There is apparently debate about whether or not a Mary Kay business can take “real tax deductions.” Ya’all are probably tired of hearing me say this… but because I come from a Corporate background this was something I checked out before starting my business… now here are some words from a real CPA – name… website and all…. they created a great document and this is just a snip from it… but GREAT information… albeit a bit long…
What Other Typical Deductions are Associated with Being a Mary Kay Consultant?
Edward W. Greenlee, CPA, PC – Client Education Series – THE MARY KAY CONSULTANT: Understanding the federal tax reporting requirements and the deductions available to you.
The following listing will assist you in determining which expenses you incur will be deductible to offset your self-employment income. Some expenses however, do not reduce self-employment tax just ordinary taxable income.
Accounting Fees – if you hire an accountant to keep your records, 100% of the expense is deductible. A portion of the tax prep fee can be allocated to Schedule “C” and the rest to other schedules on the return, namely Schedule “A”.
Advertising – any costs you incur advertising Mary Kay products and yourself as a Consultant are 100% deductible. This may include sales literature, greeting cards, newspaper ads, inventory given away in promotions, and cost of your Preferred Customer Program.
Attorney’s Fees – hopefully never needed, but if incurred you can deduct 100%.
Bad Debts – if you have a client who submits a bad check and you cannot recover it, this is a bad debt. Also, if you do not collect the cost of the product and the sales tax owed is also a bad debts
Bank Service Charges – establish a separate account so that if you incur any bank charges, it will be 100% deductible.
Business Conventions – Domestic (Fully Deductible), cruise (Limited), and foreign (Limited)
Business Meals – deductible but limited to 50%.
Charitable Contributions – Limited, but are considered an itemized deduction and will not reduce self-employment income.
Commissions – 100% deductible, refer to your Mary Kay tax guide as this is referred to as “Dovetailing”. However, you might also pay a commission for referrals and this meets this expense category.
Computer Software – depreciable over 3 years using the straight-line method.
Contributions to Profit Sharing Plan – limited to the lesser of 25% of net selfemployment income or $40,000. GREAT TAX-PLANNING TOOL – you can establish the plan; take the deduction but fund (deposit the money) as late as the filing of the tax return. There are different types of plans to consider, consult your tax professional to determine which one best suits your situation. Note – this is an adjustment to ordinary income, not self-employment income. However, this is the only deductible item in the tax code that generates a tax deduction and develops wealth at the same time, take advantage of it.
New with 2001 – now self-employed individuals can establish a plan loan program, which will allow you to borrow tax-free from your retirement account as long as you repay the plan. You will have to repay with interest, but the interest will go right back into your own balance for retirement. Consider using this as part of your financial plan. For example, if you put away a portion of your Mary Kay profit into your plan, you might have enough to fund your children’s college education, have your children pay you back, and eventually your children will inherit their own college education money back.
Dues – Deductible, except to clubs organized for business pleasure, recreation or social, those are non-deductible.
Employment Taxes – fully deductible for any employees you have. Your selfemployment tax is an adjustment to ordinary income equal to ½ paid, but will not reduce self-employment income.
Entertainment – deductible only to 50% of the amount paid.
Equipment, Furnishings and Fixtures – depreciable over the life of the asset, determined by IRS regulations and depreciation tables under MACRS (Modified Accelerated Cost Recovery System).
Gifts – deductible to $25, per person, per year.
Health Insurance – partially deductible up to 60% for 2001 (70% in 2002 and 100% thereafter), but as an adjustment to ordinary taxable income, not against self-employment income.
Other Insurance – might include product protection and general liability insurance. You cannot deduct insurance of a personal nature such as long-tem care, disability, etc.
Interest Expense – you can deduct interest paid on a bank loan or credit card if the nature of the use of the account is for business only.
Postage & Freight – 100% deductible.
Publications – 100% deductible.
Rent – office, equipment, post office and safe deposit boxes.
Repairs – if for business equipment, then 100%. If in conjunction with a home office, see discussion below.
Salaries and Wages do not pay yourself a salary, only your employees. Selfemployed individuals take draws for their living expenses, not salaries. Be careful to consider if you want to hire employees. Your legal risk and liability increase, as will payroll taxes. Many Mary Kay consultants may also want to hire an employee and treat them as contract laborers to avoid payroll taxes. Be certain to have this employee sign an independent contractors agreement to cover yourself for later unemployment and payroll tax claims that may arise in disputes.
Supplies – Supplies used for the office portion are included as a category called “Office Expense”. Sales aids are reported on a separate line called “Supplies”.
Publications – 100% deductible, if of a business nature, otherwise nondeductible.
Telephone & Cell Phones – if exclusively used for business then 100% deductible. See discussion below for telephone used in the home.
Travel Expenses – hotel lodging, car rental, parking, airport tips, etc. (keep separate from meals and entertainment). You can deduct actual expenses or deduct an established amount provided by the federal government called CONUS rates, or simply put a per diem. Our website for a link to the CONUS website.
What are Home Office Expenses?
Because Mary Kay consultants have no actual office in which to store inventory, maintain customer records and perform their bookkeeping, the regulations allow you to deduct a portion of certain home expenses. Many people hear and believe that this deduction is too risky and don’t seek it. This may have been the case before 1998, but the Tax Relief Act of 1997 amended code section 280A and added 280A(c)(1) that specifically provides relief for those who have no other place to conduct the administrative portion of their business.
Home office deductions are allowed on the allocable portion used in the home, this may be a % of the square footage used or a % derived of the number of rooms used in relation to total rooms. However, when reviewing Form 8829, you will notice that it specifically requests square footage. There are limitations to the amount you may claim as home office deductions. The use of these deductions can only reduce self employment income to zero; it cannot create a net operating loss. Any unused portion is carried over the subsequent years.
First there are direct expenses that at 100% deductible and then those that are only allowed a % of the use. The list of expenses include:
Home mortgage interest – the remaining percentage is carried over to schedule “A” as an itemized deduction.
Home Real Estate Taxes – the remaining percentage is carried over to schedule “A” as an itemized deduction.
Repairs – this includes interior and exterior, plumbing, painting, electrical work, etc. If the expense is in direct relation to the room, then it is considered a direct 100% expense.
Depreciation – you are allowed this deduction, but when you sell the home at a profit you must report the % of the business use as capital gains.
Insurance – an indirect expense, you are allowed the applicable percent.
Utilities – an indirect expense, you are allowed the applicable percent.
Security System – an indirect expense, you are allowed the applicable percent.
Telephone – an indirect expense, allowed the applicable percent, if used by others in the family. A telephone used exclusively for the business is reported on Schedule “C”.
Others – although not specifically outlined in the regulations or in tax court cases, one would be able to claim the percentage use for maid services, carpet cleaning, etc. as long as the expense was for the entire home. Other expense would include casualty losses from fire, tornado, flood, vandalism, etc.
Non Deductible Expenses – lawn services, swimming pools, hot tubs and other expenses not needed for the conduct of a business are not included in the classification of home office expenses.
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