Network Marketing Losses

[KJ Judd]

New client comes in with $2k sales from network marketing business, $12k deductions. Prior year loss of $8k for same business. I discussed IRS looks at more closely, 3 yrs income out of 5 yrs, then facts & circumstances, etc.

We had a previous thread on believing the client & I do have a strongly worded arrangement letter that I rely on his representations. I need to hear back from him, but do I just take him at his word? Does anyone else encounter all these aggressive situations or am I just lucky this year???

Thanks, wanted to vent on this one.

[jainen]

Read up on hobby losses

Read up on hobby losses. It's not just number of years. Look at the kind of expenses being claimed. Do they look like bona fide business costs, or more personal pleasure. Is it mostly travel and entertainment, with lots of personal electronics and other gadgets? Are there more standard business things like printing and advertising and referral fees and inventory maintenance. Is he being honest about personal usage, or taking the "everyone I meet is a potential customer" line? How much time is committed to developing this business, and how does that compare with his "real" job? What is he doing differently than last year, changes to improve profit? How regular and ongoing is he, how open to the public, how business-like are his books?

[veritas]

Personally I can't deal with that type of client. I send them down the road. Losing money 3 or more years in marketing business is some kind of baloney.

[Bees Knees]

Read Multi-Level Marketing Income, page 5-18 in TTB.

These types of businesses are rarely a business. People do it to buy products for themselves. The only way to buy the product for your own personal use is to either sign up as a distributor, or pay inflated prices from someone else who signed up to be a distributor. Ask the client the real reason why they are in multi-level marketing. Was it to earn a living, or were they really just interested in buying the product for their own personal use? If personal use it the answer, it is a hobby - no loss allowed.

[oceanlovin'ea]

Give them a break

Some of these people really are trying to make some extra money. Moms with little children at home will try doing Pampered Chef, Avon, the candle parties, the glassware, etc. They are trying to bring a little extra money into the home without having to put their children in daycare and work 40 hours a week. Even the little they make can help with groceries and extras.

Sometimes their loss is due to mileage deductions.

Anyway, they are trying to have a part time job and it takes a while to get these things going. My daughter tried a year and a half ago to sell Princess House glassware. She was just starting to have her shows and 2 hurricanes came through central Florida. So her shows got cancelled and it was hard to get people to reschedule plus no extra money for dishes for some of these people. But she was trying to do something that her husband could be home with the baby when she had shows.

You are right about some just doing it for personal products.But not all.

Linda

[veritas]

In all the years I have been in practice I've only seen 2 people make money. And they spent 3 times what they made since they thought they were tycoons.