In this day and age, it’s hard to go a day to not see someone who is selling a product for some type of multi-level marketing company, or what we call MLM. Being part of an MLM can bring some interesting tax misconceptions.
In this day in age, it’s hard to go a day to not see someone who is selling a product for some type of multi-level marketing company, or what we call MLM. Being part of an MLM can bring some interesting tax misconceptions. So to discuss this, I have brought Heather to join us from one of our offices at Hawkins Ash who specializes in this area. Welcome, Heather!
You’ve been working with clients who are involved in MLM for a long time. What would you say is the most common misconception?
The most common misconception is once you sign up to sell for an MLM you can just start deducting personal expenses on your taxes that you wouldn’t normally be able to. I’m sure you’re familiar with the expression, “If it sounds too good to be true, it probably is.”
We have seen people posting online and Facebook about having low hours, big money, and many tax deductions just for joining their team. In the past, I’ve heard of people saying they can deduct their mortgage/rent payments, cellphone and internet expenses, subscriptions like Amazon Prime, even pet expenses, all because they are a part of an MLM. That is simply not the case.
So are you saying that none of what you mentioned are tax deductions?
I’m not saying that at all. There are many great and legitimate tax deductions that you can utilize to reduce your income from being part of network marketing. However, there are limits like with everything.
Let’s touch on deducting your rent/mortgage expenses.
Most of us have seen the movie, The Accountant, with Ben Affleck. There’s a great scene with Ben Affleck’s character, who is a CPA, going to a client’s house and giving them bad news about the tax they owe. As they are sitting there, Ben notices some jewelry pieces sitting on the table. What results is that he convinces the couple they have a home-based business and they can deduct home office expenses because they work at the kitchen table. That’s lowering their tax burden. I guarantee every accountant who saw that scene cringed like I did, because it’s factually incorrect. The home office deduction can be an incredibly lucrative deduction, but there are pretty strict rules.
The biggest rule is that in order to deduct a portion of your housing expenses, you must have a room that is exclusively for your business. You can keep inventory and record your Facebook live videos in there, but if your children decide to use that space to do homework or you’re trying to claim the family living room as an office, it doesn’t qualify for the deduction.
You mentioned deducting your cellphone and internet expenses before. I assume if I’m conducting my own business over Facebook live, I can deduct pretty much all of my phone or all of my internet expenses. Am I right?
Unfortunately not. Like with all things when you are self-employed, you can only deduct a portion of your expenses that are used for business. For instance, if you use your phone for two hours a day for business and six hours a day for personal purposes, only 25% of your phone expenses are for business. That’s the case for everything such as internet, computer, even your Amazon Prime subscription.
It would be really hard for me to figure out how much of my Amazon Prime purchases are for business and how much are for personal use.
Yeah it can be. Thankfully the IRS allows a reasonable explanation. You can keep track as best as you can with the logs. Otherwise, the easiest way is to completely separate your business and personal. It might be a pain having two phones for two Amazon accounts, but it will save time and effort with record-keeping in the long run.
What else should we know before considering jumping into an MLM type business?
The biggest thing people can be unaware of is that when you sell for an MLM, you’re an independent contractor. 100% of commissions you earn will be reported to you on a 1099 and you will be subject to self-employment tax in addition to your regular income tax on those earnings.
The potential higher tax makes it important to claim every legitimate deduction that you are entitled to.
If I’m worried about my income being too high this year, can I just buy a bunch of stuff at the end of the year and just take it as a deduction?
Unfortunately not. If you make $10,000 of product purchases in a year but only sell $7,000 of that, you cannot deduct the remaining $3,000 in that year. You have to include it in inventory until those products are sold.
You mentioned something at the beginning and I really have to go back to that. Can people really deduct pet expenses on their tax return?
Most of the time they cannot. There are very few instances where deductions like that are allowable. That’s why it’s important to work with a tax professional who can advise you before you take a risky tax position and end up in trouble down the road.