Direct Sellers Personal Use of Product

Today TaxMama® hears from Bill in the Tax Quips Forum who raises a good question. “I have a lot of independent distributors asking about deducting their autoship of product for personal use. They say that their tax person said you can claim the deduction because you have to “be a product of the product” or because that is one of the ways to be commission qualified. I say no, because it is for personal use. I know on cost of goods sold that you pull out ‘items for personal use”; but haven’t yet found anyplace that says that you can’t use it anyplace else as a deduction. Does anyone have a ready reference on this?”

Dear Bill,

You’re absolutely right.

And IRS does pursue chains of multi-level marketing organization members once they find one of their ilk taking fraudulent deductions. They also have a tendency to audit all the tax returns prepared by preparers who engage in these practices – and to prosecute – and to publicize those prosecutions.

So you’re making a good call here. Please point your distributors to IRS’s Audit Guide for Direct Sellers. If you look at the INVENTORY section of the audit guide, you will see IRS’s specific statement about personal use. Point that out to them.

 And to further bolster your point, here are the tax issues raised in such audits:

  • Starter Kit – How does the direct seller account for the cost of the kit and related items?
  • Discontinued Display Items – When products become obsolete (discontinued) where do they go?  Are they sold at a discount, converted to personal use, or given away as a gift?
  • Other Income – For items taken out of the kit and/or inventory and disposed of by sale, where income is reported, and was fair market value or adjusted basis used to calculate income?  If converted to personal use or given away as a gift, how is this reported on the books?

 They are fortunate to have you looking out for them.

And remember, you can find answers to all kinds of questions about direct sellers, MLM, network marketing and other tax issues, free. Where? Where else? At www.TaxMama.com.

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