If you’re in direct sales (which you are, or you probably wouldn’t be reading this right now ????) and hold inventory for resale, I’d guess you’ve had times when you’ve given products away to incentivize bookings, larger party sales or team members to hit a goal.
And if you are anything like my wife, a direct sales consultant herself, I’m guessing you’ve already used some (or a lot ????) of your products for yourself instead of selling them.
Promotional giveaways are a great way to keep your booking calendar full, encourage team member engagement, and increase the order size of your customers. But can you write them off on your taxes and, if so, how do you write them off on your taxes? What value do you write off from your taxes for these items?
Likewise, can you deduct personal use products, and how do you remove them from your inventory?
Below I’ll answer these questions and a few others we receive all the time about what we at Direct Sidekick call inventory adjustments.
Questions we receive all the time include:
- How do I account for product giveaways I use as incentives or promotions?
- Can I deduct products I use as demonstrations at parties or that I use to make how-to videos?
- How do I remove products from inventory that I use for personal use?
- What if I give a discount instead of the product away? Can I deduct my discount given?
- Can I write off old non-sellable products, stolen products, or damaged products?
Accounting for Giveaways:
How do I account for product giveaways I use as incentives or promotions?
You may deduct your costs for product giveaways from your taxes. Essentially, the items are removed from your inventory, and an advertising expense is added in the amount of your costs for the items. Your costs include the cost of the items and any tax and shipping charges you paid for them.
Common reasons for this type of adjustment include:
- Booking incentives: you give your host a free product when they book or host a party with you.
- Team incentives: you give a consultant on your team a free product for achieving a goal that you set with her, such as completing your new team member onboarding training. Or you draw for a free product from every team member that achieves a specific goal.
- Incentives for larger orders: sometimes this works great for increasing party sales. If you have extra free products and need to incentivize larger sales, you can offer your customers something like a “spend over $100 and choose one of these items free.”
- Vendor event fee: This is less common, but we have customers who were asked to give products retailing at a specific dollar amount instead of paying a vendor fee to be a part of a vendor event.
To remove giveaways from your inventory and add an advertising expense using Direct Sidekick, you will navigate to the adjustments page, click new adjustment, and fill out the form using the demo/advertising/giveaway purpose. This adjustment purpose takes care of this transaction in one step. The advertising expense in the amount of your costs is added to your transactions for you.
Accounting for demo products:
Can I deduct products I use as demonstrations at parties and to make how-to videos?
If you do in-home or online parties, vendor events, or anything else where you demonstrate the use of your products, you may deduct them from your taxes as an advertising expense.
Did you use your products to show your party guests how they work so they will order? Then, you can write them off.
Did you use your products to make a promotional or how-to video to drive sales and provide fantastic customer service? You can write them off for that too!
To remove demo products from your inventory and add an advertising expense using Direct Sidekick in one step, you will use the demo/advertising/giveaway purpose like when doing giveaways above.
Accounting for personal use of inventory:
How do I remove products from inventory that I use for personal use?
Personal use of inventory is common as most consultants, including my wife, got into direct sales because she loves and uses the products she sells.
When you withdraw inventory for personal use, you do not receive a deduction on your taxes. Still, it is essential to remove these items correctly for tracking purposes, cost calculations, and to know what you have in stock.
You will use the personal use adjustment to remove personal use items from your inventory using Direct Sidekick. With this adjustment, your items are removed from your inventory without anything being applied to cost of goods sold, any other expenses, or income. Instead, the costs of the items are added as a non-taxable withdrawal for your reference.
Just navigate to the adjustments page under inventory. Start a new adjustment by clicking the “new adjustment” button. The fill out the form and click submit. Simple. Done.
What if I give a discount instead of product away?
If you give your customers a discount on their purchase and not the product, you cannot deduct the discount from your taxes. Offering your discount does lower your tax burden by reducing your taxable business profits since you are recording the discounted revenue and not the entire revenue. But unfortunately, this also means you earned less on the sale.
Think about it this way; if you sell $100 in product for $80 (20% discount), you will record $80 in revenue. But, on the other hand, if you recorded $100 in revenue and deducted a $20 expense for your discount, it would still result in $80 in revenue.
Accounting for shrinkage:
Can I write off old non-sellable products, stolen products, or damaged products?
Have you ever had any of your inventory damaged or stolen? How about product years old that nobody will buy from you?
In these situations, you can deduct your costs for these items and remove them from your inventory. With a shrinkage adjustment, your outdated, stolen, or damaged items are removed from stock, and all your costs for them are added to cost of goods sold (COGS).
Here is a quick video showing how easy it is to do these inventory adjustments using Direct Sidekick.
Wrapping it up:
Making sure you are correctly accounting for these inventory adjustments can save you money and make your life easier.
If the cost of your giveaway and demo products total $500, for example, you can save $120 on your taxes. Who wouldn’t want to save $120?!
Knowing exactly what you have in inventory always makes running your business easier. You’ve got plenty to do, and trying to remember what is in stock vs. what’s you gave away is not something you need to spend your time on.
Direct Sidekick is accounting software made specifically for you, a direct seller. Adjustments like the ones listed above (giveaways, demo product, and personal use of inventory) are quick and easy to account for by selecting your reason, customer, and items in a simple form.
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