Other Expenses

Discussed next are other expenses you may have as a direct seller.

Licenses and regulatory fees.   License and regulatory fees paid each year to state or local governments are generally deductible business expenses. Some licenses and fees may have to be amortized. See chapter 9 of Publication 535 for information on amortization.

Catalogs.   The cost of catalogs you use in your selling business for more than one year must be capitalized. The cost can then be recovered as explained under Cost Recovery, earlier. If the catalogs are used in your selling business for one year or less, you can deduct their full cost in the tax year you pay for them.

Commissions.   If you must pay a bonus, percentage, or other type of commission to direct sellers working under you, you can deduct it. Report the full amount of any commissions you receive as business income, and deduct the commissions you pay as ordinary and necessary business expenses.

Example.   Freda has her own direct-selling business and sponsors two other direct sellers. These direct sellers report their sales to her each month. She in turn adds their sales to hers and reports the total to the direct seller who sponsored her. In March, the people working under her each had $400 in sales and she had $500 in sales of her own. She reports to the company (or her sponsor) $1,300 ($400 + $400 + $500) in monthly sales for her group even though her income is only $500.

Freda received a commission or performance bonus for March equal to 10% of the $1,300, or $130, in sales. She reports the entire $130 as business income on her tax return.

Freda must pay the direct sellers working under her a commission of 7% on their monthly sales of $400. She paid each of them $28 (7% of $400) for their March sales. She deducts the total, $56, as a business expense on her tax return.

Computer.   If you use a computer in your direct sales business, you can depreciate it. However, if you use it 50% or less in your business, you must use the Alternative Depreciation System (ADS) under MACRS to figure your depreciation deduction. For more information, see chapter 5 in Publication 946.

Home meetings.   If you have business meetings in your home, you can deduct expenses for the meetings as entertainment expenses and as expenses related to the business use of your home only when they meet certain tests.

• The expenses of entertaining business associates in your home are deductible as entertainment expenses if they meet the rules discussed under Meals and Entertainment, later, and you can prove your expenses as discussed later under Recordkeeping.
• The expenses of maintaining your home as a place of business are deductible if you meet the tests discussed under Business Use of Your Home, later.

Example.   Barbara and Bill hold biweekly meetings in their home for the direct sellers who work under them. They discuss selling techniques, solve business problems, and listen to presentations by company representatives.

Because the meetings are for business, Barbara and Bill can deduct 50% of the cost of the food and beverages they provide. The 50% limit is explained later under Meals and Entertainment. They keep a copy of their grocery receipts for these refreshments, and record the date, time, and business nature of each meeting. Because the meetings are held in their living room rather than in a special area set aside only for business, they cannot deduct any of their home expenses for the meetings.

Journal subscriptions.   If you subscribe to a journal for direct sellers, you can deduct the annual subscription fee as a business expense.

Club dues and membership fees.   Generally, you cannot deduct amounts you pay or incur for membership in any club organized for business, pleasure, recreation, or any other social purpose. This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. The purpose and activities of a club, not its name, will determine whether or not you can deduct the dues.

Exception.   None of the following organizations will be treated as a club organized for business, pleasure, recreation, or other social purpose, unless one of its main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities.

• Boards of trade.
• Business leagues.
• Chambers of commerce.
• Civic or public service organizations.
• Professional associations.
• Trade associations.

Legal and professional fees.   Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. However, you usually cannot deduct legal fees paid to acquire business assets. Those are added to the basis of the property.

If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. The personal portion of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. See Publication 529, Miscellaneous Deductions.

Tax preparation fees.   You can deduct as a trade or business expense the cost of preparing that part of your tax return relating to your business as a sole proprietor. The remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions.

You can also take a business deduction for the amount you pay or incur in resolving asserted tax deficiencies against your business as a sole proprietor.

Samples and promotional items.    You can deduct the cost of samples you give to your customers and the cost of promotional items such as posters. You cannot deduct the cost of any samples you use personally.

Service charges.   You can deduct service charges you pay on orders for goods. The service charge can be a flat charge or it can be based on other criteria.

Supplies.    Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year.

If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all three of the following requirements are met.

• You do not keep a record of when they are used.
• You do not take an inventory of the amount on hand at the beginning and end of the tax year.
• Your taxable income is clearly reflected by this method.

Business Use
of Your Home

Many direct sellers work out of their own homes and have business expenses for using their homes. You can deduct expenses for using your home if you meet certain tests.

Qualifying for a Deduction

To deduct expenses related to the business use of part of your home, you must meet the following tests. Even then your deduction may be limited. See Deduction limit, later.

1. Your use of the business part of your home must be:
   1. Exclusive (however, see Exception under Exclusive use, later),
   2. Regular,
   3. For your trade or business, AND
2. The business part of your home must be one of the following:
   1. Your principal place of business (defined later),
   2. A place where you meet or deal with clients or customers in the normal course of your trade or business, or
   3. A separate structure (not attached to your home) used in connection with your trade or business.

Exclusive use.   Exclusive use means you use a specific part of your home solely for carrying on your direct-selling business. You do not meet the exclusive use test if you use the area in question for your direct-selling business and that same part for personal purposes.

Example.   You use a den in your home to write orders and do the paperwork for your business. The den also is used by your children to do their homework. You cannot claim any business deduction for the use of the room.

Exception.   If you use part of your home for the storage of inventory or product samples, you can claim expenses for the business use of your home without meeting the exclusive use test. However, you must meet all the following tests.

• You keep the inventory or product samples in your home for use in your direct-selling business.
• Your home is the only fixed location of your business.
• You use the storage space on a regular basis.
• The space you use is separately identifiable and suitable for storage.

Example.   Your home is the only fixed location of your business. You regularly use half your basement for storing inventory as well as for personal purposes. You can deduct the expenses for the storage space even though this part of your basement is not used exclusively for business.

Regular use.   Regular use means you use a specific part of your home for business on a continuing basis. Occasional or incidental business use of part of your home does not meet the regular use test even if you do not use that part for any other purpose.

Principal place of business.   Your home office will qualify as a principal place of business if you meet both the following requirements.

• You use it exclusively and regularly for the administrative or management activities of your trade or business.
• You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

Alternatively, if you do business at more than one location and your home office does not qualify as your principal place of business based on these rules, you determine your principal place of business based on the following factors.

1. The relative importance of the activities performed at each location.
2. The time spent at each location if the relative importance factor does not determine your principal place of business.

Place to meet clients or customers.   If you meet with clients or customers in your home in the normal course of your direct selling business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if both the following apply.

• You physically meet with clients or customers on your premises.
• Their use of your home is substantial and integral to the conduct of your business.

You do not qualify to deduct expenses for the business use of your home if you have only occasional meetings or telephone calls.

Separate structure.   You can deduct the expenses for a separate free-standing structure, such as a studio, garage, or barn, if you use it exclusively and regularly for your business. This structure does not have to be your principal place of business or a place where you meet clients or customers.

Deduction limit.   If the gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.

Where to deduct.   If you qualify to deduct expenses for the business use of your home, you must figure your deduction on Form 8829 and attach it to Form 1040. You deduct the expenses on Schedule C (Form 1040).

More information.   For more information, including how to figure the deduction, see Publication 587.

Travel and
Transportation

Travel expenses generally are those business related expenses for trips that require you to sleep or rest while traveling away from home for substantially longer than an ordinary day's work - for example, the cost of travel to a distant city to attend a business-related function or convention. Transportation expenses generally are those business related expenses for trips you make in the area of your tax home - for example, the cost of transportation to call on customers or make deliveries in the city where you work and its suburbs.

You must be able to prove your expenses for travel and transportation. Deductions for travel and transportation are looked at closely when the IRS examines returns. For more information, see Recordkeeping, later.

Travel

Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.

If you temporarily travel away from your tax home on business, you generally can deduct your ordinary and necessary travel expenses. You cannot deduct lavish or extravagant expenses or those for personal or vacation purposes.

You can deduct all your ordinary and necessary travel expenses, subject to certain limits, discussed later, if your trip was entirely business related. This includes expenses for attending a seminar, meeting, convention, or other function if you can show that your attendance benefits your business. If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a nonbusiness side trip, or had other nonbusiness activities, you can deduct only your business-related travel expenses. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination.

Example.   You live in and conduct your direct selling business from Atlanta and take a business trip to New Orleans. On your way home, you stop in Mobile to visit your parents. You spend $830 for the 9 days you are away from home for transportation, meals, lodging, and other travel expenses. If you had not stopped in Mobile, you would have been gone only 6 days, and your total cost would have been $730. You can deduct $730 for your trip, including the cost of round-trip transportation to and from New Orleans. The cost of your meals is subject to the 50% limit on meals explained later.

If your trip was primarily for personal reasons, such as a vacation, the entire cost of the trip is a nondeductible personal expense. However, you can deduct any expenses you have while at your destination that are directly related to your business.

For more information, see Publication 463.

Transportation

You can deduct transportation expenses for your business when you are not traveling away from home. Transportation expenses include the costs of getting from one workplace to another in the course of your business when traveling within the city or general area that is your tax home, and of getting from your home to a temporary work location. They also include the following kinds of trips you make in the area where you live and work.

• Visiting clients or customers.
• Attending business meetings away from your workplace.

Transportation expenses include train, bus, and cab fares, car rental fees, and the cost of driving and maintaining your car for business transportation. Meals and lodging are not included in transportation expenses. Commuting expenses.    You cannot deduct the cost of transportation between your home and your main or regular place of work. The cost of commuting is a nondeductible personal expense, regardless of the distance or whether work is performed during the trip.

Example.   Elaine works full time as a bank teller. She also sells cosmetics part time to her co-workers at the bank. After her customers select items from a catalog, she sends the orders to the cosmetics company. She delivers the items to the bank when she receives them from the company.

Elaine's expense of delivering items is not deductible. Her cost of getting to the bank is a commuting expense. The fact that she carries cosmetics does not make her commuting expense a deductible business expense.

Two places of work.   If you work at two places in one day, you can deduct the expense of getting from one workplace to the other. However, if you do not go directly from one location to the other, deduct only the amount it would have cost you to go directly from the first location to the second.

Deductible expenses.   If you use your vehicle in your business, see Publication 463 for information on how to figure your expenses for business transportation.

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