of the Sch C numbers.
With the Etsy shop, a CPA might be overkill, but working with a tax preparer would probably be a good idea as more money starts to flow through the business.
The National Association for the Self Employed publishes an excellent guide, called “Schedule C from A to Z”. It used to be an inexpensive book, nowadays it’s a free download:
Did you sell more than $5K of stuff?? If not, Etsy will not be sending you a 1099-K. If that’s the case, I wouldn’t report it. Next year the limit lowers to $2.5K…
Either way, cheap ($35) tax software like turbotax or Tax Cut will walk you through it. I would NOT just try and fill in IRS forms, that’s a PITA!