As mentioned last week, IRS uses a number of factors to determine if an eBay hobby that generates sales revenue is actually a business.

These factors include: - Do you carry on hobby in a business-like manner? - Do you spend considerable time working on hobby? - Do you depend on income from your hobby for your livelihood?

If answer to any or all of these question is yes, you're running a business, not carrying on a hobby, and you are responsible for paying taxes on your income.

What's eBay's take on all this? Naturally eBay is vehemently opposed to anything that might rock eBay boat. eBay does not does not issue 1099 tax forms to sellers, nor does it report seller's sales figures to IRS.

Ebay considers itself merely to be a facilitator, meaning that they provide a marketplace in which buyers and sellers come together to do business.

Furthermore, under it's current system it would be impossible for eBay to issue accurate 1099s to sellers. eBay does not track if a seller actually gets paid by buyer, so eBay has no idea how much money - if any - actually changes hands at end of each transaction.

On bright side, if you do sell on eBay as a business you can deduct a number of business expenses, including cost of inventory, listing fees, shipping, envelopes, packing materials, etc.

You might also be able to deduct things like purchase of a computer for business use, office space (even if it's a home office), office supplies, and more.

Talk to your accountant if there's any doubt as to whether you should or should not be paying taxes on your eBay earnings.

Here's to your success!

Tim Knox tim@dropshipwholesale.net For information on starting your own online or eBay business, visit http://www.dropshipwholesale.net

Small Business Q&A is written by veteran entrepreneur and syndicated columnist, Tim Knox. Tim serves as the president and CEO of three successful technology companies and is the founder of DropshipWholesale.net, an online organization dedicated to the success of online and eBay entrepreneurs.

Now for obvious question: Which method is better?

Well, here's how I look at it. If you want to get highest deduction, you should "run numbers" under both methods and then use whichever method results in higher deduction.

You are allowed to pick whichever method you want.

But once you pick a method, be careful to follow rules on "switching" from one method to other: You can switch from Mileage Method to Actual Method, but generally are not allowed to switch from Actual Method to Mileage Method.

Having said that, let's be practical. If you hate recordkeeping, use Mileage Method. It's much simpler and faster. You won't have to keep all those receipts.

Even Mileage Method requires some recordkeeping, however. You should keep a log that documents business use of vehicle. Here are 3 IRS-approved car logs:

1. Daily Log. Yep, you just record all business miles for all 365 days of year.

2. 90-Day Log. Here's a little-known rule -- instead of keeping mileage records for entire year, you can get by with just a representative portion of year -- and a 90-day period is considered an adequate representation of entire year.

So you would keep a Daily Log for a 3-month period, say January through March. To get your annual mileage total, you multiply 3-month total by 4.

3. One-week Log. Here's another short-cut: The IRS also allows you to keep a log for just first week of each month. Then you multiply that week's mileage by 4 to get monthly total.

Regardless of which method you use, there's a goldmine of deductions sitting right there in garage.

Wayne M. Davies is author of 3 tax-slashing eBooks for the self-employed, available separately or as a 3-volume set, "The Ultimate Small Business Tax Reduction Guide". http://www.YouSaveOnTaxes.com/ultimate-guide