Inventory is Not a Business Expense

As we are at year's end and taxes are looming, I have heard many directors tell consultants that ordering inventory at the end of the year is a wise thing to do as it increases your business expense. Formerly from an accounting background this statement has always made me want to scream. Inventory is not an expense, it is an asset. If you need product in December, than order product in December, and if you don't need product in December don't order product in December. The less you have on the shelf, the less you have to count when you do your inventory.

A little piece from our Tax info on intouch is copied below:

You should remember these three facts about inventory/cost-of-goods-sold deductions:
• The amount of this deduction is not the total of all inventory (product) you purchased during the year, unless you sold exactly what you bought.
• The amount of the deduction is not the amount of product you have in stock at the end of the year.
• The amount of the deduction is the cost of product that you sold or distributed as hostess or incentive gifts-with-purchases during the year. Thus, stocking up before December 31 will not increase your deduction.
Inventory is not deductible until sold. (Emphasis was added by Mary Kay)

Any inventory that is purchased but not received before 12/31 will be counted as part of your ending inventory. The ending inventory becomes part of your cost of goods sold computation. All those purchases do is to increase what you have on your shelf.......it does nothing for tax deductability.

and the other little things that makes me want to scream... no we can not deduct nylons and manicures/pedicures. IRS would LOVE to audit some of the consultant's tax returns with some of the things I have overheard.

Remeber when indoubt check with a professional and always error on the side of safety. An IRS audit is noooooo fun.

Happy New Year Everyone!!! Be Safe!!

Ask and receive... a Schedule C

I have been very sceptical to do this but if it will help others, it will be worth it. First, I am sorry for the quality, after finally deciding to post these my scanner wasn't working so I took pictures with my digital and uploaded them to the computer. Hopefully once I upload them to Balanced, everyone will be able to enlarge them so that they can see. Don't get too excited, :) - it isn't a 6 figure income but I am very comfortable with this... Things to keep in mind... from my net profit, I do not have to make any car payments, insurance payments, a portion of my internet, laptop, etc.... and my mileage is a business expense and my home office deduction is $685 - which, the room is in my house anyway! The Schedule C lumps the income from our 1099 commissions and sales in the same box so if there are any questions my sales were roughly $38,000 for the year. So basically my net profit is for groceries, and other household expenses that most people would have to pay from that net profit.
A look at my unit...
My new consultants come in with 0 - 600 for the most part - I think 2 this year coming in at $1800 by their choice and both had been consultants in the past so they had a feel for what product they wanted.

I have a very full life, with a side commitment- and have one unit meeting a week and 2 -4 appointments - I actually feel guilty (occassionally) because I could be doing so much more thaan I am but just wasn't willing to part with the personal time with the kids. (My time is coming).

Persoanlly I think it is a fair income for doing something I love to do and not having to work 24/7 to do it, but everyone is entitled to their own opinions.

So I guess I am putting up and not shutting up. And just because I feel like being a bit of a brat... my highest ever check BEFORE was just $64 shy of $9000 and I had of $4500 in sales that month as well. But I have to admit, I am not willing to work that hard every month, Hope some of you find this enlightening.

Hobby or Business ????

From one of our readers: I wanted to start my business as more of a hobby. I would eventually like to spend more time, but currently I am a full-time student(19 credit hrs this semester!), mother of a 4 and 5 yr old, working part-time, and also married. My husband is getting ready for a year-long assignment (active duty Air Force) in July so I will be an “almost” single parent for a year. Can you tell me if I would still be able to consider my business as a “business” and claim expenses, etc? I wasn’t sure since I would probably only spend a few hrs a week and have about 2-3 parties a month. I didn’t know what all the rules were and wanted to do my homework before I got started. I haven’t signed up yet and I am planning to in a few months.

I am not a CPA and haven't stayed totally current on the guidelines, I would suggest everyone visit the irs website to read more about what can and can not be claimed. In most cases if you are operating with the intent to earn a profit, most reasonable expense may be claimed. One must show a profit for a certain number of years within a certain time period (matter of years) or IRS has the right to say that it looks as if you are not operating to earn a profit and disallow the expense - if it is more of a hobby. If one makes under a certain amount, it may not be necessary to file - but as I said, I am not qualified to give you absolutes because I never would want anyone to have trouble because of my advice. It may even be worth a call to your favorite accountant.

Nothing burns me more than hearing a director "over" sell the expenses, sorry all, manicures, nylons, getting your hair done, taking your hubby out to eat, etc... don't count as reasonable expenses!

A little note is even our director's suits may not be claimed as a deduction because it could be used other than "MK" - it is not a "uniform" per se.

Expenses are important in reducing our reportable income so it is important to know what you can deduct. Man yourself with knowledge, it will be worth it. There is no better time than now - at the beginning of the year - to make sure you are keepting track of every allowable expense.

I apologize for not being more definitive but I do not want to cause anyone any potential headaches. Play it safe and check with the pros.

IRS INFORMATION RE: SMALL BUSINESSES

I am not promoting or suggesting these classes but this information is very useful to all in a small business. I hope many find this information useful.

IRS INCREASES ENFORCEMENT BUDGET BY $5.5 BILLION TO LOCATE EXTRA TAX REVENUE FROM HOME BASED BUSINESSES
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
IRS believes home based, direct selling businesses could be a major source of tax revenue. Just to prove it, they've convinced Congress to increase their annual "enforcement budget" to $5.5 Billion dollars.

One major focus will be home based businesses with losses.

When CPAs are worried, we should all be listening at full attention. Rather than cause you all to just worry, our tax-law guru, Vicky Collins, CPA has put together a teleconference that will inform you all how to document your profit intention and prevent your business from being re-classified as a hobby with the new IRS Initiatives.
As you know, we at Ascend are always teaching three business rules:

(1) PROVE INTENT RULE: You must prove that you have an intent for profit in your business. You do that by keeping diligent books and records in Ascend (remember having appropriate "books" for your business is not negotiable--they're legally required, and your Inventory program is NOT books). Sadly, you can't pull the personality, busy, or "I don't like numbers" card w/ IRS.

(2) COMPANY MONEY RULE: Every single dollar, every single cent of revenue generated by your business needs to be put in your business bank account (yes, even ProPay dollars... NEVER apply those directly to an Order). No using your business bank account for personal things, and no co-mingling business and personal income or credit cards.

(3) YOU'RE NOT A DUMB BLONDE, SO DON'T ACT LIKE ONE: You're in business, legitimately. You have all the rights and responsibilities that business owners have under the law. "Profit level inventory" is a phrase, but there is no profit in unsold products. Remember, you can't even deduct the cost of the product until you SELL it. So sell your heart out. Revenue (sold inventory) is the cornerstone to a successful, profitable business.

The upcoming teleconference will dive in deep to the new IRS Initiatives, and practical steps on WHAT TO DO, especially if you showed losses in your business last year.

Class Date: Sunday August 16th @8p CST (6p PST, 7p MST, 9p EST) Even if you cannot attend the call live, sign up now as an MP3 download will be available after the call. Register for the Class: CLICK HERE

6 main types of small businesses audited by IRS
9 Key Characteristics IRS uses for business vs. hobby
3 Main IRS Examination Techniques used
4 Types of information likely to be requested
3 Key Rulings and Laws that support taxpayers
What happens to your deductions when business is reclassified as a hobby


Cost: $29 (1 hr of consultation w/ Vicky is $225, this is very generous of her)
Register for the Class: CLICK HERE
CLICK HERE TO LEARN MORE...

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

GETTING STARTED STRONG WEBINARS - FREE TO ALL
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Whether you've been subscribed to Ascend for a long time, heard about it at Seminar, just want to see it in action, or the new IRS Initiatives motivate you to finally get a legit financial system up and running in your business, feel free to be our guest at one of these 4 free webinars. You must click the registration link for the class you want to take.

Mon Aug 3, 8:00p CST - Register Me For This One!
Thurs, Aug 13, 9:00a CST -Register Me For This One!
Sun, Aug 16, 7:30p CST - Register Me For This One!
Tue, Aug 25, 6:30 PM CST - Register Me For This One!

All class times are listed in central standard time.

Quarterly Taxes

Whether you consider Mary Kay a business opportunity or not, the bottom line is you are self-employed which makes you responsible for your own federal, state, and local taxes, since you have no taxes withheld because you do not receive a "paycheck" from the Company.

If you end up owing IRS too - you can be be charged penalities and of course will owe what ever shortage. Each quarter I simply take one of my quarter coupons and send IRS, a check I do the same for state and local. (there are worksheets available to help you figure out your estimates based on what you are making)

My method is to put a certain amount weekly into a savings account and then once a quarter, write out and mail the checks.

When I was newer to Mary Kay and just dabbling, I was still working a fulltime job. To save myself, the added trouble of filing quarterly, I simply increase the amount I had withheld from my primary check, to make sure I was covered.

Getting into the habit of keeping the money there makes writing that check alot less painless.

Don't forget that the tax filing deadline is approaching fast so get your taxes done and don't forget to use every legal business expense possible.

Year End Info

Year-End Reminders


*Be sure to take an odometer reading on 12/31 and mark it into your calendar to prove the total miles driven in 2008

*Be sure to take an ending inventory count and value it at your cost

*Be sure to have a new check register to begin 1/1/09. You want to be able to file the register in the same box as the cancelled checks for 2008.

*Buy a new calendar for 2009. If you are using an electronic calendar, be sure to print out ALL transactions and appointments for 2008 and store the printout in your 2008 receipt storage box

Make sure you check out MK Intouch for tons of useful tax information.
(Taxes aren't as hard as most believe as long as you keep good, organized records!- So if you haven't in the past, make your new years resolution to keep your records up today and you will spare yourself many headaches.)

Mileage Information from the IRS

IRS Decreases Business Mileage Rate to 55 Cents for 2009

The IRS has announced that the standard business mileage rate for transportation expenses paid or incurred beginning January 1, 2009, will be 55 cents per mile, down from the 58.5 cents per mile rate in effect during the second half of 2008 [IR-2008-131, released 11-24-08; See www.irs.gov/newsroom/article/0,,id=200505,00.html].

The mileage rate may be used to compute the deductible cost of operating a passenger car (also vans, pickups, or panel trucks) for business purposes. The 2009 standard rate for miles driven for medical or moving purposes will decrease to 24 cents per mile, down from the 27 cents per mile rate in effect during the second half of 2008.

Expenses and tax write-offs

Disclaimer: The following is for general discussion. If you have specific questions about your tax write-offs or legal issues, please consult your tax preparer or attorney.


One of the things you may hear from the anti-MKers is that the commission checks for Directors are "misleading" because that is what they are paid "before expenses."

Employee checks are "before expenses" as well, aren't they? I mean, the employee has to pay for gas, food, clothing, pantyhose (if female) and a whole lot of other things from that check. However, if someone asks "How much are you paid?" the employee would never say, "$45,000 - but that is before expenses." Of course not.

Anti-MKers say that when figuring your average hourly commission you should take your travel time into account. I don't. I have never been paid for my travel time to and from work. It is just assumed that you have to drive in order to get to work - your commute is your problem.

HOWEVER, you can (generally) write off your mileage as an independent contractor (for business-related travel).

Let's look at some comparisons between employee vs. independent business person. But first, let's look at some qualifications for tax breaks. You must:

1. Operate a legitimate business, not a hobby.
2. Demonstrate that you have an intent to make a profit.
3. Work your business like any other real business (not just on your lunch hour or the golf course)
4. Show regular and consistent activity. (For example, one hour a day, 4-5 days per week. This is why MKers are encouraged to block out "Mary Kay time" each week to consistently work their business.)
5. Be able to demonstrate your expertise in your business category OR your efforts to gain expertise by learning from others.
6. Document your business income, expenses AND ACTIVITY. (Notes in your daily calendar usually are sufficient.)

Write-offs are not automatic, and each person is unique. Be sure to consult with your attorney or tax professional (not your Uncle Bobby John) to discuss your tax situation.

Now let's look at your expenses.

Employee (generally cannot write off these expenses):

1. Gas/wear and tear on car/mileage
2. Car insurance
3. Rent/Mortgage
4. Travel
5. Meals
6. Car payment/Lease

Independent Contractor (can write off these expenses if qualifications are met):

1. Mileage
2. Car insurance
3. A portion of rent/mortgage
4. Travel (if business-related or if business is done during the trip)
5. Meals (again, if business is conducted)
6. A portion of the car payment/lease
7. And more

Businesses write off every single penny they (legally) can so that their tax liability is as low as (legally) possible. Why? So they pay less taxes (legally)! You WANT your taxable income to be as low as possible (legally) so your tax liability is lower!

So if I travel 100 miles round trip for a SCC, I can write off whatever the IRS says I can per mile (let's say 50 cents). So in this example, I have 100 x .50 = $50 in a tax writeoff for mileage!

Did I pay $50 in gas for the trip? No. The IRS mileage takes into account gas, wear and tear on the car, etc.

So can you see how putting miles on your car can quickly reduce your taxable income? And that is just one example. I can't do that just for driving back and forth to work.

Directors do have expenses. IBC's have expenses. The great thing about it is that these expenses are tax deductible!

Employees have expenses, too. They just don't usually get to write them off.