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Monday, September 25, 2023

When it comes to reporting your business activity to the I.R.S., the secret’s in the details. Accurate and detailed reporting begins with a general understanding of the various tax provisions affecting your business. I will outline some of the important points below, but please consider seeking professional assistance. Tax return preparation fees may be deducted, if incurred primarily for the purpose of completing your return.

If you are a sole proprietor not conducting business as a corporation or some other form of legal entity, your business activity will be reported using Schedule C with your individual Form 1040.  If your spouse is your partner in the business, be sure you put both names on your Schedule C.

If your spouse is your partner and you put both names on the Schedule C, be sure and allocate one-half of the Income (Loss) to each spouse when calculating social security and Medicare tax for each person.

Also, be sure your spouse is included on your Amway registration and annual registration renewals.

Explain your “sales” and “cost of goods sold.” When reporting income, be sure to report as “sales” all receipts for sales of products to retail customers and to IBOs, as well as sales of business support materials to other IBOs. Then report as “cost of goods sold” your cost for all such products and materials. Explaining these items on your Schedule C, rather than just reporting the end result (i.e., net income), helps demonstrate the level of activity in your business.

Exclude Personal use and promotional items from your “sales” and “cost of goods sold.” Treating products taken out of inventory for your own personal use as a “sale” to yourself, while including their value in computing cost of goods sold, has a tendency to create a negative gross profit, which is an audit flag. Alternatively, you might remove personal use items from the cost of goods purchased during the year before you determine your cost of goods sold. Similarly, products and business support materials given to others to interest them in the product or encourage them to build a business should be deducted as an “advertising” expense (see Schedule C, Part II, Line 8), and, thus, also excluded when computing cost of goods sold.