Q&A: How do I deduct the cost of books that turn out worthless?

QUESTION: I'm collecting books to start selling online. I've bought books from family members, friends, yard sales, estate sales, thrift stores, etc. Most of these places don't have receipts, or the receipts don't say what was purchased.

What is the best way to go about keeping records for myself and for taxes? Also, how do I show losses for books I buy, but then discover they aren't worth anything?

ANSWER: Please keep in mind that I'm not an expert on taxes, so I'm really not qualified to give advice. So the advice here is worth about what you're paying for it ;-)

However, here's the way I've always handled it: You're right, it's impossible to keep track of the individual costs of books. The way I report my business to the IRS is "cash" accounting, which is the simplest way. I list (on the Schedule C in my long 1040 Form) all my expenses (books, postage, mailers, etc.). For the books I buy, it's all documented by the checks I've written at book sales (or credit card receipts). I don't account for the individual items. Total it up and that's your "cost of goods sold" for the year. You subtract that from the income from bookselling, and that's your profit, and that's what you pay taxes on.

So back to your question about "showing a loss" for books that turn out to be worthless: Under my simple system described above, they're already deducted since you've documented their cost and subtracted it already from your profit.

As far as keeping records, I have a checking account dedicated to my book business, and I download the transactions into Quicken, everything goes into a category. If you don't do something like that, I'd recommend keeping a journal of your expenses, so that even if you don't have a receipt, you'll have some documentation for the IRS in case you're ever audited.

Personally, I think the system I've described would satisfy the IRS if you're running a small home-based business. However, if you want complete peace of mind that you've got everything up to snuff, you could hire an accountant to do your taxes one year. Then you could follow that example in subsequent years fairly easily. The trick is to find someone who has experience doing taxes for people who have home-based businesses. If you end up with the wrong accountant it can be a real headache. Personal recommendations are a good way to find one.

Every online seller has a different way of handling their business. A couple of months ago when we brought up donating books for charitable deductions, the range of comments was amazing.