IRS Tax Advice for Direct Sellers
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Transcript of IRS Tax Advice for Direct Sellers
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Beginning inventory+ Purchases- Returns and allowances- Cost of goods withdrawn for personal use= Cost of items available for sale- Ending inventory= Cost of goods sold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. Manner 2. Expertise3. Time and effort expended4. 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 loss7. 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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