Home Office Red Flag

Today TaxMama hears from John from Georgia, who is wary. “I run my network marketing business from home, but heard that taking an office in home deduction is a red flag to IRS. Help!”

Well, John, you’re right to be concerned about the red flag.

Taking an office in home deduction will increase your chances for audit. It will increase it even more if your business shows a loss. When you really are running a business, with a profit motive, don’t worry. Take the deductions, it will survive audit.

But, if you’re just dabbling with some MLM, multi-level marketing thing, just to make it look like you’re running a home business – back off! IRS is wise to that. Don’t even think of playing the office in home card.

Look, IRS doesn’t have a problem with MLM. Lots of legitimate businesses are based on income from downlines, Avon, Mary Kay, Team BeachBody, Amway, and Herbalife.

What IRS objects to is those people who don’t take these businesses seriously. IRS objects to people whose sales are mostly the result of buying the products for their own use. Those aren’t really sales – and you don’t really get to deduct the cost of the products for ‘testing’ purposes if you’re not actually selling products.

So, you want to protect your office in home deduction? Here’s what you do.

1)       Draw up a rough sketch of your floor plan, showing the total square footage of the home.

2)       Identify the areas you use for business. Remember to include storage space for products or supplies. If you use garage space, or parking area storage, include that, too.  You’ll be taking a deduction for the business percentage of the home. 

3)       Keep a copy of this information in each year’s tax file.

4)       Run your business with a profit motive. Outline what steps you’re taking to generate income, and how long it will take to turn a profit. Your organization gives you a lot of information about how to sell. Go ahead and print out your organization’s step-by-step guidelines, putting your target dates on each step.

5)       If things go wrong, or personal emergencies prevent you from following through, temporarily, document that for your file. IRS understands things don’t always go as planned.

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

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