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The IRS Considers Your Business to be a Hobby

June 21, 2011

I was forwarded this fascinating article on Amway businesses and how they have fared in tax courts when it comes to justifying deductions as business expenses. The whole article is too long to re-print here, but read Peter’s post and come back with your comments.

What I do want to highlight were the numerous cases where the tax courts deemed that expenses related to attending Major Functions were not allowed because these events were primary social gatherings. Yup, that’s basically what Major Functions, Monthly Opens and House Meetings amount to. You get together with a bunch of “friends” and talk about the same thing over and over. Is there any actual business happening? Are you selling products in order to make a profit at these meetings?

Taxpayers weren’t entitled to deduct business loss related to Amway distributorship: taxpayers didn’t engage in activity for profit. Expenses of distributorship activity related mainly to social functions: taxpayers attended seminars in Colorado and California, and monthly dinners with their “network”; taxpayer-husband took guest who was interested in finding out more about distributorship on fishing trip; and “supplies” expense included groceries bought while taxpayers were away delivering products or visiting clients.

For people who have been losing money year after year, while still deducting “business expenses” on their tax forms, be careful. You may find that your business is really just a hobby.

9 Comments leave one →
  1. June 21, 2011 1:05 pm

    IBOs sometimes make up stories about being profitable in Amway and in the same breath, tell us they got a bigger tax refund because they get to deduct expenses. The reality is that a bigger tax refund means an IBO took a loss (most likely from tool purchases) which lowered their tax liability and the refund is a result of lower tax liability from taxes withheld from the IBO’s job. Very simple.

  2. Burned Out With MV permalink
    June 22, 2011 4:07 am

    Bottom line is if you are not showing a profit after 2 years in the biz you will raise many red flags with the IRS, still if you are in the biz and after 2 years and are still truly in the red and most of your expense is functions and sales tools that should raise many red flags with yourself.

  3. June 22, 2011 11:36 am

    Burned out with MV,

    Of course FACTS DONT COUNT when you are drown in the Koolaid RARAism. However it is so ironic that the leaders would at the same time be saying NUMBERS DON’T LIE.

    If Amwayers/MVers and other MLMers would just stop to think even for a few minutes about the completely contrasting statements they say, they would wake up sooner and face reality.

  4. Matt P. permalink
    June 22, 2011 8:22 pm

    This happened to my mother. After losing money at Amway for years, she got called in for an audit and had that year’s (and all future years’) deductions disallowed.

  5. Chuckles permalink
    June 22, 2011 8:23 pm

    I went through an audit recently. My deductions were found to be in line with all the rules. What totally shocked me though, was that I had spent over $15,000 in training alone for that year. Product was a whole other category. That was also in the thousands. I guess I just needed to “read more” and “listen to a few more cd’s” so I could have been a better leader. Being a better leader would have meant a bigger TEAM and more income, and with that there would not have been as many red flags. Expenses would have been more in line with income.

    Well, like I was told, “You have as big a TEAM as you can handle. When God feels you are ready for a bigger group He will bless you with one.” “Keep reading!”

  6. Burned Out With MV permalink
    June 23, 2011 4:09 am

    I always love the claims of “I went Super De Duper Diamond in a month and a half and you can do it too”, then the pitch changes to “Stay the course, it will happen for you” when you don’t and it’s months / years later and you are broke and all your friends treat you like a leper.

  7. Speak Your Truth permalink
    June 23, 2011 3:48 pm

    Burned Out W/MV Lmao`~ so true! Too bad the super de duper anthings aren’t even the rank they claim~deception? The system of people just got flushed and what a telling story it is. There was a commentor, stated that 98% of their group~GONE.

  8. Observer permalink
    June 24, 2011 6:45 am

    Anyone see the new landing page for the new LIFE mlm. A round table person who I follow on twitter posted this link yesterday.

  9. Former WWDB Lemming permalink
    June 24, 2011 2:11 pm

    lol Observer. A count down to a new Life, very funny indeed.

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