Direct Sellers

Small Business/Self-Employed Division July 27, 2011

The information contained in this presentation is current as of the date it was presented. It should not be considered official guidance.

Todays presentation will cover:

Who is a direct seller Basic tax information
Business income Business expenses
Travel Transportation Meals and entertainment

Is this an activity engaged in for profit

Who is a Direct Seller

Sells in the home or other place
not a permanent retail establishment

Sells on a deposit or commission basis or to other persons Delivers and/or distributes newspapers or shopping guide

Direct Sellers
Compensation from sales not hours worked Written contract Not treated as employees for federal tax purposes

Basic Tax Information

Most are sole proprietors Report income on
Form 1040 Sch. C Form 1040 Sch. C-EZ

Basic Tax Information

Information Returns
W-2s 1099-MISC
Bonuses Commissions Direct sales of consumer products

Information Returns Example

Earned $25,000 in commission income from ABC Co Paid each consultant $2,500 for their portion of commission income Issue a 1099-MISC of $2,500 to each consultant

Business Income
All income is includible unless excluded by law Commissions, bonuses and percentages Prizes, awards and gifts Value of goods or services received Value of use of property

Example 1
Customers pay the retail price for goods Company sends merchandise to fill orders Company pays a commission Acting as a sales agent for company

Example 2
Customers pay deposit with orders Send the orders to company Keep deposits Customers pay company remainder of retail price

Example 3
Customers pay you for goods Order the goods from company Send the money directly to company Buying products wholesale and selling them retail

Example 4
Goods held in inventory Order and pay for the goods before sales

Example 5
Recruit other direct sellers Commissions and or bonuses shared with direct sellers Keep portion of commissions

Gross Profit
Gross receipts minus cost of goods sold = gross profit

Cost of Goods Sold

Beginning inventory + Purchases - Returns and allowances - Cost of goods withdrawn for personal use = Cost of items available for sale - Ending inventory = Cost of goods sold

Capital Expenses
Going into business Business assets Improvements to business assts Demonstrators

Demonstrators
Can be either
Inventory Capital expense Business expense Personal expense

Demonstrators - Example
Customers purchase from catalog One item from catalog kept to demonstrate Sells discontinued items Keeps for personal use

Demonstrators Example
Uses products in home to show customers Personal use

Demonstrators - Example
Uses copies of products to show potential customers Keeps products for a period of time Sells at a discount

Business Expenses
Ordinary and necessary Commonly accepted in the business Helpful and appropriate Keep business expenses separate from personal expenses Deduct only business part Meet recordkeeping requirements

Travel Expense
Ordinary and necessary Overnight travel Business Both business and personal Substantiation requirements

Transportation Expense
Ordinary and necessary Business trips Does not include commuting Substantiation recordkeeping requirements

Example
Works full time Direct sales part time to co-workers Delivers items at work

Entertainment
Ordinary and necessary Tests Substantiation requirements

Is this an activity engaged in for profit?

Is the primary purpose of the activity for profit? 9 Factors to determine if the activity is engaged in for profit

Factors used to determine if profit motive exists

1. 2. 3. 4. Manner Expertise Time and effort expended Expectation assets may appreciate in value

Factors used to determine if profit motive exists (contd)

5. Success in other similar or dissimilar activities 6. History of income or loss 7. Amount of occasional profits, if any Financial status 8. Elements of personal pleasure or recreation

Factor 1
Business-like manner Separate checking account Books and records Business plan

Factor 2
Expertise Direct sellers background and education Advisors
Was advisors advice followed Was advisor successful in their own business endeavors

Factor 3
Time and effort expended carrying on the activity Time spent Personal effort Other jobs

Factor 4
Expectation assets may appreciate in value Evidence Intent

Factor 5
Success carrying on similar or dissimilar activities Successful activities Unsuccessful activities

Factor 6
The taxpayers history of income or loss with respect to the activity Has a profit ever been generated?

Factor 7
The amount of occasional profits, if any, earned

Factor 8
Financial status

Factor 9
Elements of personal pleasure or recreation
Personal vs. profit motive

Summation of Factors
All 9 factors must be taken into consideration in determining if profit motive exists

Additional Resources IRS Publications

Pub 334, Tax Guide for Small Businesses Pub 463, Travel, Entertainment, Gift and Car Expenses Pub 535, Business Expenses Pub 583, Starting a Business and Keeping Records Pub 587, Business Use of Your Home Pub. 946, How to Depreciate Property

Additional Resources Audit Technique Guides

Retail Industry, Chapter 3, Examination Techniques for Specific Industries IRC Section 183 Activities Not Engaged in For Profit

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