Things to Consider at Tax Time

Are you DONE with tax filings or just getting started?  I hope you are planning to file a Schedule C, I hear a lot of small businessowners do not and it’s a shame to pay MORE than you need to on taxes.  Since this just might be on your *to-do* list, I wanted to share some tips my accountant has given me:

The first step in reducing taxes is to know what is deductible.  A simple definition of a deductible expense is an “ordinary and necessary expense you incur while furthering your business for profit”.   If that seems vague, keep in mind that Congress intended the tax code to be general, because all deductions are unique to the particular facts and circumstances of a particular person and/or situation.  My tax guy has defined ordinary as “one that is common and accepted in your field of business” and necessary is “one that is helpful and appropriate for your business”. However, an expense does not have to be indispensable to be considered necessary. 

In our network marketing business it is not unusual to have an expense that is used partly for business and partly for personal purposes.  You can divide these expenses and deduct the part that is for business.  (Example:  I wrote off a trip to Mexico and even though I stayed with friends, the purpose of the trip was business so I wrote ALL my expenses off…airfare, rental car, food…but not the lodging since I stayed with friends.  In the audit for that year, the auditor let it go after I explained it).

Limits on Losses:  If you DO NOT carry on your business activity with the intention of making a profit, you CANNOT use it to offset other income.  If you deem this to be a hobby, or for sport or recreation, then you are eligible to only deduct the expenses of the hobby up to the income the hobby generated.  Some people DO choose to work network marketing as a hobby…so this applies to them!

Be SURE you document your expenses as all of these things can come up in your business and can be used to offset taxes paid to the government:

1.  Advertising.  Literature, price lists, catalogs, display and classified ads.  Printing of flyers, brochures, newsletters and business cards.  Product demonstrations, new products used for promotion or samples.

2.  Answering Service.  Payments for taking phone messages.  Could be an outside service or someone in your home (possibly your children, yes, they ARE tax deductible).

3.  Bad Debts.  Anything due but uncollectible – based on actual expenses – could be rep or customer that didn’t pay.

4.  Bank Charges.  Service fees, checking costs, including imprinting, overdraft protection, and any costs or penalties from late charges or insufficient funds.

5.  Business Gifts.  Items given to any prospect, customer or associate, up to $25. annually per recipient.

6.  Car/Truck.  Expenses for business purposes:  lease, insurance, tax, license, maintenance–gas, oil, wash, wax, repairs, replacements, parking and toll fees.

7.  Continuing Education/Educational Supplies.  All business related schooling – self improvement related to business – usually from an institute of higher learning.  Know any students who need to write-off their education?

8.  Conventions & Seminars.  Transportation, tickets, and other costs associated with attending or participating. Including meals and incidentals.

9.  Demonstration & Training.  Items used or consumed to illustrate quality.  Product testing, Self use of products (first time).  Portion of groceries used for business (cookies & coffee meetings, etc.)

10. Dues & Publications.  Newspaper and magazine subscriptions.  Any purchase from a newstand.  Fees for business, service clubs, professional associations, Country Clubs, and physical improvement centers.  Any distributorship fees.

11. Entertainment.  Costs of meals, theater, shows, games, sports events, catering and refreshments for occasions when promoting your business with prospective clients. Entertainment expenses are only 50% deductible.

12. Home Office/Maintenance/Repairs/Insurance.  This is a category for only home office expenses, not for office expenses outside of the home (which are 100% deductible). 
Include the business portion of homeowners insurance, as well as repairs and maintenance like carpet cleaning, household cleaners, a new roof, window replacements, etc.   (Expenses outside the home belongs in #16, as does any meeting places you have expenses for and any home office decorations)

13. Incentives and Awards.  Pins, plaques, applicable product discounts, rewards (cost of contests or prizes–expenditures to generate sales, including raffles, drawings and door prizes.  Also, personal gifts that are over $25.

14. Interest.  Interest on business loans, installment payments of auto furniture, equipment and credit card interest charges.

15. Laundry & Cleaning.  Cost of preparing home and furnishings for meetings, including draperies, carpets, and cleaning products.  Cleaning of any items that clearly identify your business–logo shirts, jackets, etc.

16. Office decorations/Maintenance/Repairs  Interior decorating items used in your office–wall hangings, potted plants, etc. cleaning of office – carpet, drapes, windows, machines and equipment, painting, flooring, resurfacing, concrete fixing, new glass, hardware supplies and small equipment purchased for such work.

17. Office Supplies.  Office paper and pencil supplies, file folders, product order forms, bookkeeping and art supplies, small equipment items such as calculator, stapler, paper punch, groceries for home meetings or entertainment, refreshments; cups, napkins, blackboard and easel or guest book.  Photocopies, faxes.

18. Postage/Freight.  Stamps for all correspondence, newsletters, IRS audits, Christmas cards, bills, and all costs certified, registered and insured mail.  Parcel post shipments, handling charges, costs of product shipments sent and received–including gifts, catalog item mailing costs, and special carriers like UPS, Federal Express, or Airborne.

19. Professional Services.  Payment for services of all kinds including attorneys, accountants, business managers, tax service, etc.

20. Promotion.  Business related meals, recreation, entertainment incurred outside the home on behalf of clients and yourself.

21. Research & Development.  Product testing.  Cost of
expansion into out of state areas.

22. Rent.  Applicable business portion of house rent.  Meeting rooms, or storage facilities.

23. Security.  Locks, garage door openers, tear gas, mace, electronic sensors, alarms — including installation and repair, guard dog care and feeding, and sometimes self defense classes.

24. Taxes & Licenses.  Business portion of real estate taxes, sales, and excise taxes, (Do not include sales tax of inventory purchased if purchases is gross figure), business license.
  
25. Telephone.  ALL telephone costs, including service charges, message units, long distance calls and pay phones.

26. Training.  Costs of materials, equipment and supplies used for training associates.  Costs related to your own training, i.e.; books, tapes, fees.

27. Travel.  Travel costs such as plane fare, taxi and bus fare, rental cars, meals and lodging, tour and guide fees, and any special arrangements (translators).

28. Utilities.  Business portions of natural gas, electric, heating oil, water and sanitation.

29. Wages/Commissions.  Payment for services/labor performed.  Could be independent contractors or could be your children doing office work, unloading boxes, etc.

What I do is set up an envelope for each category and I put the receipts in the envelope so I merely need to total that up and give it to my accountant for tax preparation.  I also have a software program called MYOB so I can run my own business reports off my data to keep me informed of all the financial aspects of my businesses.

Hope this is helpful and that it gets you BACK every penny you PAY to Uncle Sam. 

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2 Responses to “Things to Consider at Tax Time

  • 1
    Tom Butler
    August 10th, 2011 13:04

    Your article is an IRS Auditor’s dream!

    So many things that you mentioned are NOT deductible, and anyone who is misled by the falsehoods here is going to get badly hurt if they get caught.

    For instance, bad debts are not dedctible, since MLM players report on a cash basis. If you never received the cash to begin with, if a sale goes sour, you don’t have a bad debt expense.

    Laundry and cleaning, unless they are for uniforms and equipment unique to your particular industry, are NOT deductible. No one should ever try and deduct a house cleaning as a business expense unless the cleaning is limited to the home office.

    Your home office deduction section is misleading, as only a portion of expenses are deductible, and there are regular and exclusive use tests that need to be met in order to have any deduction at all.

    I could go on and on, but let’s just say that most of your article is just pure misinformation.

    Oh. My authority on this is 30+ years as an Enrolled Agent, a tax professional licensed directly by the IRS.

    The best thing MLMers should do is get a good tax advisor on board…someone who actually knows what they’re talking about.

  • 2
    Cheryl Gonzalez
    April 30th, 2012 14:58

    Tom…You are mistaken on several counts:

    A bad debt for an MLM player could be the purchase of a downline…I’ve had it happen to me…so have others. I WAS audited and it WAS acceptable! My accountant also knew that it was acceptable which is why he took it!

    Many MLM players HAVE created special clothing they ONLY wear for DOING the business. Logo wear IS deductible. Cleaning expense is also fair if you are conducting meetings in the Living Room next to your home office. You may not be deducting the living room, but obviously the cleaning expense IS deductible.

    You certainly don’t give MLM Players much credit for their “common sense”. Most know that you deduct the portion of the square footage used for business. Perhaps you missed that I said “the business portion”.

    Also, MANY of us have listened and even purchased Sandy Botkin’s information, so WE DO know what we’re Talking About!

    You say: My authority is 30+ years as an Enrolled Agent …well, we have been WARNED about you guys who LOVE stating…”you don’t WANT to do that…that’s a Red Flag to the IRS”…so that you cover your own butt as you don’t want to be audited!

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