Direct Sales Tax Deductions: The Complete Guide
What would you say if I told you there is a way for you to earn more money with your direct sales business and you do not have to sell any more products or recruit any more team members to do it?
How does that sound to you?
Well instead of showing you how to earn more, I am going to show you how to keep more of your money and pay less tax on it with these easy to track direct sales tax deductions.
Calculating your taxable business income correctly and not missing potential tax deductions is key to keeping as much of your income as possible.
As I told you in our story my family got into direct sales for the free stuff so taxes were not even in our minds then. Once my wife started being more and more successful and we had to pay a pretty hefty tax bill we knew we had to get serious about writing as much off as we possibly can.
We also knew we had to get serious about tracking everything.
Those early days using a spreadsheet was not super fun but it allowed us to have good records and maximize our deductions. Of course we now use Direct Sidekick to make it all quick and easy to track all of our income and expenses.
Why are direct sales tax deductions so important?
Tax deductions can have a huge impact on any directs sellers bank account!
Here is a quick example. Let’s say you earn $30,000 in total income in a year. Currently the federal self-employment tax rate is 15.3% which would require you to pay $ 4,238.87.
Now what if you were able to deduct more things from your earnings? How would that impact how much you have to pay in taxes?
Let’s say you were able to deduct $5,000 in expenses? Your new tax bill would be $3,532.39.
That could be a savings of $706.48!!!
Would $706.48 make a difference in your life? What would you do with the extra money next year?
Now what if you kept real good records and found $7,500 in tax write-offs next year? This will include your mileage tracking, writing off your home office expenses and all of the other write-offs listed below?
This would lower your taxable business income to $22,500 and lower your tax bill to $3,179.15.
That would save you a total of almost $1,060!!! Now that makes a difference, doesn’t it?
Early on a lot of direct sellers are just like we were. They either don’t know how or what they can write-off on their taxes or don’t think it is worth their time. Too bad, as this is very easy to do and can pay off very well for direct sales representatives.
Here are the direct sales tax deductions:
Income is everything you have earned. Sounds simple enough, right?
But what about product you were “given” by your company for recruiting or having a certain number of parties in a given month?
That’s all considered income to you as well and if you check you 1099 it probably shows up there.
Income includes things like free product earned, incentive trips earned (although you can write that off as we will see later) and products “purchased” with “shopping sprees” or credits earned.
Some direct sales companies give their reps shopping sprees which are credits that can be used to buy company product. This does not become income until it is used to purchase products unless your company includes this on your 1099. My wife’s shopping sprees go away if she doesn’t use them so she does not earn anything until she actually does (of course, she always does).
Of course, any commission you make on your own sales or on your team/downline sales are also added to your income.
If you are just starting out as a direct sales consultant, you can deduct up to $5,000 in business startup costs and $5,000 in organizational costs. Examples include your starter kits, any fees you paid to become a consultant, any costs you incurred researching different companies and training you had to pay for. Organizational costs are costs you paid to setup your business entity (highly recommended).
Cost of Goods Sold
There is a lot of misunderstanding with how to handle inventory for direct sales businesses. Many people are unsure if they are required to track their inventory and when to write off the costs for it.
To be very clear, if you receive and hold any product for resale you must track your inventory and costs for the inventory.
When you sell the inventory you are allowed to write off the costs for those products. You will not write off the costs when you purchase the product, only when you sell it.
Let’s use an example to illustrate this:
On December 1, 2016 I purchase 10 units of my best selling product for $20 each for a total cost of $200. On February 4, 2017 I have a vendor event and sell 5 of the products. When do I write the cost of those products off?
February 2017 and not December 2016.
How is Cost of Goods Sold (GOGS) calculated for direct sellers? This is all using YOUR COSTS for the products NOT the retail cost.
(Beginning Inventory – Personal Use) + Inventory added during the year – Ending Inventory.
For example, let’s say I started the year with $2000 worth of products. I use $200 of product during the year for personal use and ended the year with $800 with of products left.
My cost of goods sold will be ($2000 – $200) + 0 – $800 = $1000 COGS
Of course, many direct sellers join specifically for free products. Unfortunately you cannot deduct the products that are used for personal use as seen above.
Assuming you are keeping inventory you will also write off products given away as samples or incentives to host parties with you in the cost of goods sold section.
Expenses for advertising your business include:
- Fees paid for vendor events
- Posters purchased
- Retail displays
- Products purchased by you to demonstrate at home parties, Facebook parties or other events
- Samples given away to advertise your business or as an incentive to host a party. I know I just said above that this would go under cost of goods sold. The only time you will put this under an advertising expense will be if you do not purchase and track inventory for resale.
- Any sort of online advertising (AdWords, Facebook ads, etc.)
- Branded promotional items
Car and Truck Expense (Mileage)
In direct sales mileage will be one of the larger tax deductions you will have. This, of course assumes you travel to home parties or vendor events. My wife’s mileage deduction was her second largest deduction category last year.
For 2017 the mileage rate is 53.5 cents per mile. What that means is if you drive 40 miles to and from a home party you can write off $21.40.
Well what if you do one party per week, 50 weeks per year?
This could be a write off of $1070!
I highly recommend getting a good mileage tracking app for your phone that tracks every trip AUTOMATICALLY for you. At the very least a pad of paper always in your car to track your mileage will suffice.
Remember, you can write off your miles to the bank to deposit your party checks, the post office to send thank you letters or hostess packs or when you drive to purchase office supplies, anything related to your direct sales business.
Don’t miss mileage deductions!
Once you have a good tracking app it is very easy to do and can be a large write off for you.
Contractors may be someone that you paid to setup a website for you. It is also possible to have an assistant as a contractor but there are a lot of rules to make sure they are not actually your employee. This includes not setting there hours among other things.
If they are working on their own time and not considered an employee you can write off what you pay them in this category. Be careful not to set specific hours when the assistant must work. This might be something you check with your accountant on.
If you pay a contractor (an individual or LLC) more than $600 in any given year you must provide them with a 1099-MISC by January 31st.
Legal and Professional Fees
This includes things like attorney fees, accounting fees and other professionals you work with.
Office Expenses are the expenses of running an office. Think monthly costs for apps such as Direct Sidekick.
If you pay a monthly fee to your direct sales company for an office suite or website this is an office expense.
If you have your own website, the hosting and domain name is also an expense.
Supplies are the things you purchase for your office. Think tangible, traditions office supplies here.
- File folders
- Printer paper
- Thank you cards
- Printer ink or printing services
Do you have to pay state taxes on your business? Well, great news (read sarcasm here)! You can write it off. Here are taxes that be written off:
- Income taxes paid at the state level.
- Employment taxes. If you have an employee you can write the taxes you paid for him or her out of your pocket such as social security, Medicare and for unemployment.
- Self-employment taxes. I deducted this from the examples at the beginning of this article when calculating how much you can save by tracking tax deductions. As you are self-employed and paying self-employment taxes the IRS allows you to deduct 50% of the taxes paid.
Travel write offs can be a bit tricky. You must keep great records and make sure you are only writing off business travel. You may deduct the following expenses while traveling for your business:
- Your transportation such as airplane tickets, bussing, taxi and your car.
- Baggage and shipping including if you have to ship supplies or inventory to the location.
- Car expenses, whether rental or standard mileage. Also tolls and parking fees.
- Costs for you lodging (hotel, condo, etc.).
- Your meals. You may write of your 50% of you meals during your trip.
- Dry cleaning and laundry expenses.
So what to do if you are combining business travel with a family vacation?
If this is the case you can only deduct things that are directly related to you business. You may not deduct expenses for your full family if you are the only one working.
For example, if my family travels with my wife for her business we can only write off the cost of a room that she would need not the full cost we incur. If a single room costs $125 per night but we have to upgrade for the full family to a room costing $200. We can only write off the $125.
Kiekover, Scholma & Shumaker, PC has an excellent article on combining vacation and business travel to maximize your deductions. One key point is to have at least one business appointment scheduled BEFORE leaving to your destination.
We were blessed with an all expense paid trip to Hawaii last year. We added a few extra days on top of that. The cost from the company showed up on the 1099 as income and we were allowed to write that off. Of course, we were not allowed to deduct the extra personal days we added.
Business Meals (updated for 2018)
Your direct selling business is not done solely in your home office is it?
How many times have you met with a potential recruit for coffee or lunch?
You can definitely write this off. As with all expenses keep your receipt and jot a note on it to remember who you met with and what you discussed.
To write this off you must have a business related discussion during the meal. If you are friends with the recruit getting together for a meal on Friday night and never talk about the business you cannot write it off.
How much can you deduct?
When it comes to meals you can deduct 50% of the total amount you paid. For example, let’s say you spend $50 on a meal with a potential new recruit. You can deduct $25 for that meal on your taxes. Still record the full amount and keep your receipt. You cannot deduct the cost full cost if you split the bill, only the amount you paid.
Similar to contract expenses above you can deduct all expenses due to having an employee. If you hire an employee you will have to handle payroll and employee taxes.
Do you have an assistant working with you? Some direct sales consultants do. They have someone help with setting up hostess packs, write thank you cards and so on.
Sometimes expenses don’t fit neatly into the other categories. That’s why the IRS includes an “Other Expense” category. Some things that fall under other include:
- Education expenses
- Subscriptions to professional publications
- Cell phones if used exclusively for work
The home office write-off is one of the wonderful perks of direct sales (as well as writing off mileage, of course). As long as you are using the office exclusively for your office you can write it off.
With direct selling you can also write off a home office used for storage of product and supplies even if it is not used exclusively for your business!
This is such a big deal that I have devoted another blog post solely to this topic.
Read the full home office deductions article.
Basically with the home office deduction you figure the percentage of you home that is used for your office. Once you have that you are able to deduct that much of your expenses.
For example, let’s say your home office is 10% of my house. You would then be able to deduct 10% of your mortgage or rent, utilities, property taxes, even water and waste disposal.
Wrapping it up
Tracking these direct sales tax deductions is simple to do with the right tools. Direct Sidekick offers an all-in-one web-based (mobile app coming soon!) for tracking your tax deductions.
We make this SIMPLE by automatically calculating your taxable business income in IRS Schedule C Worksheet form when you enter your transactions.
We do the hard work so you can spend your time on more important things!!!