Many multi-level marketing businesses are able to write off expenses related to their promotional activities as business expenses, which can decrease their tax liability. But what are the top MLM tax write-offs?
Is MLM businesses tax deductible? If so, what are the terms of that write-off? Network marketing can be a legitimate business, allowing a company to utilize tax deductions to its advantage just as any other legitimate business. Throughout this article, we are going to explain to you the top 5 tax write-offs that you may want to take advantage of in your MLM company.
Is it true that MLM businesses can write off their taxes?
MLMs are legal under federal law, according to the United States Department of Justice. Consequently, they are entitled to the same deductions as other businesses when it comes to taxes. The fact that you are able to write off the expenses from your tax return makes it more financially advantageous for you.
However, there are many misconceptions about what is actually deductible, versus what most new MLM reps were told can be considered a tax write-off. While there are ways to use tax write-offs correctly, it's important all the rules are followed.
CPAs and accountants that are well versed with independent contractors and those in network marketing, will be able to advise you on your tax filings and qualifications.
How Do I Qualify for Deductions in my MLM Business?
Independent distributors belong to the same category as self-employed workers. They must then file a Schedule SE
along with Form 1040
. Schedule SE calculates your self-employment tax, whereas Form 1040 records your personal tax information.
Tax Write-Offs for MLM Businesses: What Deductions Are Available?
MLM companies are entitled to claim tax deductions for their expenses. The expenses incurred in running an MLM business can be deducted by both the organizers as well as the independent distributors. The top 5 write-off categories are:
- Vehicle Expenses
- Office Equipment
- A Home Office
- Contract Labor
If your vehicle is used to conduct your MLM business, your mileage may qualify for a tax deduction. There are two ways to deduct car expenses: (1) by using mileage allowances, and (2) by utilizing receipts and actual costs. The majority of independent contractors use method one from above to deduct their car expenses from their taxes, the standard mileage rate. It is estimated that the IRS's standard mileage rate for operating a vehicle for business purposes in 2017 is 53.5 cents per mile. If this method is applied, you will not be able to deduct your actual car expenses, including depreciation, maintenance and repairs, gas, oil, insurance, and registration fees.
To keep track of the actual mileage used for business versus personal purposes, a mileage log is recommended if you use your car for both personal and business purposes. It is best to consult a tax professional in order to maximize your vehicle expense tax deductions.
A taxpayer can deduct 50% of meal expenses when traveling on business (for example, for a conference). The General Services Administration (GSA) sets standard per diem rates based on travel location to simplify the process. Tracking meals expenses is simple and easy with the Per Diem method since you do not have to keep receipts!
The cost of computers, phones, cameras, laptops, and other office equipment can be depreciated for tax purposes when used by your business. Depreciation is usually accumulated over several years. If you want to take advantage of office equipment tax deductions, consult your tax professional.
Small businesses and the self-employed can claim a deduction for the use of part of their home as an office if they meet the following two requirements:
- Your home office space must be used exclusively for business purposes on a regular basis.
- You must conduct your business from your home office, which should be your primary location. If your home office is used regularly and substantially, you can still conduct business outside of your home.
Deductions for home offices are generally based on the amount of space devoted to business. For example, if a spare room that makes up 10% of your home is designated as your office, you will be able to deduct 10% of the costs related to that room (utilities, gas, water, sewer, etc.).
A room in your house you use to store inventory is eligible for claiming as a home office expense. In contrast, if you organize a party to sell products in your living room you cannot claim a deduction since the room is also personal.
Many times, network marketing involves the hiring of independent contractors to run the business. An example of this may be a photographer who takes photographs for your website or a freelance writer who posts to your blog. There are special requirements for claiming contract labor as a tax deduction.
A 1099-MISC must be completed and submitted by all MLM professionals who hire outside contract work. If you pay an independent contractor more than $600 during the year, you must submit a 1099-MISC form. You should take note that your employees do not fall into this category.
Samples and demonstration products are a common tax pitfall faced by direct sellers. The costs of keeping some of the company's products on hand for potential customers may be deducted.
To be considered as inventory, you should count demonstration kits or products if they are expected to be sold rather than utilized up to their value.
In both cases, if the products were purchased for personal use, the cost was not deductible. Whether or not you demo the product(s) on a frequent basis is not important.