NOTE: I wrote this post in 2013, so be aware of its age. The information in the post is still accurate, though.
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If you sell food products in a multi-level marketing system, can you deduct personal grocery expenses?
I’ve actually had this question posed to me before. The person’s “sponsor” in the MLM system told the taxpayer that the taxpayer could deduct all of their grocery purchases from Wal-Mart, etc. as a “marketing expense” because you have to know what the competitor’s food tastes like. Thus, according to the sponsor, grocery expenses are a necessary business expense.
Of course, the sponsor’s accountant allowed the sponsor to take the deduction.
An additional question came up regarding whether it was okay to deduct all food purchases from the MLM supplier, even if it was consumed by the taxpayer instead of being sold to customers. Again, the logic being that you have to know what the food you’re selling tastes like.
Neither deduction is okay.
Here’s what the IRS Audit Technique Guide on multi-level marketers says (my emphasis added):
“(T)he cost of a product that is used by the direct seller is a personal expense, even if that product is occasionally shown to prospective customers. Some direct sellers erroneously think they can decorate their home with products and deduct the cost as a business expense. To be deductible under IRC Section 162, the expense must be an ordinary and necessary expense paid or incurred in carrying on a trade or business (also see Regulation 1.162-3). Under IRC Section 262, no deduction generally is allowed for personal, living, or family expenses.”
In other words, anything that you buy and consume for personal purposes is a non-deductible personal expense. This would include your personal grocery bills and purchases from your supplier that you consume personally.
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Thank you! If you don’t mind, I’ll use this article when I teach micro-businesses. It will remind me to talk about honest tax preparers as well!
Deb – absolutely! You can use any of my blog posts in your classes!
Kim – good question. On the one hand, since it’s a required expense that you have to make in order to get paid, you could probably argue that it’s deductible. On the other hand, the IRS could counter that the expense involves the purchase of personal-use products and therefore it isn’t deductible. I searched the Audit Technique Guide and didn’t see anything that addresses this specific situation.
As always, I’ll give my standard legalese disclaimer that blog posts here are not tax advice, and that responses to questions posed in the comments section are typically off-the-cuff, off-the-top-of-the-head responses and again, should not be considered tax advice. Each taxpayer should pay a tax advisor to research their specific situation before making any financial decisions. 🙂
Thanks for the free advise. Doing taxes when one is self employed. Especially if one has not made a profit during that year is a quandry to say the least. Good advise like this post is welcome.
thanks
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