Tax Write-Off Myth #7: Direct Sales (MLM) Is Not A Real Business
This is probably the most common Myth! Tax preparers often discourage their clients from claiming this kind of business on their income tax returns. Have you heard this? Sound familiar?
There is nothing more from the truth! The Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) do recognize an independent distributor as a home-based business for tax purposes.
I believe the reason for this bad tax advice is fourfold:
- People just don’t understand the industry, have had a bad experience from it and/or are not willing even understand it.
- The cost of entry to join a company is so small in comparison to a traditional start-up that it almost seems insignificant from a small business standpoint. (This is actually a positive)
- Because the cost of entry is so small many who do join a company do not treat it like a business as they do not have any “skin in the game”. Record keeping is not there, time/effort is inconsistent… and this leads us to #4.
- The majority of people in the industry do not earn an income, therefore people view it as a hobby or insignificant. (There are many reasons for this…perhaps we will address this in another day).
So, when we take these four together, we can start to understand why others would discourage from claiming it on their taxes. But from the IRS and CRA standpoint it is a REAL BUSINESS! Treat it like one!
Commissions and sales earned must be reported on tax returns and as a result, you are eligible to claim tax write-offs against that income regardless of the amount of income. Being a home-based sole proprietor in this way has so many tax advantages that other traditional small businesses don’t enjoy!
Industry Facts, Legality & Direct Sellers Association
There's been enough companies in the industry who have been challenged and vetted through courts by regulators (specifically FTC in the US) but they've never proven it not to be a legitimate business model. Sure, there are examples of bad actors who are truly pyramid schemes masquerading as a legitimate business. It's unfortunately this happens but it happens in EVERY industry and profession imaginable. Scammers are everywhere!
The industry has a whole has over 1.2 million reps in Canada and over 7 million in the US generating well over $40 billion in sales across North America (2019 figures). Some statistics say that almost every household in North America has purchased something from a company in this industry.
I recently had the privilege of interviewing Peter Maddox, President of the Direct Sellers Association of Canada. In our conversation we tackled some of the most common questions and addressed many misconceptions about the Direct Sales & MLM industry. Below is the summary of the interview.
- The difference is between direct sales, multi-level marketing, network marketing, MLM (all loosely used terms). What is a pyramid scheme?
- What are the signs “red flags” of a pyramid scheme that people should watch for?
- Why do they say it's difficult to make money? Is this true?
- What about inventory? What is reasonable (average) for an opening investment and to support an ongoing business?
- If someone were to consider joining a direct sales company. What recommendations would you give them in evaluating a legitimate company?
- DSA Mark of Distinction Award - what is it this and what is the significance in this industry/profession?
This is Myth #7 in a 7-part series:
- Myth #1: My Accountant Does That For Me At Tax Time
- Myth #2: Can’t Claim Tax Write-Offs No Business Income
- Myth #3: The Government Wants Me to Pay More Taxes
- Myth #4: If You Claim It, You Will Get Audited
- Myth #5: You Can Use Google To Find All Your Answers
- Myth #6: Tax Software Will Do All This For You
- Myth #7: Direct Sales (Network Marketing) Is Not A Real Business
Take the Mystery Out of Home-Based Business Tax Write-Offs!