Tuesday, October 6, 2015

If You Are Earning Money on eBay - Listen Up!

This is not a "what to sell" post or a "hot discontinued item" post, but I recommend you read it anyway. It could save you a lot of time, money, frustration, and disappointment in the future.

If you are selling on eBay, and depend on the income, or ever want to rely on the income to prove you can afford a mortgage loan, start preparing now. If you have any plans to move, downsize, or rent, start getting your paperwork in order now. Even if you already have a CPA.

Here is the problem. If a CPA has been doing your taxes for you, that is great! A CPA is trained to make sure their clients pay the minimal amount of taxes. With self-employed people and entrepreneurs, their goal is to whittle down "adjusted gross income" so that taxes owed are minimized. This is what accountants are trained to do. Unfortunately, CPAs and mortgage lenders are looking at financial information from two different perspectives. The CPA is looking a how low he can get your income so taxes are minimized. The mortgage lender (or apartment leasing office) is looking at a person's income and ability to pay, which is the amount of income they have claimed and what they pay taxes on.  Usually, you can't have it both ways - if you are self-employed, you may have to strategically prepare tax returns so that you can qualify for a mortgage.

This is where worlds collide and it isn't pretty. Let's face it, self-employed people can look bad on paper. Because of all the deductions we can take, and how we pay expenses out of our business accounts, our taxable income is usually much lower than what we actually "take home." I have talked to several sellers lately who have run into the problem of not being able to prove their income to get a mortgage. They may be able to afford where they live now and have excellent credit. But after the housing crash in 2008, lenders look at self-employed people much differently - as a risker borrower. It is all about how the numbers line up on the Schedule K (if you are an S-Corp) and how much of a salary you take. Bottom line:

The mortgage process is designed for people with a regular W-2 income, not entrepreneurs. 

I am not a CPA or a tax professional, but I am telling you to consult one if you have any plans of moving in the next 12 months. Make sure your CPA knows your goal of getting a mortgage loan or renting a new place. If you aren't showing enough income on your tax returns, or taking an official salary, you may not be able to qualify for a mortgage or even a rental agreement. It is tough out there for single self-employed folks when eBay is the only source or income, or both spouses are self-employed. This post not meant to cause panic or alarm, but to inform so you can prepare.

Start looking into this now because you may have to make adjustments to show more income so you can qualify for what you want in the future. You may need to show fewer write-offs or take a larger salary to make the numbers work. Disbursements usually don't count - you need to show a salary.

If you don't have a CPA, now is the time to find one. Check around in your area for CPAs who offer free initial consultations.  Call the Chamber of Commerce or use our good friend, Google. This is a great time of year to start a relationship with a CPA - come January through April they will be slammed during tax season.

And if you aren't keeping records on your sales, you certainly should be. (I recommend this spreadsheet for eBay sellers.) Get your paperwork in order now. Taxes and accounting definitely aren't the fun part of eBay, but just grit your teeth and do it anyway. Your future self will thank you.

A few tips:

1. Keep good records. Record all inventory purchases, fees, and supply expenses. KNOW WHAT YOUR PROFIT IS AND HOW MUCH MONEY YOU ARE MAKING. (Yes, I am yelling!!)

2. Don't co-mingle personal and business money. Lenders don't like to see that.

3. Mortgage lenders will look at 2 years of tax returns - so make sure you have enough time to get the right documentation in order before you plan to move. (Talk to a CPA!)

4. Work on improving your credit score. Self-employed people have been stereo-typed to have lower credit scores than W-2 employees.

5. Start saving for your down payment. A larger down payment may help counterbalance any self-employment income issues.

6. Talk to a CPA and different mortgage lenders. Seek out lenders who work with entrepreneurs - they may have some workarounds or connections that will help you. Some lenders won't even work with self-employed people because of all the extra paperwork and hassle.

Here are some helpful resources if you are considering buying a house (that includes downsizing) if you are self-employed (even if one spouse is self-employed):

Self-Employed? Good Luck Getting a Mortgage

How to Qualify for a Mortgage When You are Self-Employed

Self-Employed? How to Get a Mortgage

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