As a network marketer, you can be eligible for great tax deductions, assuming you are treating your business like a real business and you have the INTENT to make a profit.
The IRS has clear rules about the difference between a hobby and a business. In order to be eligible for tax deductions, you must ensure the IRS considers your business a business (by your intent, game-plan and efforts). I suggest you go online and read those rules, or sit down with your licensed CPA to find out more.
The bottom line is that you don’t get to enjoy the tax deductions of having a business IF you aren’t treating your network marketing business like a real business.
What I want to do in this post is share some of the common tax deductions for network marketers in the United States (as of 2014). As a quick disclaimer, I am NOT a CPA, bookkeeper, or tax professional. I’m just sharing some of my first hand knowledge of doing my own taxes for more than a decade.
These deductions listed below are subject to change at any time, so make sure you visit the IRS website frequently or find out from your CPA. Ultimately, it’s your responsibility to know what you can and can’t deduct on your taxes. This article is for educational purposes only and is NOT financial or tax advice.
All of these “deductions” I’m going to share with you today are by no means exclusive to network marketing. They are available to anyone who owns any type of business. In fact, all of these deductions are right off the official IRS website and the Schedule C for your tax return. I am simply sharing that information with you.
Here are the common categories on a Schedule C:
# 1 Advertising – This might include business cards, buying leads, participation in an advertising COOP with your upline, sample products, newspaper ads, or any type of online or offline advertising that you might do to generate leads, find prospects or make more sales.
# 2 Car and Truck Expenses – Basically, you can do a standard mileage deduction or you can do an actual expense deduction (the IRS site explains the differences). I highly suggest you get a mileage log and track your business, personal and commute miles each day. The IRS requires that you document your mileage.
In addition, keep all of your receipts for oil changes, repairs, car payments, gasoline purchases, etc. At the end of the year you can decide between the standard mileage deduction or actual expenses. In addition, you can deduct tolls and parking, when they are business related. Some states (not all) even let you deduct part of your vehicle registration costs.
# 3 Commissions and Fees – This might include membership fees to your website, any commissions you pay someone for referrals, eBay fees, PayPal fees, etc.
# 4 Contract Labor – This category is for any independent contractor that you hire to help you with your business. For example, maybe you hired someone to write some blog posts for you, to create a custom eBook cover, or to do a freelance project. This is the category that would fall in. Anytime you pay a person more than $600 in one year, you must provide them (and the IRS) a 1099-MISC form. This is also what your MLM Company does for you (if you earn more than $600).
# 5 Home Office Deduction – This is a legal tax deduction, although a lot of folks are scared to use it! Basically, if you have a home office space that is used exclusively for your network marketing business, you can claim a home office expense. For example, if that home office was 5% of the total space in your house, you could deduct 5% of your home expenses. You definitely want to take some time and educate yourself on this one. The IRS website does a great job explaining how it works.
# 6 Interest – Most network marketers won’t use this expense, but examples could include if you have a credit card that is EXCLUSIVELY for your MLM Business or if you took out a business loan for your MLM Business (not recommended). In either case, it’s just the interest that would be deductible.
# 7 Inventory – This one only applies if you keep an inventory. Not all network marketers have an inventory. If you keep an inventory, you will have to determine your cost of goods sold. This is basically where you take your sales, minus your inventory purchases, and combine it with your remaining inventory on hand at the end of the year. Ultimately, you need to do an inventory on January 1st and one on December 31st, so you can make these calculations. Do a quick internet search on how to determine “cost of goods sold” and you will have a better understanding.
# 8 Legal and Professional Service – Anytime you hire a lawyer, accountant, or any other professional (for business purposes), the fees would be placed in this category.
# 9 Meals and Entertainment - This category is a “touchy” one. You can’t deduct your own meals, but if you take a client out to lunch and pay for their meal (and yours) you can deduct 50% of the cost of the meal on your taxes. You can also deduct any food you buy exclusively for home parties to promote your business. Some food is 100% deductible, but most meals are only 50% deductible. Educate yourself on the difference between the two.
# 10 Office Expense – This would include any office supplies that are used for your business, such as ink, paper, toner, pens, staplers, paper clips, folders, etc. Please note that if supplies are not 100% for business use, you can only deduct the percentage of the cost that is used for business purposes. For instance, if you bought an ink cartridge and it is used 50% of the time for business and 50% personal, you could only deduct 50% of the cost.
# 11 Supplies – Here’s what I found on the IRS website about supplies.
“In general, the cost of materials and supplies used in the course of a trade or business may be deducted as a business expense in the tax year they are used. In addition, the cost of incidental materials and supplies that are kept on hand may be deducted in the tax year of purchase provided that:
No records are maintained indicating when supplies are actually used,
No inventory is taken of the amount of supplies on hand at the beginning and end of the year, and
This method does not distort income.
Taxpayers should be careful to avoid deducting expenses as supplies when they are capital assets. For example, if the useful life of an item is significantly greater than one year it must be depreciated.
Supplies used directly or indirectly in manufacturing goods are part of the cost of goods sold.”
Source: IRS Website
# 12 Taxes and Licenses – This category is for any quarterly tax payments that you made to the IRS or any business licenses you purchased. This category isn’t real common for network marketers.
# 13 Travel, Meals and Entertainment – This category is for any type of travel expenses to meetings, regional rallies, company convention, training events, etc. that are OVERNIGHT and away from your home. They MUST be business related.
# 14 Utilities – This might include your cell phone, land-line or any other home utility used exclusively for your business.
# 15 Miscellaneous Expense – This would be any other type of legitimate business expense that does not fall into one of the categories mentioned above (or below).
Here is the link to the 2014 Schedule C on the IRS website.
Not So Common Deductions
Here are some other deductions that are on the Schedule C that you CAN deduct, although they aren’t very common for network marketers.
# 16 Depletion – This is on the Schedule C, but I’ve never used it and know nothing about it.
# 17 Depreciation and Section 179 – This is when you purchase an expensive item, such as a printer or laptop, and plan on using it more than one year. The IRS won’t let you deduct the whole thing in one year, so you are required to depreciate it.
# 18 Employee Benefit Programs – This only applies if you have employees, which hopefully you don’t have!
# 19 Insurance – This would be any business specific insurance that you bought for your MLM Business.
# 20 Pension and Profit Sharing – This would be if you have created a pension program or profit sharing program FORMALLY for your business (employees or yourself).
# 21 Wages – This would be in case you had any employees on payroll.
I believe that every network marketer has the responsibility to educate themselves about taxes, and to learn what they legally can and cannot deduct. It’s your responsibility to pay what you owe, but not a dollar more nor a dollar less.
If this is your first time owning a business, I highly suggest you sit down with a CPA or bookkeeper and have them help you get set up. You should also purchase a few books on small business taxes. There are plenty to choose from on Amazon.
Once you learn the basics about what you can and can’t deduct, what reports you need to do and what receipts you need to keep record of, your life will be a lot simpler.
What are your thoughts? What are some of your favorite tax deductions for network marketers? Leave a comment below to let me know what you think.
DISCLAIMER: This article is for educational purposes only. Please consult with a trusted CPA or licensed tax professional before deciding what you can or cannot deduct.