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Creating a Tools Culture
Help Your Sales Force Survive Tax Time
Legal Issues Affecting Promotions and Sweepstakes
What Every Online Merchant Needs to Know About Payment Processing
Getting Back on the Growth Track

Help Your Sales Force Survive Tax Time
by Nina Cunningham

One of life's ultimate deadlines is quickly approaching, and independent contractors in the direct selling industry face particular challenges. While this isn't a year for major tax changes, there are a few that may pertain to your distributors. By providing your distributors with tips on the tax situations that affect direct sellers, you can help them minimize their stress as April 15 nears.

Self-employed individuals need to report their business income and expenses separately from other income and expenses. Many direct sellers are considered sole proprietors and must use Schedule C rather than Schedule C-EZ to account for their inventory. Net business profit, which is subject to income and self-employment taxes, is figured on Schedule C and entered on Form 1040. Allowable business expenses are subtracted from the business income and business income is then added to or subtracted from other income on Form 1040 to figure adjusted gross income (AGI).

Did Your Distributors Purchase Equipment for Business Use?

As small business owners, your distributors may reap a tax advantage for purchasing equipment placed in service in 2005. The section 179 deduction will allow independent contractors to expense the cost of the property used for business. Please note that this amount has increased to $105,000 for 2005. If listed property is purchased-i.e., computer and cell phone-it can be expensed if the business use of the property is over 50 percent. If a distributor used listed property less than 50 percent for business use, he or she cannot take the section 179 deduction, but may depreciate the item over five years. (Desks and office furniture may be expensed or depreciated.) Distributors must file Form 4562 to claim a section 179 deduction, and they are required to maintain detailed records to document the business and personal use of listed property.

Using Vehicles for Business

If your distributors purchased a vehicle for business use, they may be able to take a section 179 deduction for it in the year of purchase. The maximum section 179 deduction is $25,000 for SUVs that weigh more than 6,000 pounds but less than 14,000 pounds and that were placed in service for business use after October 22, 2004. This amount must be reduced by the business use percentage.

If a vehicle was placed in service for business in 2005, distributors have the choice of deducting actual expenses or using the standard mileage rate. Actual expenses include depreciation or lease payments, gas and oil, insurance, licenses, registration, repairs and tires. The rising cost of gasoline in 2005 drove up the allowable business mileage deduction. The standard mileage rate is 40.5 cents per mile for all business miles for the cost of operating a car, van, pickup or panel truck from January 1, 2005, through August 31, 2005. The rate from September 1, 2005, through December 31, 2005, is 48.5 cents per business mile. In addition, sole proprietors who placed an electric hybrid car in service in 2005 may also qualify for the clean-fuel vehicle deduction.

Other Deductible Expenses

Direct sellers may be able to deduct product and liability insurance, interest on business loans, legal and professional services, taxes and licenses, freight and hostess gifts. Certain expenses, like business cards and ads placed, can be deducted as advertising expenses. Did your distributors attend your annual conference or pay for company tools or training? Those expenses can also be deducted. Fifty percent of business-related meals and entertainment expenses can also be deducted. Catalogs used in direct selling businesses for one year or less can be deducted in full in the tax year they are paid for. Distributors can deduct a bonus, percentage, or other type of commission paid to their downline; annual subscriptions to publications for direct sellers; the cost of samples they give to their customers; and the cost of promotional items, such as posters. However, distributors may not deduct the cost of samples they use personally. Also, service charges paid on orders for goods-whether a flat charge or based on other criteria-can be deducted.

To Take or Not to Take: A Home Office Deduction

What about the home office deduction? Should distributors be afraid to claim it? Will it send a red flag that will attract closer scrutiny from the IRS? No. There are allowances for those engaged in direct selling who store their product inventory at their homes. Distributors may deduct their inventory storage areas if the space is used regularly for storing inventory and is a "separately identifiable space suitable for storage"; for example, the inventory has its own closet or designated area of a garage. It's advisable for distributors to document their business use areas by taking pictures and making notes on home office or inventory storage areas and by recording the date they started using it and a description of what they are storing. If a home office wasn't established until the middle of the year, it can only be deducted for usage starting at that time until year's end.

A home office must meet IRS requirements in order to qualify for deducting its business use. The home office must be used exclusively and regularly for business. If it doubles as a television rec room, it cannot be deducted. If a distributor conducts managerial and administrative activities for business-such as placing orders, making appointments, and keeping books-in an exclusive area of the home, he or she can qualify to deduct that percentage of the total home as a home office. This would apply even if the core of business activity involves calling on customers or hosting parties outside the home.

To figure a home office deduction, it is essential to keep accurate records of gross income from business, mortgage or rent, real estates taxes, utilities and home repairs. Taxpayers are limited to the amount representing their net business income, but may be able to carry over the balance to the following years.

Quarterly Estimated Payments

Taxpayers who expect to owe $1,000 or more in taxes are required to make quarterly payments. The due dates for quarterly estimated payments are April 15, June 15, September 15 and January 15. If any of these dates falls on a holiday or weekend, the due date is the following business day.

Good Record Keeping Saves Time and Money

Encourage your distributors to apply "exclusive use" to items used in their business operations; they should have a separate checking account and install a second phone line for business. In order to deduct expenses, they must keep a mileage log to chronicle mileage for business or other use, and must record the date and purpose of the excursion.

Other Changes for This Year

Besides the increase in section 179 deduction and business mileage rates, there are a few other changes to keep in mind. The maximum amount of net earnings subject to the social security section of the self-employment tax has increased to $90,000. Also, self-employed taxpayers may be able to take an adjustment for 100 percent of the amount paid for medical and qualified long-term care insurance if the plan is established under their business.

Nina Cunningham is the Marketing/Public Relations Director for Liberty Tax Service, small business specialists with more than 2,000 offices operating in the United States and Canada. Visit Liberty Tax Services at www.libertytax.com.