Taxpayers working for an MLM company may need to know about available tax deductions, to save not only hard-earned money but also time and energy.
In this article:
- MLM Business and Operating Expenses
- Personal Expenses in Marketing for the MLM Companies
- Transportation Costs
- Home Office Space
- Office Supplies
- Dining Out Expenses
- Entertainment Costs for the MLM
- Health Insurance Premiums
- Telephone and Communication Expenses
9 MLM Tax Deductions for Taxpayers
1. MLM Business and Operating Expenses
Like any other business, operating as part of an MLM company has its own expenses and tax deductions allowed under the Tax Code. While the main bulk of business expenses considered as tax deductible for MLM operations lies on the capital for procurement of goods, other expenses can also become tax deductible.
For example, most MLM companies have a membership fee, which is either paid annually or once for life. If the company has legal standing and the taxpayer has all documents needed, the IRS can consider membership fees as tax deductible to further lower your tax bracket.
Sometimes, someone has to organize an event or attend a conference for publicity. As long as renting the space and payment for entry to the event relates only to the business function, no personal entertainment present whatsoever, then taxpayers can write these expenses off.
Another possible tax deduction that can help lower your income bracket drastically is the purchase of product samples. As long as the amount and prices are reasonable, the IRS can consider such items as valid for lowering taxes owed.
Interestingly, the IRS considers such items that are for business purposes as assets that the IRS cannot seize. However, do note that audits are generally stricter, so make sure that your products do not have the possibility of being confused as for personal use.
2. Personal Expenses in Marketing for the MLM Companies
Advertising and marketing expenses are valid business expenses to lower your income bracket. In fact, these kinds of expenses are actually the first item in the Schedule C expenses list that taxpayers send to the IRS.
These expenses cover magazine and newspaper prints as well as brochures and flyers. Other traditional media costs also cover radio and television ads.
The IRS has also accepted internet advertisement as possible business expenses.
Do note that the digital advertising costs must have receipts. Posting on Facebook is free and is not a business expense, but buying sponsored ads on Facebook has digital receipts.
Another issue to note is that of social media influencers and blogs. Because payment for these service providers is usually personal transactions, receipts are a bit more difficult to prove.
Some influencers prefer bank or wire transfers, while others prefer PayPal or Venmo, which is great as they leave records. However, local influencers may prefer getting paid in person, which may not have records.
As long as the taxpayer has proper documentation for advertising costs, the IRS can consider these expenses for lowering the tax income bracket.
3. Transportation Costs
Most MLM marketers have to drive miles to reach more people and close more sales. Fuel costs can raise business expenses, so the IRS allows the deduction of transportation costs.
Marketers will need to calculate the transportation costs themselves. According to the IRS, the transportation cost is total mileage covered multiplied by the fuel cost on the day of travel.
The taxpayer can choose between the current fuel price cost or the standard mileage rate by the IRS. According to the IRS 2018 Standard Mileage Schedule, the rate is 54.5 cents per mile traveled for business purposes.
Most of the time, the standard rate is higher than the current rate, so taxpayers take advantage of this.
Tolls and parking fees are also possible business expense deductions. Vehicle depreciation is a substitute tax deduction for tolls and parking fees.
Do note that if investors choose toll and parking fees as a tax deductible, he or she cannot choose vehicle depreciation and vice versa.
The IRS considers a specific travel session as valid for business purposes if the taxpayer can show proof that such travel is for business.
4. Home Office Space
Knowing home expenses that one can write off when they work from home can help minimize tax brackets.
Having your home office space as part of your business can lower your tax bracket. Constructing a home office usually carries a big financial cost, and can help decrease the taxable amount.
The IRS requires that the room or space is solely used for business purposes, so having a kitchen or a living room where you do your networking is not considered as valid. A garage or a separate room, if used for business purposes, has a higher chance of receiving approval by the IRS.
Do note that the expenses for your home office include not only construction but also electricity and utility costs. However, the utility costs computation is based on the proportion of the home office to the total area.
For example, if the home office is 300 square feet and the home area is 1500 square feet, then only 20% of the electricity bill is reportable for business purposes.
5. Office Supplies
Sometimes, taxpayers confuse office supplies as an advertisement expense, especially if taxpayers use office supplies for brochures or personalized banners and marketing materials.
Remember, if the IRS finds something not just wrong but also possibly suspicious, then the taxpayer will receive a collection notice. The IRS sends a bill and a corrected file which they deem is the right amount, so documenting and categorizing your expenses are necessary.
An item is considered an office supply if one uses it in the home office for business purposes. On the other hand, an item is considered marketing material if the one uses it for marketing products and services.
Even if the item came from the home office, the IRS considers the item as a marketing tool if used for advertising.
Common examples of office supplies for tax purposes are pens, paper, folders, clips, and staplers. Other interesting possible reportable expenses include computer software and programs.
6. Dining Out Expenses
Sometimes, eating out with the prospective clients is necessary to foster both trust and goodwill. Some MLM networkers also need to stay on the road for extended periods of time, so eating out is inevitable.
Interestingly enough, meals celebrating closed deals is also a possible deduction. However, make sure that documentation and other proof are available when the need to review theses costs arises.
These expenses are deductible. However, the IRs only allows 50% of the bill as a business expense.
Make sure that receipts and proof are available just in case an audit happens.
7. Entertainment Costs for the MLM
Under the new tax law of 2018, most entertainment costs that were previously deductible are no longer valid for business expenses.
However, if an outing is with employees, such expenses are valid. The important thing to note is the IRS may require proof, so make sure that 100% of attendees are employees or downlines for MLM companies.
Downline Definition: In MLM, a downline is a member who works under a person or overseer, called an upline, and sells the products or services of the company.
8. Health Insurance Premiums
Health insurance can cost quite a bit, so having insurance premiums as deductible can really help lower tax amounts.
Taxpayers can actually deduct all health insurance premiums for business expenses. Also, the IRS allows taxpayers to deduct health insurance premiums for spouses and children.
The IRS does have few limitations. Taxpayers can only deduct the premiums if they or the family member are not getting health insurance premiums from the other spouse.
Lastly, the business expenses for premiums cannot go higher than the business revenue.
9. Telephone and Communication Expenses
Communication via phone is still quite popular even with the instant massaging apps available. Taxpayers can deduct phone bills for business expenses.
The IRS allows 100% of the phone bill as a valid business expense.
However, it is advisable to have a separate line for business and for personal use since proving that each call is for business purposes can be quite challenging. Having a separate phone line for business can really help keep track of all your business calls.
The IRS can also consider mail correspondence as communication expense, as well as online communications that have subscription fees. However, these communication methods may need evidence proving that they are purely for business purposes.
Operating an MLM business can help the finances of everyone, however, these operations also carry risks.
As long as taxpayers pay their taxes promptly and properly, the IRS will help make the whole tax process easy and convenient. For a speedy tax filing, it is always advisable to have proof of expenses copied and stored.
The more that taxpayers know about possible deductions, the bigger the chances of lowering your taxes. However, knowledge can only do so much, so if taxpayers got stuck with a difficult tax issue, it is best to get a free tax relief consultation.
Do you have other questions about MLM tax deductions? What other business tax deductibles do you list down in your tax filing? Let us discuss in the comments section below.