Tax Deductions for Multi-Level Marketing
Multilevel marketing companies provide distribution services through decentralized networks, in which independent distributors can recruit and develop their own teams of downline distributors. As a distributor with a multilevel marketing company, you operate your own business and are responsible for your own costs. Like any other business owner, you’re entitled to deduct any “ordinary and necessary” costs of doing business on your tax return.
When it comes time to do taxes, if you earned income as a multilevel marketer, you earned business income. That means you need to complete a Schedule C to go along with your tax return, so your taxes will be more complex. You determine your net income from business activities on the Schedule C, which means that you get to deduct business expenses from your revenue, the amount listed on the Form 1099, before reporting it as income.
You’re probably driving significant amounts as a marketer and distributor. Whether you’re heading across town to deliver products, venturing to the next county to recruit new distributors or driving a few states over to a conference, track your miles and expenses. You are allowed to deduct expenses related to your vehicle either at the standard rate, set annually, or by actual incurred expenses. Typically, the standard rate provides the larger deduction; however, keeping records of your actual expenses ensures you can take whichever deduction proves to be larger.
You might operate out of the trunk of your car, or you might have an office and a dedicated advertising budget. Operating costs such as the cost of inventory, advertising costs, educational expenses and dedicated business phone lines are all deductible on the Schedule C. Certain costs, such as use of an office in your home or meals and entertaining costs, are subject to additional rules and scrutiny.
Claiming tax deductions for your home office allows you to deduct expenses related to your home you otherwise wouldn’t be able to deduct. You must have an entire room dedicated solely for your business, not just a space at the dining room table. You may deduct costs relating to just your office, such as painting your office, as well as a proportion of costs shared by the whole house, such as Internet or depreciation. The proportion of shared costs you’re allowed to deduct is the proportion of your house set aside solely for business use. For example, if you have a 100 square-foot office in an 800 square-foot house, then 12.5 percent of your household expenses are attributable to your business use.
When you’re on the road often, you probably will eat out. Whether you’re eating alone, taking a group of recruits to lunch or entertaining potential clients, those are deductible business expenses. Unlike other business expenses, expenses for meals and entertainment have limits. You can deduct only 50 percent of business meals and entertainment. Keep very exacting records, too, because unsubstantiated meals and entertainment expenses are disallowed if you get audited.
If you are earnestly attempting to make money with a multilevel marketing company but are still investing in your business, it’s all right to post a loss on your Schedule C. Your business loss reduces your adjusted gross income, decreasing your overall tax liability. However, using a business loss to reduce your AGI can be a red flag for a tax audit. If you’re audited, you must be able to demonstrate that your multilevel marketing activity is a bona fide business and not just a hobby that provides a discount. Keep your personal and multilevel marketing business finances separate. Have a written plan documenting how you intend to get a return on your business. Track your activity and time committed to the business.