This is a Tax Guide for all the would be home-based business millionaires. This guide will tell you virtually everything you need to know about how taxes should, and do, work for a Multi Level Marketing type business. The kind of business where someone in the business recruits you to sell the products, and, eventually, you recruit others into the business. This guide works for Rodan + Fields, Lularoe, Plexus, Wildtree, Mary Kay, Avon, Pampered Chef, Herbalife, Isagenix, Scentsy and dozens of others you've never heard of.
First, a couple of terms, some basic advice, and some warnings:
1. You should be, at this point, a sole proprietor. This means that you own and run the business by yourself, with no employees. You will file the business taxes as a part of your personal taxes, usually on a Schedule C.
2. You are going to spend more time doing taxes, and it's going to cost more. Even if you use software (which I highly discourage if you are running a business) you will pay more for the programs.
3. You might not actually be a business. Many of the people starting these businesses will never have a dime of profit, and, after a few years, the IRS will put the kabosh on taking a negative income from your business off of your regular taxable income. The IRS will it Hobby Income. It means you do it more for fun than for profit. You still have to claim the income (on Line 21 - Other Income), but you deduct the losses on your Itemized Deductions (subject to 2% of income limit, maximum deductions equal to income and a bunch of other restrictions that ensure that you pay taxes on the income instead of getting write offs.) My advice is to go full bore, gung-ho towards making a profit for 3 years. File the Schedule C's and take the losses on your taxes (improving your refund). If, after three years, you haven't made a profit, and gross revenues aren't approaching 5 digits ($10,000), take real stock of where you're at. If revenues are growing and profitability seems close, keep things going. If revenues are flat, profits are a distant dream, and/or your enthusiasm is waning, bite the bullet and either shut the business down, or tone it back and start filing as a Hobby.
Record Keeping: This is where the rubber meets the road. Good record keeping will save you when it comes to tax time. Your records don't need to be extensive, but they do need to be accurate and useable. The best and easiest record keeping method involves a small notebook, a big notebook and an envelope or box. The small notebook is for mileage, discussed below. The big notebook is for every other expense. You need simple columns set up: date, description, cost and payment received (if you pay something, it goes in the cost column, if you’re paid it goes in the payment received column.). You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible. The box/envelope is for receipts - just throw them in. Really? No sorting, categorizing or organizing? No. Simply put, your odds of ever needing them for an audit are slim to none. Save the box, notebooks and tax returns for 7 years, and then throw it all away. If you ever do get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary. If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything. You don't have to prove things to me. It’s important to understand not to over think things. For example, if you make a sale involving sales tax, which you know a portion will go to the government, you still write down 100% of what you were paid (including the tax). Later, when you remit the sales tax to the government, it is entered as a payment (deduction.) Get it – you get money, it’s entered as income, you pay money, it’s entered as a deduction.
The trick to your kind of business is that sometimes you don't make the sale, it happens through a website and is fulfilled by the company, with the payment going straight to the company, the product going straight to the consumer, and you getting a commission. Generally the company will only report the commission as income to you, which means you don't need to track any expenses like shipping, sales tax or the wholesale price - just the commission, which you can track when the payment comes to you. Just make sure your company handles it this way, and you'll be good. If the product is paid for by you, comes to you, and then you pass it on to the client for a markup, the entire price paid goes into your records as income, and all the costs to you (shipping, wholesale price, sales tax) go into your records as an expense.
Expenses: You can deduct any ordinary and necessary expenses for your business. I generally describe the requirements like this: If it will make you more money, is required by someone in authority, or makes your business more efficient or your life as a business person easier, it's probably deductible. Here's a non-exhaustive list:
1. Pretty much anything the company charges you for. If they deduct it off your commission check, deduct it off your taxes (you report the gross commission, not the commission after deductions).
2. Marketing Expenses: Business cards, website fees, posters, signs, sponsorships, commercials, advertising, pretty much anything you do to get someone to call YOU when they want your product.
3. Insurance: I'm not talking about homeowners insurance here. I'm talking about ‘oops I screwed up and someone is suing me insurance.’ Sometimes this is called Errors and Omissions Insurance, sometimes it’s a liability bond, or a rider on your homeowner’s insurance. Also, if you pay a rider to your car insurance for business use, the difference between that and regular insurance is deductible. There is also a self employed health insurance deduction that allows you to deduct your health insurance costs if you have no other insurance source (if you can get insurance through your spouse’s work this is a no-go.)
4. Entertainment Expenses: Those party expenses count. The food, the favors, the entertainment. It all counts if you expect there's a chance you'll make money. Eventually you'll be with a client, or potential client, and pick up the tab for lunch, or dinner. Generally, if you expect the expense to result in a sale that makes you money, either immediately, or in the future (whether it ultimately does or not doesn't matter, as long as you expect it to) it's deductible. I recommend writing the name of the client on the receipt, as well as a quick description - "referral source", "potential client" or something like that.
5. Travel Expenses: These are a toughie. People love conflating personal and business travel. If you travel to Maine to visit family and see the lobster festival, and try to sell to some family and friends, the trip is primarily personal. You can deduct expenses DIRECTLY RELATED to the sales efforts, but little else. You can visit a friend for dinner on a three day business trip, but don't do business for an hour on a three day personal trip. Also avoid what I call BS travel. Flying to Vegas to assess potential markets is transparent vacationing disguised as business travel, especially if you spend 23 out of every 24 hours in the casino! Be reasonable! Go on trips that are going to increase your money-making potential. Stay away from any others. For legitimate travel, you get airfare, rental car, tips, taxis, laundry, internet and phone, as well as 50% of meals and any other reasonable and necessary expenses. Travel assumes overnight trips away from your home area.
6. Cell phones, laptops and tablets: Do yourself a favor, get a business only laptop, cell phone, tablet and/or computer. It is simply too difficult to calculate expenses on a part personal and part business electronic device. Don't share your business number with friends and family (other than wife and kids). If you keep everything separate, the deductions are easy and legitimate. If you don't, you have to establish a business use percentage, and worry about listed property rules - which suck!
7. Vehicle Expenses: Keep a mileage log. Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log. Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance). There are other ways to track vehicle expenses, but mileage is the best. Do track annual car taxes and finance charges. The easiest mileage log is a notebook where you right the date, the trip purpose and the miles driven. You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st! Mileage will be one of your biggest expenses, so keep track of it religiously! 10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings! Mile IQ is the absolute best way to do this. It is a mileage tracking app the AUTOMATICALLY tracks every trip, allowing you to very simply identify business vs. personal, and add notes on the purpose. HIGHLY recommend using this!
8. Home Office: Set aside a space in your home that is 100% business use. Never used for anything else, and regularly used for business. This is where you keep your business records, your business computer or laptop, make your sales calls from and meet clients. The tax term is regular and exclusive business use. If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage. Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed. You can also take a small depreciation deduction for the home losing value. The IRS "simplified" this, allowing you to take $5 for every square foot of Home Office, up to $1500, but it's BS to call it simplifying, because any tax guy worth their salt is going to run the numbers both ways and take the number that makes the most sense.
9. Depreciation: Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras, machinery, big tools or office furniture). There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life. Talk about these items with your tax advisor.
10. The stuff you buy to sell: This can get tricky. If everything you sell is paid for and shipped through the company, it's easy, as discussed above about commissions. If you order the stuff, pay for it and either deliver it or ship it to the customer, you have to track the wholesale price, shipping, sales tax and the amount you received. Even worse, if you order items to keep on hand for later sale directly to customers, you need to track all the purchases you made (at your cost is my recommendation) and track what is sold and what is on hand. This is the devil called inventory. You need to know what you have on hand at the beginning and end of the year, what you bought, and what you sold. The easiest way to do this is with an inventory notebook - now you have three. If you buy something, write it down with date, description and price paid. Have columns for date sold, and price sold for, and another column to make a note if it's disposed of without selling it (given away, used by yourself, or expired/lost/stolen. Track each item as it's disposed of, and then, at the end of the year, total everything left - that's Ending Inventory, everything bought during the year - that's Cost of Goods Sold, and everything sold - that's Gross Receipts. Ending Inventory this year becomes Beginning Inventory next year. If you sell some this way and some through the company on commission, you'll have to add commissions to your Gross Receipts, but I think you get the point. If I ran a business like this I would desperately try to avoid inventory, but that might cost you some sales - so - do what works best for you. A lot of scenarios involving display items, demonstrators and personal items can be handled through inventory. Also, since most companies accurately report total purchases, all you need is that number, and the cost of items at the end of each year, and inventory is DONE. Just make sure to use wholesale or retail price for both inventory and purchases. I recommend wholesale.
11. Taxes: Mainly sales taxes. You need to work with your State or County to make sure you collect and remit sales taxes. Don't blow this off. Things get bad. The sales tax you collect and remit is deductible if included in the price you charge, and the income you report. You also may need to pay business taxes and licensing fees to State/County/City. These are deductible, but you need to work these out on your own - this is an income tax guide, and these other taxes vary too much by locale to cover here. Again, don't screw these up. The local governments can be worse than the IRS if you mess up.
Keep the record keeping up to date. It's a nightmare to back fill. Work your ass off to generate business and make money. Research best practices and talk to the people making money doing this. The idea is to MAKE money, and then be unhappy that you are paying taxes on it. Getting a big tax deduction from your unprofitable business is only good at tax time. Paying taxes is a sign of success!
If you gave money or property to someone as a gift, you may wonder about the federal gift tax. Many gifts are not subject to the gift tax. Here are seven tax tips about gifts and the gift tax.
1. Nontaxable Gifts. The general rule is that any gift is a taxable gift. However, there are exceptions to this rule. The following are not taxable gifts:
- Gifts that do not exceed the annual exclusion for the calendar year
- Tuition or medical expenses you paid directly to a medical or educational institution for someone
- Gifts to your spouse (for federal tax purposes, the term "spouse" includes individuals of the same sex who are lawfully married)
- Gifts to a political organization for its use, and
- Gifts to charities.
2. Annual Exclusion. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you give a gift to someone else, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion for the year. For 2017, the annual exclusion is $14,000 (same as 2016).
3. No Tax on Recipient. Generally, the person who receives your gift will not have to pay a federal gift tax. That person also does not pay income tax on the value of the gift received.
4. Gifts Not Deductible. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).
5. Forgiven and Certain Loans. The gift tax may also apply when you forgive a debt or make a loan that is interest-free or below the market interest rate.
6. Gift-Splitting. In 2017, you and your spouse can give a gift up to $28,000 ($14,000 each) to a third party without making it a taxable gift. You can consider that one-half of the gift be given by you and one-half by your spouse.
7. Filing Requirement. You must file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return if any of the following apply:
- You gave gifts to at least one person (other than your spouse) that amount to more than the annual exclusion for the year.
- You and your spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- You gave someone (other than your spouse) a gift of a future interest that they can't actually possess, enjoy, or from which they'll receive income later.
- You gave your spouse an interest in property that will terminate due to a future event.
Still confused about the gift tax? Please call me for assistance.
Hi! I'm Jaimie and I have a B.A. in Accounting, an MBA with an emphasis in Accounting and a CPA license. I worked for about 10 years in CPA firms doing audits and reviews and then for about 10 years in private companies managing accounting departments. I've learned a lot about accounting, finances and taxes over the last 20 years! And now I want to share my knowledge with you here!