2 different businesses with all losses no income

[POCAHONTAS]

client got into the business of selling E-fusion some kind of a health drink and Xango another health drink he purchased different marketing software and in order to join E-fusion, had to sign up to purchase a box of the drinks for $166/month. he did not sell anything at all so therefore he made a loss, the question is can he take a loss on schedule C for both businesses without having any income?
Don't you have to have some kind of income to make a loss

[taxea]

Sounds personal,,.I wouldn't do a Sch C in this particular case until the business has some income.

[geekgirldany]

If he did not sell any of the drinks then would he not have inventory? What other expenses did he have? Take a look at the hobby/business info in TTB. If there was a clear intent that he was trying to sell the drinks then I would do a Schedule C. Looks like Efusion is a MLM.

[POCAHONTAS]

the drinks can be used as samples to give to other people as advertising, and also you have to get other people to sign up under you and then the more purchases are made from the people under you, you make a percentage (so I would say MLM.) When you sign up it is mandatory to buy a case every month for $166/month, you can sell the drinks individually it is up to you. After you sign up 4 to 5 people the $166 that you get from signing up those people will pay for your monthly mandatory drinks. After the 5 people the more people sign up you begin to make profit. And the more people sign up under you and under the people that sign up under them, in theory you can make $50,000/ month or more.

I know that this client was genuinely trying to make money cause he had lost his job and was trying to get this business going to not lose his home. So I would assume that I would have to do part inventory and part advertising, but the question is can you do samples as advertising or supplies???

[taxea]

Product samples are expensed as advertising. Purchases are inventory. My concern for your client is that he has no income and shows a loss. If this continues for three out of the next five years this is considered a hobby and there may be tax liability in the future.
This was not a good business for him to get into as it is a pyramid.
He can't even take the losses as a hobby because there is no income. If he waits until he has income he can use the first year expenses as startup/amortized depending on the amount.

[Larmil]

Product samples are expensed as advertising. Purchases are inventory. My concern for your client is that he has no income and shows a loss. If this continues for three out of the next five years this is considered a hobby and there may be tax liability in the future.
This was not a good business for him to get into as it is a pyramid.
He can't even take the losses as a hobby because there is no income. If he waits until he has income he can use the first year expenses as startup/amortized depending on the amount.

The "three out of five" rule is a presumption - not a hard fast rule. Desperate people often do not realize that MLM is mostly a sucker scheme. Profit motive is one of the keys to the 3 of 5 rule. I would take the losses and advise the client to close the 'business'.

BTW, I have had some licensed Realtor who had ZERO income in 2009. ZERO income does not always mean a 'hobby'.

[powerage]

I would take the expenses on Schedule C. Then I would advise the client that if they want to join a true MLM program that it has to have a great product that is consumed and must be purchased over and over, like beef jerky. There are legit MLM's. A true MLM focuses on selling product, not recruiting people.

I was in Equinox back in '97. A lot of the products were excellent, especially the hair care. I couldn't keep it in stock, and I used it myself. But the overall business was bringing in new people, not selling, so it was brought down. I did have expenses, but I had no clue I could claim them.

[mwarney]

There is no rule that says you must have income in any single year to be a legitimate business. I would tell your client to be prepared for scrutiny, and that it would be advisable to show some revenue next year. You might want to consider amortizing his first year expenses as start up costs.