Taxes and the Network Marketer
By Jeffrey A. Babener
|In 1999, the IRS reinstated the favorable tax treatment of home office deductions, and helped make tax planning more attractive for networkers. If you take your network marketing business seriously, you may qualify for some serious tax advantages that are available to business owners, and in particular, home-based business owners.|
|That’s the good news. The bad news is that the tax
deductions that you may be able to take are shrouded in volumes and volumes
of IRS codes, regulations, and interpretations that could (and in fact does)
keep a small army of tax lawyers and accountants busy for years.
Even though these deductions are often confusing and unclear, it is better to have an understanding of them and take advantage of them than to pay more taxes than you need to year after year. With that in mind, here is a sampler of some significant tax points to be aware of, and take up with your CPA or qualified tax advisor….
"I’m proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money."
— Arthur Godfrey
|Remember to be able to take advantage of tax deductions for
your network marketing business, it has to be a real business. The IRS says
that you can’t deduct business expenses unless you engage in the business on
a “for profit” basis — not just as a “hobby business.”
How do you tell the difference? The IRS will look at one of two tests. The first objective test is whether you have made a profit in three out of five years. The second subjective test is whether or not you are prepared to demonstrate that you engage in your business in order to make a profit. Here, the IRS is looking at whether or not you carry on the business in a businesslike manner; the time and effort you put into the activity; whether you depend on income from it; your expertise in the business; how much profit the activity makes in the years it does profit; and other pertinent considerations.
Meals and Entertainment
Network marketing is a social business. You have to eat and you may as well have some fun and do it while you are recruiting or selling. This is one of those expenses the IRS keeps whittling away at, however. Your deductions are now limited to 50 percent of your meal and entertainment costs.
Beyond that, you must have records to substantiate your meal and entertainment deduction claims. In addition to the usual receipts you should keep for expense deductions, you will need to be able to document the substance of the business discussion, the business relationship, and who you had a meal with, or went with to be entertained. The business discussion has to be during the activity or immediately preceding or following it.
The Home Office Deduction
You can deduct the cost associated with your home office, but be prepared to show how you use it. Assuming you qualify, you can deduct a proportion of expenses related to your entire home, such as mortgage payments, insurance, utility bills and home repair. The space must be used regularly and exclusively for business. Second, you must use it for administrative or management activities of the business and you cannot have another fixed location for your business where you conduct substantial administrative or management activities.
Ordinary Business Expenses
You can deduct ordinary business expenses such as accounting fees, advertising fees, license fees, and so on. The tax advantage here is that many of your expenses may cross over between your home lifestyle and your business lifestyle, including telephone, cleaning supplies, office supplies, answering machines, audio and video equipment, fax machines, office furniture, and office decorations that improve both your home office and your house.
The Traveling Networker
Do you like to travel? Does your spouse like to travel? Do both you and your spouse promote your network marketing business? The business travel deduction is a real advantage for networkers.
Of course, you are going to have to make a clear allocation between the business-related purpose of the travel and the vacation portion. Obviously, there is a gray line, and it will be in your interest to substantiate as much of the travel as relating to your network marketing business. Inside the U.S., all travel expenses are deductible when the trip is “primarily” for business. When traveling abroad, you must divide the travel expenses between business and vacation time.
Do you have friends and family who are also customers and business associates in network marketing? The probability on this point is high. A network marketer can convert gift-making, which might normally take place, into business gift-making, which is eligible for a tax deduction. Under IRS rules, you may deduct up to $25 for the cost of business gifts given directly or indirectly to these people. That should make you popular!
All Those Forms
Almost every network marketing distributor agreement recognizes your independent contractor status, and so does the IRS. Because the IRS considers you to be self-employed, you are going to have to pay both income tax and self-employment tax.
If you have income greater than $500 a year, you will be making estimated quarterly tax payments as a self-employed individual. You will receive a Form 1099 from the network marketing company if you receive more than $600 in income or buy more than $5,000 of product or inventory. Your Form 1099 will be attached to your Schedule C, which in turn will be attached to your tax return. Your Schedule C will summarize your income and expenses from your network marketing business.
Computers, Automobiles, and Capital Assets
When it comes to these issues, you’re definitely going to need to talk to your tax advisor. You have some choices to make about how to deduct the acquisition costs of computer equipment and automobiles that are used for your network marketing business.
The IRS provides some very liberal limits on the amount that you can actually expense as a business deduction in any one year. (Of course, you are limited in expenses to the income from your business.) The other option is taking a depreciation write-off over a number of years for business equipment. Only your tax advisor knows for sure which is most advantageous.
The costs of running your automobile for your network marketing business are deductible. You have a choice of using the IRS’s standard cents-per-mile (in 1995, for instance, it was 30 cents per mile), or itemizing the automobile expenses, such as gasoline, repairs, maintenance, insurance, and depreciation. Obviously, you need to calculate what percentage of your overall car use is devoted to your network marketing business, and adjust the expenses to that percentage.
Record Keeping — The Name of the Game
If you talk to our friends at the IRS, they will tell you time and time again that the most important aspect of claiming your expenses and deductions is keeping adequate records. The IRS will suggest that you keep a separate bank account, make a record of all business transactions, and retain all your records. Record keeping and substantiation are particularly important for deductions for travel expenses, entertainment expenses, and gift expenses. And the IRS will always tell you that a receipt is ordinarily the best evidence to prove the amount of expense.
Is It All Worth It?
Should you take advantage of the expenses and deductions in the Internal Revenue Code? The IRS will tell you that those expenses and deductions are there for you as long as you don’t abuse them. If you’re a serious network marketer, the expenses and deductions can enrich your business and your personal lifestyle by putting hundreds or thousands of dollars of after-tax savings in your bank account.
For an in-depth analysis, please visit www.mlmlegal.com, and also check out the Tax Guide for MLM/Direct Selling Distributors (Jeffrey A. Babener, Legaline Publications, 1-800-231-2162).
|Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
|Jeffrey A. Babener, the principal attorney in the
Portland, Oregon law firm of Babener & Associates, represents many of the leading
direct selling companies in the United States and abroad.
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