Deduct That?

Ensuring Success for 
the Home-based Business

Every day, stay-at-home moms and dads, entrepreneurs or people looking to earn an additional income stream join a direct sales or multi-level marketing company. Companies such as Mary Kay, Rodan+Fields, Arbonne, Scentsy, DoTerra, Young Living, LulaRoe, Herbalife, Isagenix, etc., are constantly growing with eager entrepreneurs. Everyone aspires to live the American dream–own your own business, live prosperously and reach the golden pinnacle of retirement early– and many find these business opportunities as a possible means to help reach the dream.

It never fails that the people who have joined these home-based businesses aren’t prepared for the tax consequences of owning their own business. Over the years, I’ve accumulated my list of what I feel are the most asked, or addressed, questions in consultations with home-based business owners. I recently shared this information in more detail to a large group of eager business owners at a lunch-and-learn, and felt that the readers of this magazine might benefit as well.

”Should I set up an LLC?”

My answer, why not?

The costs associated with setting up an LLC (Limited Liability Company) are minimal, but the protections that an LLC affords a small-business owner are worth the price of gold. Limited liability is exactly as it sounds; a business owner’s liability is limited to the assets held or acquired within that LLC. What this means is the owner is not held personally liable for any debts or judgments. Creditors are not allowed to go after an owner personally.

LLCs also afford you the right to choose how you want to be taxed. You can be a sole-proprietorship, S-Corporation or C-Corporation (all assuming you’re the only owner). Each have their tax advantages and disadvantages.

“I didn’t keep any receipts or records and I received a 1099 in the mail, what do I do?”

If you purchased something with cash and didn’t keep a receipt, you’re probably out of luck because you have no proof of purchase. Unless you can reasonably estimate those expenses and validate it with other purchases within the same range, it would not be substantiated in an audit. As far as other receipts, some you should keep, some are less necessary. Many owners use the NEAT scanners or a phone-scanning app. As I have been told by an auditor in the past, it’s a luck of the draw in the event you ever get audited as to what that auditor wants to see. Most will allow a meal deduction if you have the actual credit card or bank statement with the who and why listed, or a reconciled accounting file with the same information in the memo.

Mileage is any LLC owner’s best friend; how it’s deducted depends entirely on the chosen tax structure. With mileage, I tell all our clients that it’s imperative you record the beginning and end-of-year odometer readings. The mileage in-between is known by one person and one person only: the business owner. Expected record-keeping identifies who you’re visiting, the purpose and miles traveled.

We provide spreadsheets to our clients in the home-based industries that help simplify the record-keeping requirements. In short, Excel is your friend.

“What can I deduct?”

Wow, what a loaded question! The answer to this question lies with who you put your trust and confidence in to help you with taxes. We are a strong believer in aggressive, but not to the extent of noncompliance. An example of our aggressive but not noncompliant approach:

Why can’t a Mary Kay rep justify a pedicure as an advertising expense? Think about the person buying the Mary Kay product from a rep; would they want to buy from someone with toenails like a troll, or someone with toenails like a Disney princess?

Why can’t an essential oils rep write-off the costs of a guard dog that’s guarding their inventory?

Ultimately, the scope of tax deductions for home-based business owners is extensive, and I could write about those well beyond the length of this article. We would love to have you in for a complimentary consult to see if we are the right tax and accounting firm for you and discuss these topics in more detail. Thanks for reading–I hope you have learned at least one new idea, and have a prosperous 2017!

Matthew Mann is owner of Matthew Mann, CPA PLLC, a full-service accounting and tax firm located in Moore. He can be reached at 703.2599.