Publication 911 |
2000 Tax Year |
Not-for-Profit Limit
If you do not carry on your direct-selling activity to make a
profit, there is a limit on the deductions you can take. If the
not-for-profit limits apply, you cannot use a loss from direct selling
to offset any other income.
This limit applies, for example, if you go into direct selling
primarily for the business deductions you can take. It also applies if
you become a direct seller only so you and your friends can buy
products at reduced rates.
If the not-for-profit limit applies, you must take the deductions
allowed on Schedule A (Form 1040). See Limit on Deductions and
Losses under Not-for-Profit Activities in chapter 1
of Publication 535
for information on how to figure your allowable
deductions. Do not use a business tax return, such as Schedule C (Form
1040).
Not for profit.
In deciding whether your direct selling is carried on for profit,
take into account all the facts about the activity. No one factor
alone is decisive. The following are factors to consider.
- Whether you carry on your direct selling in a businesslike
manner and maintain complete and accurate books and records.
- Whether the time and effort you put into direct selling
indicates that you intend to make it profitable.
- Whether you are depending on income from direct selling for
your livelihood.
- Whether your losses are due to circumstances beyond your
control (or are normal in the start-up phase of direct
selling).
- Whether you change your methods of operation in an attempt
to improve profitability.
- Whether you, or your advisors, have the knowledge needed to
carry on direct selling as a successful business.
- Whether you were successful in making a profit in similar
activities in the past.
- Whether your direct selling makes a profit in some years,
and how much profit it makes.
- Whether you can expect to make a future profit from the
appreciation of the assets used in your direct-selling
business.
If the IRS inquires about your tax return, you may be asked to
provide proof that your direct selling activity is carried on for
profit. However, your direct selling is presumed to be carried on for
profit if it produced a profit in at least 3 of the last 5 tax years,
including the current year, unless the IRS establishes otherwise.
If you are starting a business and do not have 3 years showing a
profit, you may want to take advantage of this presumption later,
after you have the 5 years of experience allowed by the test. For more
information on postponing any determination that your direct selling
is not carried on for profit, see Using the presumption later
under Not-for-Profit Activities in chapter 1 of Publication 535.
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