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IRS Tax Advice for Direct Sellers

IRS Tax Advice for Direct Sellers

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Published by Kevin Thompson
DSA organized a webinar about taxes. The presenter explained specific tax requirements for distributors in the direct selling profession.
DSA organized a webinar about taxes. The presenter explained specific tax requirements for distributors in the direct selling profession.

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Published by: Kevin Thompson on Jul 27, 2011
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09/18/2011

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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.

Today’s 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 (cont’d)
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 advisor’s 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 taxpayer’s 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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