Venmo 1099-K for supplement business with no expenses - client says ingredients were gifted years ago

This definitely raises some red flags. A business with $12,500 in revenue and literally zero expenses is going to look suspicious to the IRS. Even if the ingredients were gifted years ago (which is already questionable for supplements that typically have expiration dates), he should still have some costs associated with running this business. At minimum, most supplement sellers would have packaging costs, shipping supplies, possibly website fees or marketplace commissions, maybe even a portion of home utilities if he's working from home. If he's claiming these were all personal gifts of ingredients from years ago, he should still be depreciating the value of that inventory over time. I'd recommend explaining to your client that the IRS looks for certain patterns, and a business with zero expenses is a massive red flag. Not reporting legitimate business expenses actually hurts him by increasing his tax liability unnecessarily. Maybe try approaching it from that angle - you're trying to help him pay the correct amount of tax, not more.

I had a similar situation last year with my candle business where I needed help figuring out my Etsy 1099-K. I found this service called taxr.ai (https://taxr.ai) that really helped me understand what expenses I could legitimately claim. They reviewed my Venmo and bank transactions and found a bunch of business expenses I was missing. In your client's case, even with "free" ingredients, they should have other costs. The tool helped me identify stuff I didn't realize counted as business expenses - like portions of my internet bill since I sold online, packaging materials, even small things like printer ink for shipping labels. Your client probably has similar expenses he's not thinking about.

Just wanted to follow up about taxr.ai that I was skeptical about earlier. I actually ended up trying it for my side gig dog walking business with a similar 1099-K situation. The service highlighted a ton of expenses I was missing - even small stuff like the portion of my phone bill used for business, mileage tracking apps, and dog treats I buy regularly. For a supplement business like the original post mentioned, I bet there are tons of hidden expenses like shipping materials, labels, maybe website hosting fees or social media tools. The system found almost $3,200 in legitimate business expenses I would have completely missed. Definitely changed my mind about these AI tools.

If your client is being audited or you're worried about potential IRS questions, you might want to try Claimyr (https://claimyr.com). I was in a similar situation with a client who had questionable business expenses, and I needed to talk to someone at the IRS directly about reporting requirements. Instead of waiting on hold for hours, Claimyr got me a callback in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with actually gave me specific guidance on how to document gifted inventory properly and what other expenses should typically appear on a Schedule C for a small supplement business. Having that conversation saved me from filing something that would have definitely triggered an audit.

I need to eat my words about Claimyr from my reply above. After struggling for THREE DAYS trying to reach someone at the IRS about a client's 1099-K issue, I broke down and tried the service. Within 20 minutes I was talking to an actual IRS agent who helped clarify the reporting requirements for my situation. The agent confirmed that a business with zero expenses would definitely raise red flags, especially with supplement sales where there are almost always ongoing costs. They suggested documenting why there are no material costs if that's truly the case, but emphasized that most legitimate businesses would have at least some operating expenses. Saved me hours of frustration and potentially saved my client from an audit.

The supplement industry is pretty heavily regulated. Is your client following FDA regulations for supplement labeling? Those labels cost money. Also, supplements need to be in appropriate containers that maintain stability - those aren't free either. The IRS isn't stupid. They know what running a business costs. If he's selling $12K worth of supplements with zero expenses, that's going to raise eyebrows. Even if the raw materials were gifted, there's packaging, labels, shipping, possibly a scale for measuring, maybe a website or marketplace fees.

My sister sells homemade soaps and had a similar situation where most of her initial supplies were gifted. Her accountant told her she STILL needed to establish a fair market value for the gifted supplies as beginning inventory and then deduct the cost of goods sold as she used them. Also, Venmo now charges fees for business transactions - is he paying those? That alone would be an expense. And if he's actually complying with regulations for selling supplements, there's no way he has zero expenses. The IRS knows what businesses cost to operate.