• Products received for meeting certain sales quotas.
A direct seller must include all income received on the tax return regardless of whether
or not he or she received an information return, usually a Form 1099-MISC reporting
that income. A seller who sells at least $5,000 in the aggregate of consumer products to
a buyer for resale anywhere other than a permanent retail establishment is required to
report the sale by checking item 9 on Form 1099-MISC.
Expense Issues
Direct sellers can generally deduct ordinary and necessary business expenses.
However, start-up expenses are capital expenses and are not deductible unless the
seller elects to deduct the expenses. The seller makes an election by attaching a
statement to his or her income tax return prepared for the year the business begins and
filed by the due date.
Start-up expenses may include the following costs: exploring different direct-selling
opportunities; training to be a seller for a product line; fees paid to the company to
become a direct seller; and purchasing a starter kit from the company.
Start-up expenses paid or incurred after Oct. 22, 2004, may be deductible the year the
business begins by an amount equal to the lesser of:
• The amount of start-up expenses, or
• $5,000, reduced by the amount the start-up expenses exceed $50,000,
• The remainder of the expenses may be deducted ratably over the 180-month
period beginning with the month the business begins.
(Start-up expense rules were amended in 2004. Expenses paid or incurred on or before
Oct. 22, 2004, are treated differently.)
Since direct sellers purchase and sell merchandise, inventories of products at the
beginning and end of each taxable year are necessary to correctly reflect taxable
income.
Products held in inventory include: merchandise with title vested in the seller; goods
under contract for sale but not yet segregated and applied to the contract; and goods
out on consignment.
Additional information on inventories and the cost of goods sold can be found in the
second fact sheet of the series titled, Cost of Goods Sold and the Tax Gap.
More information on reporting income and expenses can be found in Publication 334,
Tax Guide for Small Businesses.
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