In this post, I will share the top 21 tax deductions for network marketers.
As a network marketer, you are eligible for great tax deductions, just like a traditional business, 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 most common tax deductions for network marketers in the United States (as of 2016). 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 small business taxes for more than a decade.
The 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 could include business cards, buying leads, flyers, participation in an advertising COOP with your upline, sample products, newspaper ads, postcards, pay-per-click 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 for your vehicle 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. Log it into your mileage log. The IRS requires that you document your mileage. You can buy a mileage log at Office Max or Office Depot for less than $3.
In addition, keep all of your receipts for oil changes, repairs, car payments, insurance, registration fees, gasoline purchases, etc. At the end of the year you can decide between the standard mileage deduction or actual expenses, whichever is larger. 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 category might include fees you paid to set up a booth at a trade show, fees for your company’s replicated website, renewal fees with your company, etc. This would also include any PayPal fees you paid from money send to you electronically.
# 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 work would fall in. Anytime you pay a person more than $600 in one calendar 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). If you have employees working for you, they would not fall into this category.
# 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 take a home office deduction. For example, if that home office was 5% of the total space in your house, you could deduct 5% of your home expenses, such as utilities, gas, water, sewer, etc. 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 used 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. If you have a credit card that is used for both personal and business expenses (not recommended), you could only deduct a percentage of the interest, based off business purchases.
# 7 Inventory/Cost of Goods Sold – 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, bookkeeper, or any other professional service (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. Whenever you get a receipt, make sure you write down what the food was for, who you were with, and what the business purpose was.
# 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 from your county clerk. 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. Once again, visit the IRS website to learn the details. This is one area a lot of people mess up with. If you take a trip and it is a combination of personal and business use, which most trips are, then you can only deduct the business perecentage of the trip.
# 14 Communication – This might include your cell phone, land-line or any other home utility used exclusively for your business. If it isn’t used exclusively for business, it must be pro-rated. Keep in mind that you can’t deduct the first phone line in your home.
# 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 Tax Deductions for Network Marketers
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 (in most cases), so you are required to depreciate it over a certain amount of years.
# 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 suggest you look into the laws about employing your spouse and/or children. It can definitely be worthwhile and be a huge tax savings.
Other Must Read Posts
- Five Ways to Save Money on Your Small Business Taxes
- Bookkeeping and Tax Tips for Network Marketers
- Reasons to Hire a Bookkeeper
- Your First Year in Business
- What to Do with Your MLM Bonus Check
Tips for Success
First off, hire a CPA for one or two hours. Sit down with them and ask them all of your tax questions. Make a list of things you think you can deduct and run each category by them. Also ask them if you are missing any categories you should know about. Ask them what tips and suggestions they can offer you to get organized and simplify things.
Next, don’t rely on your CPA for everything. Yes, you should have a CPA to advise you on tax issues. But, you should also have a basic understanding of bookkeeping and tax law yourself. You don’t need to be an expert by any means, but you should know the basics. Remember, no one else cares as much about your business as you do.
Furthermore, realize that the tax law in the United States is very complex and changes each year. If you were to sit down and read the tax code, you probably couldn’t do it in one lifetime. This is why I suggest you have a CPA advisor. They have continuing education to keep on top of the tax law changes and know what is going on and how it affects their clients.
Some folks will argue you should never do your own taxes. I disagree. If you enjoy it and feel comfortable doing it, there are plenty of software programs you can use to assist you. If you are unsure of yourself, take your finished return that you just did yourself and run it by your CPA to see what they have to say about it. If you don’t have the time to do your own taxes, don’t feel comfortable, or don’t want to do your own taxes, then by all means have someone else do them.
However, don’t just hire anyone off the street to do your taxes. Avoid the little tax places you see at the mall and in retail stores. Find a CPA who specializes in small business to be your advisor. Even if it costs a little bit extra, it is well worth the money. Ultimately, you want a CPA who specializes in small businesses, that you can build a long-term business relationship with.
Finally, stay organized with your taxes throughout the year. Don’t wait until January 1st to do it. Keep your receipts organized and update your monthly profit and loss statement each month. You can hire a bookkkeeper to help you with this or you can do it yourself. At a minimum, keep an updated monthly profit and loss statement (income and expenses), balance sheet (liabilities and assets) and pay your quarterly taxes.
A little bit of tax planning and preparation can make a huge difference.
Of course, these tips are just my opinion. Feel free to do as you wish.
I believe that every network marketer has the responsibility to educate themselves about small business 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 things set up. You should also purchase a few books on small business taxes, or attend a workshop or seminar. These things are also all tax deductible.
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. I look forward to hearing from you.
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. Also, know that tax laws do change from time to time.