One of the big benefits of having a business is getting a bunch of write-offs that you just can’t get as an employee. It’s a little ironic because when I’m talking to an eBay Seller, I have to convince them they really have a business because they don’t understand the business write-offs. But with a MLM’er, I’m having to check to make sure that they REALLY are operating like a business. And we now have one more new ruling from the Tax Court on why that is so critical.
In a recent Tax Court case, a part-time MLM’er was found to not have a legitimate business. Here are some of the particulars of the case:
- Robert was a full-time engineer, making $85,000 per year.
- He signed on as a distributor for Reliv International, a direct marketing company.
- He had been a long-time user of the product and got a substantial discount by becoming a distributor.
- The only sales he ever made were to his family and himself.
- He only sponsored two people – his son and his brother.
- He left cards on windshields, promising the “opportunity of a lifetime” but never received a response.
- He never wrote a business plan.
- He didn’t have a record-keeping system.
- He never calculated his break-even ratio.
All these facts added up to the decision that the Tax Court reached. Robert had entered into the distributorship solely to get a better deal on the products. He didn’t operate like a real business and didn’t demonstrate a profit motive. And, he lost the business deductions.
What could he have done differently? Of course, if he’d had a profit, all the rest would be moot. But, with a loss he needed to be especially careful that he had a solid marketing plan, good accounting system and a written business plan.