MLM Network Marketing for College Funds

    WHOEEE. Got a ton of eMails and Twitter "tweets" on using Multi-level Marketing AKA MLM AKA Network Marketing to pay for college and other cash flow needs.  What I shared was so popular, I was asked to publish it on my blog so here you all go!

NOTE:  Make sure you check with your personal tax advisor for how this information relates to your situation (sorry, this is my official CYA). 

 

      Joining an MLM means you are now a retail customer or an "independent" representative, (associate, partner, business owner, etc.) but usually BOTH.  The key to success is to understand that if you joined to sell and recruit for that MLM, you are now representing a product/service.  You now own your own wholesale and commissioned sales COMPANY. 

      The key to success is making sure you run your COMPANY as a real business!

The IRS clearly defines what is a business and what is a hobby.  If you run your MLM as a “hobby”, you can only deduct the amount you spend up to the amount you earn.  So if you earned $400 and then bought a laptop for $1,500, you would be limited to zeroing out your earnings but the other $1100 is not deductible as a business expense.

      Sadly, most people try to run the MLM as a kinda sorta thing and drift from one MLM to another looking for the right product or company.  They never learn it's not usually the product that's the proble.  It's REALLY more about how they were taught (or sadly, not taught in most MLMs) to run their new MLM as a business!

 

      GOOD NEWS is if you do run your MLM as a business, you can go “negative” and deduct more than you earned which may save you taxes.  NOTE - you want to MAKE money in the MLM or any business you start! You are not in business to lose money! You should not join an MLM to spend more than you make!  But in the early start-up days, the IRS allows you to deduct losses to help you grow into a profitable business.

 

      The key is to RUN YOUR BUSINESS LIKE A BUSINESS. You MUST, MUST, MUST behave as a home-based business with a "clear intent to make a profit" as defined by the IRS. That means you must have at LEAST the following in place for ANY business but especially and MLM network marketing companies:

1.  You must use a Schedule C on your federal taxes.  You can incorporate as an S Corporation or C Corporation and use a K-1 Form but that is probably not something you do unless you are already making a profit and probably more than $3,600 in MLM earnings.
2. You MUST have a separate checking account used SOLELY for the MLM business.  It can be a personal account but it must be separate from the account you use for your daily life.  I keep my personal account at a different bank (WAMU) than my “business” account (Wells Fargo) to keep it simple for tracking. 
3. You must deposit all income checks into the MLM account and use checks from the account ONLY for MLM activities & purchases. If you use a personal credit card, buy something for the MLM from the other checking account or spend cash, you MUST write yourself a check from the MLM account to reimburse yourself. You need to keep the money separate like a real business does.
4. You MUST keep books on your business.  Use a checking account program like Quicken or MS Money.  Track all expenses and income through these books.  Don’t worry if they go negative in the account.  This is NOT a checkbook balancing thing. So you would put in $400 and then put in the $1500 laptop and would show a $1100 negative. You also put in your monthly costs for the product only if you share it.  You cannot deduct it if you consume it personally.
5.  Keep track of activities like where you are when you make an MLM presentation in a diary or calendar.  Keep track of mileage, meals, sodas, Starbucks, etc., when you are talking about the MLM.

 

     When you do these 5 things, you are much more likely to be presumed by the IRS to be in a real business.  If you run the MLM like most people as a “sometime thing” or where you are only spending money on the product and NOT selling it retail and actively recruiting, you are presumed to be a hobby or using it for personal reasons. Then you have the "hobby" limits on deductions.

 

     A lot of people look at all those steps and think it’s too much work.  But it is VERY profitable if you do it right!!  You want to make money, not lose money. But in the early days of an MLM, losing money is okay if you can deduct it all! 

 

     Let’s assume you are in a 20% tax bracket between federal and state taxes.  That means you will be refunded 20% of your taxes for all negative expenses.  Lets assume you made $400 in 2008.  So you’d get back 20% of $400 profit minus the $1500 laptop costs => 20% times $1,100 = $220 in tax savings. 

      Would you do the 5 steps for $220 in tax refunds? 

      But let's assume you use the product for marketing and it costs you $180 per month. Your potential tax savings are now 12 x $180 in advertising = $2160 x 20% = $432 in tax savings. 

      So between the two – buying a laptop and using the products – you could save $652 per year in taxes if you are in the 20% net tax bracket.  Is doing the 5 steps now worth it? Would you do these things for $54 per month?

 

     Hope this helps . . .