One of the biggest benefits of having a home-based business is the long list of tax deductible business expenses you can claim. With an MLM business, the list of tax deductions is enormous and includes everything from mileage and internet access fees to your children’s allowance and a round of golf (really!).
Now some of these deductions might seem like tax loopholes, but they’re not. They are legitimate tax deductions allowed by the IRS as long as you follow certain rules. One of the biggest rules is this:
You must have the intent to produce a profit in your MLM business.
Does this mean you have to produce a profit? No. But you do have to have some means of proving to the IRS that you intend to produce a profit. The IRS uses certain criteria to determine if you have the intent to produce a profit in your MLM business. I outline and define four of those criteria in this article. Double check your business against these criteria and make sure you “pass,” else you might lose the right to take all those tax deductions.
Four IRS Criteria for “Intent to Produce a Profit”
1. Time and Effort
Consistency is the name of the game here. If you put consistent effort into your MLM business on a regular basis, your business passes this criteria. One taxpayer was recently called into tax court to defend the effort she put into her business. The court ruled in her favor once she showed that she “worked her business 45 minutes a day, 4 to 5 days a week.” That’s not a lot of time, but the taxpayer put regular and consistent effort into her business. The consistency of your effort turns out to be more important than the total amount of time you put into your business. If you need to give your work habits a laxative to get more regular, then do it!
2. Losses
If your business suffers losses, meaning you didn’t actually turn a profit, that’s all right. Two criteria apply to losses. As long as the losses were beyond your control or they occurred during the start-up phase of the business, you are in the clear. For instance, if you breed and raise horses to sell, and the horse market crashes (like it just did), then your horse business will probably operate at a loss because of circumstances beyond your control. It’s the “Not my fault, dude!” clause. Just be prepared to show documentation that proves the overall crash in the market.
3. Expertise
You or the advisors to your business need to have the expertise to make your business successful. In other words, you can be a total idiot as long as you are getting advice or training from people who are demonstrably experts. In MLM, one of the best ways to pass this test is to attend company or upline trainings, and then document your attendance. Sometimes it’s the company you keep that matters, in this case, your upline sponsors and expert trainers from your parent company.
4. Dependency on Income
Do you need the income from your business to pay the bills? If you depend on the income from your MLM business, then chances are that you will do the best you can to make the business profitable. This is a biggie. Unless the IRS catches you trying to shoot yourself in the foot, it will be pretty hard for them call your business a tax loophole if you use the income from the business to buy groceries.
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Photo credit: IF: Tax Man
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