Help with a new Amway business

[ttbtaxes]

A client and his wife start with Amway in 2018. Amway requires that a husband and wife register as a single business. The husband is listed as the primary and wife the secondary and the 1099-MISC will go to the husband. I'm thinking this is a partnership as the both the husband and wife are on the license or permit that Amway issues.

How are you handling theses husband/wife arrangements...as a partnership?

[TaxGuyBill]

I would treat it as a Qualified Joint Venture, which is two Schedule Cs.

I would report all income and expenses on the husband's Schedule C. When that is finished, I would look at the profit divide by two (or whatever the other spouse's ownership percentage is). The enter that as an "Other Expense" on the bottom of the husband's Schedule C (I would call it "Qualified Joint Venture: Allocate to spouse").

Then report the half of the profit on the wife's Schedule C, with no expenses (they were all taken on the husband's Schedule C).

[Twin Turbo Z]

You can treat it as a joint venture if they file together or complete two schedule c's (which the IRS recommends). If they file separate then of course schedule c for both. We have several married couples with businesses and have done the joint venture (one schedule c), but usually do separate schedule C's. If they start doing good with the business then you might recommend them filing for a partnership and start doing a 1065 for them. Most of these "direct sales ventures" dont last long though, so I would hold off on the 1065 route.

[ttbtaxes]

I thought that was a good option but in order to qualify as a QJV each spouse must materially participate [Section 761(f)(2)(B)]. When you look at the 7 tests of Reg 1-469-5T, unless BOTH spouses work 500 hrs or more, I don't see how they can each pass the material participation requirement. Since Amway is a part-time endeavor for many people I bet few people work 500 hrs.

Any ideas?

[Twin Turbo Z]

Not sure if you have read through this. https://www.irs.gov/businesses/small...ted-businesses .

[ttbtaxes]

I just spoke to Amway about a husband/wife registration vs single individual. One spouse is listed as the primary in a H/W scenario. No matter the level of sales activity of either the spouse, all commissions are 1099'd to the primary spouse listed. Moreover, the primary has the right to remove the spouse at any time.

I'm beginning to think this is NOT a partnership as the non-primary spouse has no rights to income at all. The non-primary spouse would be more of an employee or I/C to the primary spouse. Am I seeing this incorrectly?

[Twin Turbo Z]

Well if they both want soc. sec. credits then the hubby could 1099 his wife. . How much income from this venture ?

[ttbtaxes]

They just started and had a small amount of commissions earned in 2018 so I have to come to a conlusion with this issue shortly.

[Twin Turbo Z]

This all brings back memories of my days with the green box folks when they didn't yet have the green box. . .just calculators and check tapes and blue print machines.
Somewhat tongue in cheek, it was not uncommon for an employee to need to take a quick bathroom or nicotine break whenever an Amway or Mary Kay or similar return walked in the door.
It was not unusual to spend hours with the "business person" who often thought virtually everything in life was somehow deductible as a business expense. Once some degree of common sense was negotiated, they often did not like "our" answers and just walked.
I don't miss those scenes one bit. Perhaps / hopefully things are a tad more organized now. . .

FE

Amen !!!! All these party plans or pyramid scheme's are for the birds (IMHO). But there are some that do well. That 1 in 1,000,000

[ttbtaxes]

After considerable research, I finally found two U. S. Tax Court cases where it addressed/commented on the issue of a husband wife who were involved with Amway and whether it was a partnership. The courts concluded in both instances the husband /wife Amway distributorship should be treated as a partnership.

The first case involving Mr. and Mrs. Guadadno, and the issue for the court did not involve partnership status but the Tax Court did properly footnote the issue at #5 and said that their income and expenses were not properly reported on Schedule C. (T.C. Summary Opinion 2003-88). The second case of Mr. and Mrs. Zampa, the sole issue was whether the arrangement was a partnership and the Tax Court unambiguously concluded that it was. (T.C. Summary Opinion 1990-561).

If you're going to choose the QJV election vs partnership, they need to meet the definition of a QVC under Section 761(f). That means that each spouse must pass the material participation test. Unless they each incur more than 500 hrs, I don't see how that is possible. One spouse's hours don't attribute to the other spouse.

[TaxGuyBill]

Thanks for the update. I never knew about the Material Participation Test for a Qualified Joint Venture, so it does sound like a 1065 is the proper way to go.

[ttbtaxes]

It could get particularly thorny because I believe that relief from penalties pursuant to Rev Proc 84-35 no longer applies to years after 2017. The penalty for failure to file a partnership return can be staggering.

[Burke]

This all brings back memories of my days with the green box folks when they didn't yet have the green box. . .just calculators and check tapes and blue print machines.
Somewhat tongue in cheek, it was not uncommon for an employee to need to take a quick bathroom or nicotine break whenever an Amway or Mary Kay or similar return walked in the door.FE

I had a case once where the husband started an Amway business. He got audited 18 months later. The IRS auditor asked him if he knew why he was being audited......, and said "this," while dropping his tax return on the desk with a big book labeled Amway! It was a huge red flag. And oh, I remember those check tapes! It was actually quite fun. In those days I could calculate an entire return (and income averaging) on an adding machine.