Nondeductible Loss on Schedule C?

[Mactaxes]

A client took in over $8,000 in gross sales in 2021, on somewhere between 250-300 transactions using Paypal on the sale of their used clothing.  Based on those numbers, this seems to be rising to the level of a reportable trade or business. 

They have original receipts for all items and are using these for their cost basis.  After Paypal fees and shipping costs, they have calculated a small loss, but because they are selling used personal property, this loss is not deductible to them. 

The ProSeries Schedule C does not seem to allow for this situation or the reporting of a nondeductible loss on a “business.”  When I try to zero out the loss as an expense line item entitled “nondeductible personal property loss,” it won’t allow a negative expense figure.  Is there another way to report their figures without taking the Schedule C loss?

They believe their sales will be even greater for 2022, so they will undoubtedly receive a 1099-K in 2022 and will face this same issue. 

[Just-Lisa-Now-]

If theyre not in the business of selling items, sale of personal property would be reported on Sch D, Code L, no loss allowed.

If it is a business, then a loss would be allowed.

[qbteachmt]

"They believe their sales will be even greater for 2022"

So, are they selling their own clothes, or are they buying locally and then selling? And, you stated they have a Loss, but they intend to keep doing this? Wouldn't it be cheaper to donate your own clothes to Goodwill? At least there is no Cost for that.

[sjrcpa]

I don't think they can use original cost of the clothes when new, since they are used at the time of sale.

There's a rule about converting personal property to business use where you use the lower of cost or FMV on the date of conversion. Usually applies to real estate but I would think it applies here, too.

[qbteachmt]

"I don't think they can use original cost of the clothes when new, since they are used at the time of sale."

Exactly! That's why I asked if they are just now buying to sell. Because this seems like a "flipping" operation and it is not going well.

[Mactaxes]

I was seeing 250-300 transactions as rising to the level of a "side" business, but I see your point about Schedule D, Code L.  If they receive a 1099-K for these transactions in 2022, wouldn't that need to then go on a Schedule C?

[Mactaxes]

Not flipping operation.  It's a boutique baby clothes shopping problem and she is trying to recoup some of her cost by selling online.  I also see the point about converting personal property to business use and using the lower of cost or FMV.  But then we are creating a loss with fees and shipping....

[qbteachmt]

"But then we are creating a loss with fees and shipping...."

What you have is It's Deductible or Goodwill, where you can find FMV. And you have to be careful not to run up against issues of Hobby. In other words, buying new at retail, not using, and then selling, is a mental health issue; not a tax issue.

[Camp1040]

I don't understand why they would use original cost on used clothing, but anyway the loss should be allowed, be sure the material participation box is checked.

[Mactaxes]

We were struggling with cost basis issue because they were all purchased for personal use but some of the outfits were only worn once (think $60-80 per baby outfit) and others were never worn.  So using Thrift Store values didn't seem proper, but original cost isn't either.  Are you saying to report on a Schedule C and claim only the loss for shipping and Paypal fees?  And use the selling price as the cost basis, or net zero??

[qbteachmt]

Even if never worn, an item is considered "used" when it is on the secondary market.

COGS for this operation is not New Price. They are considered used, and that is taken into consideration. FMV is more like "worth" and used is not Retail value.

See if this helps:

I have a client whose retail storefront operation is to buy from you or allow you to trade-in children's clothes, toys and furniture. You get store credit or cash, depending on what you bring in. Everything she then puts for sale, price points run about 1/3 to 1/4 Retail. Brand new toys never opened are roughly 1/2 retail. When we value the inventory, we run about 1/2 of what she would sell it for, as the cost on hand.

So, your $60-$80 item is FMV about $5-$10. Check this:

http://www.goodwillswpa.org/UserFiles/File/Misc%20Files/Donation_Valuation_Guide.pdf

[rbynaker]

Maybe I'm in the minority but I'm not seeing a business here.  Cleaning out the attic/garage is not a trade or business.  If she were buying stuff in thrift stores and then selling them online then yes, that's inventory and presumably there's a profit motive.  But selling your own (kids) clothing sure sounds to me like a non-deductible personal loss.

I reported one last year in other income (Sch 1 somewhere now?)

1099-K from Paypal $xxx
Personal items sold on ebay at a loss -$xxx

Schedule 1 Line 8 $0

Won't know how it went until 4/16/24. 🙂

Rick

[Just-Lisa-Now-]

This is exactly the approach Ive been taking with these as well. Think of it a a garage sale that reaches people much further than your yard.

[qbteachmt]

I doubt there is a loss, once this is properly costed. The issue is, personal activity or not? Because I believe "loss" will fall out of the story, once the story is corrected.

[Mactaxes]

So then you are saying they have a gain here?  If an item they paid $80 for sold for $50 online and you say it should be valued at Goodwill rates of $5-10, then they should be paying tax on $40 for that item (less shipping/fees)??

[qbteachmt]

"If an item they paid $80 for sold for $50 online and you say it should be valued at Goodwill rates of $5-10, then they should be paying tax on $40 for that item (less shipping/fees)??"

Yes. If you intend to report it as Sched C, which is what you put in the Title, then this is being in business. You would need to find a FMV (from a reliable source, such as It's Deductible or Goodwill) for the conversion value from personal to business.

Or, you simply want to explain the 1099-K by showing other income and other expense as equal to each other, for "yard sale" type activities, as Lisa and rbynaker described. But pushing that amount you list, every year, starts to be close to a business. Intent is part of this; is there the intent to profit? Is she making profit, when the numbers are corrected?

[rbynaker]

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@Mactaxes wrote:

So then you are saying they have a gain here?  If an item they paid $80 for sold for $50 online and you say it should be valued at Goodwill rates of $5-10, then they should be paying tax on $40 for that item (less shipping/fees)??

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That's absurd.  If a willing buyer pays you $50 for an item, it's FMV is $50.  Goodwill has nothing to do with it.

[qbteachmt]

"If a willing buyer pays you $50 for an item, it's FMV is $50. Goodwill has nothing to do with it."

Obviously, then, this results in an intentional a loss on every item. That means Hobby or Personal, not business. "I know it is costing me more to do this than to just giving it away." Yet, if you ask the person why they are doing it on eBay, they will tell you, "I thought I could make a bit of money back."

Sometimes you have to show them the reality. Let them see what it costs them personally, or let them see how to run it as business and pay taxes.