The Federal Trade Commission has some useful guidelines for determining what are "legitimate" multi-level marketing (MLM) companies from pyramid schemes.

Even the legal MLM operations frequently turn out to be a bad deal for people because they don't care about how many distributors get signed up in a given area and because so many people in the chain make a commission on each sale that the product winds up being very expensive. That's one reason why these companies frequently offer products like a "heath and wellness" drink that can't be directly compared to mass market, branded products distributed through normal retail channels.

One word of caution about all of those tempting tax deductions - unless you're making a reasonable profit, the IRS can (and often does in an audit) decide that it's a hobby, not a business and disallow the deductions.

The FTC link has some very helpful tips on evaluating an MLM plan.

Here is a link that might be useful: FTC

By the way, Lisa says that if you pay your kids a salary and spend the money on braces, school supplies, etc. that those items become "free to you". Well, no. You're still paying for them. You might be able to claim that wages as a business expense and offset the income (if any) from your MLM. But it would be a deduction, not a tax credit.

Never take tax advice from someone trying to sell you something.

You need to be able to justify the amount paid to the kid as reasonable, or the IRS'll disallow it, I'm sure.

The Canada Revenue Agency sure will.

Plus, they may be inclined to audit you.

Have a great week.

ole joyful

Well thank you Richard, for clarifying that point. As I said I dont have childern and have not used that deduction. I have however, used the others. I am not the slighest bit worried about an audit. I have a solid written business plan, a very exact tax file, and run a very successful business. I researched this industry and particular company for 3 months before I made a decision on what I wanted to do,including researching the FTC information and the BBB. I am in no way trying to sell anything here, I am very particular about who I invite into my business. I came in here with only positive thoughts and to share ideas and gain knowledge. I am sure there are some great thinkers in here. No way am I saying everybody can be successful in the MLM industry. There ARE a lot of rip offs out there, but for business savy people who take the time to identify a good company and product, there is money to be made, whatever the company or product may be!
Nice to meet you, Richard.:)
Lisa

Sorry, forgot to add one thing, I dont work with people in one area, I am in Michigan where the economy is terrible, I market to people all over the US and in 14 other countries. Your statement about not caring about how many people are doing bisiness in any one area may be true for some companies, but for good ones it is not a problem. Thanks for pointing that out!
Lisa

"I have a home based business and have been able to add sq. footage to my house for an office, tax free (big enough for a bedroom). I have added value to my house if I ever want to sell it."

Just to clarify this statement ... US tax laws do not allow a one-time deduction for the total cost to build the additional square footage. You may claim a home office deduction which allows you to specify the percentage of square footage used for business and depreciate this % of your total home cost over a number of years (I thinking it's around 30 years). To simplify ... instead of deducting your $30,000 cost in one year, you will be able to deduct $1000 per year for the next 30 years if you continue to be in business and use this space for business. And to take the home office deduction, you must have a profit that exceeds the amount of the home office deduction.

Be aware too that claiming the home office deduction and depreciation means when you sell your home you must recapture the depreciation usually resulting in a taxable gain. Whereas, most people selling their homes have a tax-free gain.

Complicated? You bet. This is simplified version of the taxes and as we all know taxes are not simple so before you take a home office deduction talk with your tax preparer to see if it's the right decision for you. And beware that claiming the home office deduction is red flag for audit.

"I happen to have a product that is a health and wellness product that I drink myself, I do not retail it and need to have a monthly product order to qualify for comission so I can also deduct my own personal product use."

Just to clarify this statement ... You can NOT claim a deduction for the cost of product that you use personally. Makes no difference to the IRS that the company requires you to order a monthly minimum to qualify for commission. You must take the total cost of inventory you purchased and subtract out the cost of inventory that you used personally and the resulting amount is the amount of inventory purchases you may claim.

"Never take tax advice from someone trying to sell you something."

Very good advice! Every year I see people that believe the tax advice from these companies and come tax time they learn that much of the information they were given on what is deductible is not true. The IRS is partial to auditing tax returns for taxpayers claiming expenses for MLM. If they see a pattern of incorrect deductions they have in the past "targeted" that MLM auditing all people in that MLM. Many of the deductions were disallowed and the taxpayers then owed back taxes, interest, and penalties. In some cases the IRS has deemed it a hobby meaning the taxpayer must claim the income but only can only deduct expenses IF they itemized AND only up to the amount of income.

I have over many years seen various MLM's come and go. Heard some outlandish tax advice that they have given. Talked with taxpayers audited who ended-up owing back taxes, penalties, and interest (as usually a year or two passes before IRS notifies taxpayer about an audit).

I hope this information will encourage anyone considering MLM to get tax advice from their tax preparer (or CPA) and not from the company trying to sell them.

Thank you for your input liketolearn, I do have a tax accountant who is very versed in MLM tax laws, not with the company I am involved with. We do differ on our understanding of these laws. There is a huge company (a household name)that is based not far from here. They have built a HUGE empire, hotels, sports complexes, etc. in this industry. One of the people involved in this company is running for public office. I will trust the tax laws that have worked for them.
In reading more threads from this forum I see it is not at all what I expected. I was looking for an upbeat friendly place to share ideas and learn. I will look elsewhere.
Thank you for your comments.
lisa

Gee Lisa, you come here and post all of this incorrect or misleading information about the tax benefits of running an MLM business out of your home, and then when people call you on it, you complain that this isn't an "upbeat, friendly place".

No, I guess it's not a friendly place to people who want to misinform and mislead others for their personal gain. The legal term for that is fraud.

Don't let the door...etc.

Thank you Richard! I meant no offense to Lisa and hoped the information would be of use to her and anyone else reading the post. I would not want Lisa or anyone else to spend thousands of dollars putting an addition on their home expecting that they would be able to deduct the full-amount on their tax return.

My point was that the information Lisa was told was misleading and some incorrect. I thought it was important to Lisa and anyone reading the post or considering a MLM/homebased business be aware of the correct information and be encouraged to discuss their situation and the deductions that can claim with their tax professional.

Lisa wrote ... "I do have a tax accountant who is very versed in MLM tax laws, not with the company I am involved with. We do differ on our understanding of these laws. There is a huge company (a household name)that is based not far from here. They have built a HUGE empire, hotels, sports complexes, etc. in this industry. One of the people involved in this company is running for public office. I will trust the tax laws that have worked for them."

Lisa, you might want to investigate this further ... most large businesses such as you are referring to are incorporated and file a corporate tax return claiming deductions based on corporate tax laws.

Lisa you can choose to incorporate your business. You will need to check with your state rules for incorporating a business. Generally there is a cost to incorporate and may require a lawyer. The business must have it's own checking account. You will need to set-up a payroll system (YOU and anyone you employ is an employee of the business) and you must set-up to pay various employee taxes, state taxes, and corporate taxes on a quarterly basis. And you will need to file a corporate tax return. For most home-based business it is less expensive and much easier to operate as sole proprietorship than a corporation.

Most taxpayers with a homebased business (including MLM's) operate as a sole proprietory (not a partnership or corporation) and file a Schedule C form. There are no special tax rules for sole proprietor involved with MLM's. They follow the same tax laws as any other business that operates and files as a sole proprietor.

I encourage anyone going into business to talk with their tax preparer so they understand the tax laws and plan for a successful business future.

Thanks Richard and liketolearn for the excellent responses to lisa's situation. I think she's a bit mis-guided. We have an office in our home & have chosen not to take home office deductions for the exact reason liketolearn mentioned -- recapturing the depreciation usually results in a taxable gain when the house is sold.

Lisa's comment regarding paying children stating "Of course you don't have to actually let them HAVE the money" is incorrect if taken literally. You do need to write a check to the child in order to show it as a legitimate expense & be able to document what the children did to make it a legitimate expense. Then, how you guide or allow the children to use the money is another story--hopefully it's spent on necessary expenses as she mentioned or put into savings.

Another potential (but not very likely) problem with paying your children and making them use that pay to "support" themselves is you could conceivably lose their dependent deduction. If your child pays more than half of his own support, then you cannont claim that child's personal exemption. It the same thing that happens when Mom and Dad tell the teenager that he must save his money to buy his own car. The year he goes out and buys that car, he may have just paid more than half of his support for the year.

Again, its not very likely to happen with younger children, but it could happen with teenagers.

Agree with the remarks to Lisa, especialy concerning deducting part of the home cost (not utilities, but construction or mortgage) for a home based business. Most CPAs would counsel caution, as it really, *really* complicates things when time come to sell.

It is too bad Lisa felt treated badly. The remarks seemed well intentioned and not at all rude to me. Perhaps just not what she wanted to hear.