If you earned a profit from your eBay activity in any three of the last five years, the IRS is unlikely to question your classification.
Even if your eBay business didn’t earn a profit in three of the last five years, you can still claim business status by showing profit-seeking behavior, which the IRS measures by looking at the five factors below. Studies show that taxpayers who satisfy the first three factors — you act like you’re in business, demonstrate expertise, and expend time and effort — are routinely classified as businesses even if they don’t expect to profit for years.
|Act like you’re in business||Keeping good books and other records goes a long way to show that you carry on activities in a businesslike manner.|
|Acquire eBay expertise||Having expertise as an online auction seller shows you’re serious. You can demonstrate this by attending eBay seminars and acquiring and reading material like this CD program.|
|Work on eBay regularly||The IRS is looking for proof that you work regularly and continuously, not sporadically, on your eBay business. What’s “regularly and continuously”? One court accepted 20 to 30 hours per week.|
|Having a record of success in other businesses in the past — whether or not they are related to your current business — creates the likelihood that your activities are a business.|
|Even if you can’t satisfy the three-out-of-five-years profit test, earning a profit one year after years of losses helps show you are operating a business.|
Does it help to incorporate? If you form a corporation, the IRS is likely to presume you are operating a business (and not apply the profit-and-loss test). But even with this presumption, the IRS can still pursue you if your business acts in an unbusiness-like manner — for example, you fail to separate your corporate and personal funds. To form a corporation solely to overcome the hobby-loss rule is not a financially prudent alternative.