ALTERNATE WORKING TITLE: How to not get dropped like a Hot Potato by your Accountant and Income Tax Preparer
I shudder to think how many people are making money online selling items on Ebay and collecting payments using Paypal .. and are not reporting the income on their tax return.
It’s OKAY to sell some junk and personal items that you own on Ebay to help recoup the costs of other purchases that you may have .. and you probably don’t have to report the transaction. However, if you are buying and selling products on Ebay for profit .. you are a small business and must report your net earnings on your tax return.
Now .. I am quite techy savvy when it comes to computers, ebay and paypal .. so, if a client of mine tells me he is doing “a little” on Ebay .. I always take the time to check out his or her products and feedback. I want to know what he or she is selling, because come Tax Time .. if I don’t get any mention of the taxpayers’ online activities .. I get extremely worried. They changed the rules you know. Yes .. you are certifying that you are filing your income tax from information about all your worldly income etc etc .. but, the onus also falls on us Accountants and Income Tax Preparers .. “who should know better” (to simply).
That’s right – if you cheat on your income taxes .. and I’m oblivious to that fact … I can get fined. I may also lose my E-Filing privileges .. plus not to mention .. my good name and standing in the community and among my peers blah blah blah.
So .. here’s how I do 100% of my client’s now .. who deal on Ebay and use Paypal. I will describe in detail what this is, but keep in mind this only accounts for all transactions that is being recorded on Paypal .. because their history is pretty good. For Ebay transactions .. there are always some non-Paypal transactions that are occurring .. (for cash, money orders, etc) .. and I basically only do a sampling test by reviewing the transactions in the feedback and comparing the count against the number of transactions in paypal. If there isn’t that many … I’m not worried. The point is to see what can be proven and what my client is claiming. There are many ways to obtain information off of Ebay … so if you think that making your feedback private so it doesn’t show up and there is no count – thus you are safe from review .. then you are mistaken. I will not reveal how I do that at this time.
This is what I do to find out your Paypal (and Ebay) Transactions
NOTE: Feel free to try this at home! It would sure lower your Income Tax Preparation fees if you prepared this yourself, opposed to your accountant spending time preparing this
* Go to your Paypal account and Login
* Click the top “History” button under “My Account” tab
* Click the left “Download My History” link
* In the “Custom Date Range” .. select a range for the entire year, in our case .. from 1-1-2005 to 12-31-2005 (try it for 2005!)
* In the drop-down menu “File Types for Download” .. select “Comma Delimited – All Activity”
* There’s a box to include shopping cart details (comma and tab delimited files only) .. click to Tick it
* Press the button “Download History”
* There should be a popup box for the File Download asking you if you want to open or save the file. Press “SAVE”
* Now, there should be a “Save As” box, so you can tell your computer where to save the file. The filename is named “Download.csv” with a type “Microsoft Excel Comma Separated Values File”. … >> RENAME the Filename to something that makes sense – in my example, I would add a prefix that is descriptive .. which might look like this: “2005-paypal-transactions-Download.csv”
* Load up your Excel program
* At the top menu .. File / Open the file where you loaded it. You may have to select the file type “Text Files (*.prn,*.txt,*.csv)” to have the files show up .. or, you can also just type in the filename field *.* and hit ENTER .. it will show up.
* MASSAGE THE DATA FILE …..
* By Massage .. I mean .. make the width so everything is readable – hilight the enter data that showed up .. (for me it was between columns A and AL and down to lines 855). Then go top menu Format / Columns / Autofit Selection.
* Insert 2 blank lines under the headings so lines 2-3 are blank.
* For the actual data .. (in my case) Lines A4-AL855 .. SORT THE DATA .. I sort it by going to the top menu .. Data / Sort .. and sort first by Currency (Column G) and then by Type (Column E).
*I then scroll down and insert 3 lines between each “Type” of transactions, and sub-total the figures.
* For me .. I’m lazy in a way, so I just create a NEW excel spreadsheet and manually type in each summary recap of every section .. so it can be printed and placed in the file. I don’t need 855 transactions printed – Just the totals.
How I would treat it for Income Tax… continued
* I must say it’s hard for me to describe what I really do, because it really depends on the output that I receive. I will do something unique that is required for the individual situation at hand, and will work fast at massaging the figures to a readable format with information that I can ultimately use when preparing my client’s income tax return.
* First of all – I do each currency section separately .. the CDN one .. and for the USD transactions. In my 2nd excel spreadsheet, I create a formula that converts all figures at the going USD exchange rate per Canada Revenue Agency (in 2005 it was 1.21163240 to convert it to Canadian dollars).
* Secondly, I know that some items are not required for income tax, and I will not recommend that you just ignore these altogether … just give 100% of everything to your accountant.
* If you are curious how you fared in 2005 … AT MINIMUM .. add up all the payments SENT and all the payments RECEIVED .. (net of Paypal fees) .. and that should come close to the total NET paypal payments you either received into your bank account or withdrew from your bank account.
* If you have a paypal debit card, and are using it for expenses, offline purchases like a mastercard and secret savings account to keep the finances away from your spouse … don’t forget that you have to include these transactions in the lot – and, just because you earned money in your small business .. doesn’t mean that everything you spend it on is a deductible expense.
* Don’t forget to include a recap of all your NON-Paypal transactions and give that information to your Accountant or Income Tax Preparer as well.
Now .. compare you preliminary findings to what you actually reported on your Income Tax Return for 2005 … I hope you are pretty close.