If you sell food products in a multi-level marketing system, can you deduct personal grocery expenses?
I’ve actually had this question posed to me before. The person’s “sponsor” in the MLM system told the taxpayer that the taxpayer could deduct all of their grocery purchases from Wal-Mart, etc. as a “marketing expense” because you have to know what the competitor’s food tastes like. Thus, according to the sponsor, grocery expenses are a necessary business expense.
Of course, the sponsor’s accountant allowed the sponsor to take the deduction.
An additional question came up regarding whether it was okay to deduct all food purchases from the MLM supplier, even if it was consumed by the taxpayer instead of being sold to customers. Again, the logic being that you have to know what the food you’re selling tastes like.
Neither deduction is okay.
Here’s what the IRS Audit Technique Guide on multi-level marketers says (my emphasis added):
“(T)he cost of a product that is used by the direct seller is a personal expense, even if that product is occasionally shown to prospective customers. Some direct sellers erroneously think they can decorate their home with products and deduct the cost as a business expense. To be deductible under IRC Section 162, the expense must be an ordinary and necessary expense paid or incurred in carrying on a trade or business (also see Regulation 1.162-3). Under IRC Section 262, no deduction generally is allowed for personal, living, or family expenses.”
In other words, anything that you buy and consume for personal purposes is a non-deductible personal expense. This would include your personal grocery bills and purchases from your supplier that you consume personally.