The 3 Most Common MLM Tax Myths
Multi-level marketing companies (MLMs) have exploded over the last decade. Tens of millions of Americans participate in MLMs or "network marketing". There have been countless articles written over both the potential risks and successes of these companies, so we're not going to dig into that debate. The fact of the matter is, like with any industry, some people make money in multi-level marketing, and some people don't.
What we are interested in, however, is the preponderance of tax myths we see bandied about when it comes to network marketing. New MLM participants are often encouraged to take advantage of myriad deductions that will open up when they start their own business, and are promised significant tax savings.
Unfortunately, it's our responsibility to set the record straight on that.
Here are the three (inaccurate) MLM tax beliefs we see most frequently...
If you put an advertisement on your car, all your vehicle expenses are deductible!
If this was true, every person should just file a d.b.a. and slap the name of their "company" on their vehicle, because the tax savings would absolutely be worth it. Unfortunately, it's not true. However, we still talk to many new clients who have heard this.
This myth is so pervasive, in fact, that the IRS put out a special note on it in their 2016 version of Publication 463 (which pertains to transportation deductions). A vehicle wrap is not a free pass for the government to pay for all of your fuel purchases for the year.
However, the cost of the car advertisement itself is fully deductible as a marketing expense. Also, your business mileage (excluding commute) is still deductible.
You can write off all your meals!
Don't go crazy on eating out, thinking you'll get it all back at the end of the year.
For one thing, business meals are limited to those which are not considered "lavish or extravagant". For another, except for under very specific conditions, meals are only 50% deductible. So you can still lose a lot in meal expenses if you aren't careful.
Also, don't try to classify every meal as a "business" meal. Meal deductions are frequently abused, and can show up as a "red flag" to the IRS.
It doesn't matter if you aren't making money...Just write off the loss!
Bad news: The IRS isn't dumb.
There was an actual case that came about due to a couple who were involved with Amway as a hobby. They threw extravagant parties for their friends, ostensibly for the purpose of selling Amway products, and claimed the losses on their taxes each year. That's when the IRS came in with hobby law.
Hobby law specifies the conditions under which your business can be reclassified as a "hobby". There are various criteria involved, but one major aspect is failure to turn a profit year after year. Regardless of the type of business, if your business is facing long-term failure, that is a problem.
If you have questions about how to handle your MLM business's accounting, don't take the word of your friends or upline. Talk to a professional, so you don't run into trouble.
