Direct Sales Agent deducting sales product

[PFL]

I have a "potential" client who sells jewelry via direct sales at home parties. In going over possible questions she might have, this one comes to mind; the jewelry that she uses to display at the party, and the jewelry she wears to "advertise" her products in public, are both typical of jewelry worn by women everyday. Although they were purchased with the full intent of being used primarily to advertise and/or sell at home parties, it seems to me that their use would fall in line with the same requirements to deduct clothing? I noticed on the primary company's website, that representatives can buy one of three starter kits, the main difference being the amount of jewelry you get up front, along with the display pedestal. The point being, the direct sales person is buying a "display" that just happens to be wearable in typical everyday situations. I would appreciate some thoughts on this, because in some ways it seems purely black and white, and in others (pedestal display) it seems a little gray. Thanks!

[joanmcq]

Personal use. Not an expense, not COGS.

[Burke]

Many of these type salespersons wind up getting out of the business, and keeping the purchased items, selling them later, sometimes to a new person coming taking over their business, or donating to Goodwill. Even if they stay in, there is always new product coming out to buy and replacing the old. It's theirs to do with as they please.

[Gary2]

Personal use. Not an expense, not COGS.

Including the display pedestal?

Would the answer be different if the client were male, the jewelry all for women (and no reason to believe the client does drag)?

Many types of businesses will have shady areas that are subject to easy abuse. I believe the key question here is whether the client is being reasonable or abusive of the system. Buying a single starter kit, even the top of the line one, coupled with clear behavior to make this a business and not a hobby, doesn't seem abusive to me.

[mactoolsix]

From the IRS Retail Industry ATG

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Retail-Industry-ATG-Chapter-3-Examination-Techniques-for-Specific-Industries-Direct-Sellers

Under:
"Inventory and Cost of Goods Sold

What if the direct seller keeps the company’s products on hand to show to potential customers? Is the cost of purchase part of the cost of goods sold, a capital expense, a business expense or a personal expense? It all depends on the circumstances at the time of purchase. However, the 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."

If the direct seller has a product that is used as a demonstrator for one year or less and that demonstrator itself is not available for purchase by the direct seller’s customers, its cost is considered a business expense. However, if the demonstrator is available for purchase by a customer, then it is to be considered part of the direct seller’s inventory.

Mike

[oceanlovin'ea]

this is my opinion

This is just my opinion as I have worked with people in direct sales for years. In fact, my mother has a direct sales business. (although hers is herbs and vitamins). If a person buys a kit to take to show product or merchandise at parties, it is inventory. Usually when the merchandise is taken out of their line, the salesperson will either sell it at a discount price or possibly take it to use herself. If she takes it to use herself, it comes out of inventory as personal use items.
This is the formula I was taught:
purchase price of mdse - 600.00
minus personal use items -100.00
gives you cost of goods sold.
Unless she takes the mdse to use herself, it is available to be purchased by customers. So it would be inventory. I think that if she took jewelry to wear to show to others, they would want to place an order and have their own "unworn" jewelry. That would make what she was wearing personal use.
It's late. Does that make sense to you? Hope so.

Linda, EA

[Gary2]

Did I misinterpret the OP? I didn't think it was asking "Do I report this as COGS, inventory, personal, or whatever?" I thought it was asking "Does anyone seriously believe that this is business use, when it just seems like a way to get jewelry to wear and an illegal tax break at the same time?" Or maybe not so harshly worded, but still whether or not it's a legitimate business expense.