I Get Very Sad When a Client Gets Involved in Multi-Level Marketing

ID-100116832My tax blog buddy Joe Kristan at the Tax Update blog said the following in a post Thursday under the heading “Can an Amway distributorship ever be taxed as a legitimate business?”:

I avoid multi-level marketing clients because their “profit” so often comes from putting personal expenses on Schedule C.  It sure seems that way here.

I have a few clients involved in multi-level marketing. Luckily, none of these clients are aggressive or crazy on what they try to claim for deductions. But sometimes they get some wild ideas that they’ve heard from others in their “network.” Like the time one asked if they could deduct their personal grocery bills.

I am not going to “fire” a client just because they’re involved in MLM. But neither will I tolerate one who wants to play games with deductions.

If the client is trying to make money at their MLM business, and they are okay with ONLY claiming legitimate expenses, then I have no real quarrel with someone being involved in MLM.

But I do get sad when a client says they’ve gotten involved in multi-level marketing.

The reason I get sad has nothing to do with taxes or fears that the client will be over-aggressive with deductions.

The reason I get sad is: so few of them actually make money.

I have never,

N – E – V – E – R

had a client involved in MLM who said it’s worth it. Time and again, people will say it’s not worth the time and effort. Even those who turn a meager profit after their legitimate expenses will say it’s not worth the time involved.

Most are excited the first year, but then lose interest and just stop after another year or two. A few carry on, though they gripe about it.

MLM promoters love to play up the supposed tax miracles of MLM businesses, and the “easy money” aspect.

In the real world, there are no tax miracles, and there is no easy money.

Image courtesy of rakratchada torsap / freedigitalphotos.net

Tax Court Case Involving Radio DJ Strikes Close to Home for Me, Part 2

On Tuesday I wrote about a Tax Court case involving a Mr. Ramirez, who was a radio station employee who sold advertising on his own, and was treated as an independent contractor in regards to his sales. This post is about my observations on this case.

Observations from an Ex-Radio Guy

As an ex-radio guy, several things stand out as odd about this case.

One: The ruling itself.

Based on the facts as presented, I can kinda-sorta see where the Tax Court was coming from in ruling that Ramirez was self-employed in regards to his promotional income. What surprises me is the setup of the whole arrangement between the sponsors, the radio station and himself. Which leads to….

Two: Why Didn’t Univision Keep Part of His Sales?

The Court ruling says Univision acted as a “conduit” for billing the customers Mr. Ramirez found, which implies that everything passed directly through to Ramirez. In the year in question before the Court, Ramirez received $82,000 from his sales. The ruling doesn’t explicitly say it, but it appears that this was what he actually sold, NOT just a commission on his sales.

I am shocked that the station didn’t deem that they were entitled to keep most of his sales and just pay him a commission.

Three: Why Didn’t the Station Try to Take Over His Clients?

At the station I worked at (which admittedly was a tiny, locally owned station rather than a big outfit like Univision), sales work was territorial and cutthroat. If you were in sales, you didn’t want to so much as say hello to someone else’s client or you’d get called on the carpet.

And if you weren’t in sales, management wasn’t keen on non-sales staff trying to break into sales.

I was the news director and wasn’t in sales. I wanted to get sales experience, so I asked to have a few accounts to manage. I was told no.

In denying my request, the exact words management said to me were: “You’d never make it in sales. You don’t have a sales personality.”

Management and sales staff are typically defensive about anyone infringing on “their gig.” So the whole arrangement Mr. Ramirez had just boggles my mind.

I’m pretty sure that if I had gone out and gotten sponsors on my own, and read my sponsor’s commercials on the air, and used my “celebrity” status — afforded to me by virtue of being a radio station employee — to get paid for doing remotes and live appearances, that my employer would not have been happy with me — especially if I was keeping 100% of the proceeds for myself and the station was getting nothing!

And I sure can’t imagine them agreeing to bill those customers for me and then passing through 100% of the proceeds to me while keeping nothing for the station!

Click here to view the Tax Court opinion.

Tax Court Case Involving Radio DJ Strikes Close to Home for Me

I used to work in radio. I was the news director at KNOD radio station in Harlan, over in the western part of Iowa.

I plan to start writing more about my past and my experiences and how it ties into my professional life. But those are different blog posts for different days.

Today I want to write about a U.S. Tax Court case that caught my eye last summer. I’ve had it on my “to-blog-about” list for a long time.

The case intrigued me because it involved a radio station employee who got paid by his employers as both an employee and an independent contractor. The result of the case surprised me.

Background:

A man by the name of Mr. Ramirez was an employee of Univision and worked for radio station KXTN in San Antonio. He was the station’s program director and was an on-air personality.

In 2005, the station was struggling financially so Mr. Ramirez took it upon himself to find sponsors. From the U.S. Tax Court ruling:

Mr. Ramirez established a direct, personal relationship with his sponsors, working hand-in-hand with them from the start of the advertising campaign to its end. They had no written contracts, just handshake agreements. Mr. Ramirez set the amount to be paid to him for his promotional services without input from Univision or KXTN….

Mr. Ramirez assisted the sponsors in developing their respective advertising campaigns, including the drafting of their “copy points” which outlined those elements of the advertising campaign that the sponsors desired to highlight. He promoted their products and/or services, both during on-air broadcasts and on “off-air” appearances at sites designated by the sponsors.

Even though Ramirez set the amounts the sponsors would pay, the sponsors were billed by Univision. Univision added these amounts to Ramirez’s wages. Withholdings for income taxes and FICA were taken out of his pay, and these amounts were included as wages on Ramirez’s W-2.

In 2007 (the year in question before the Tax Court), Ramirez was paid an additional $82,000 of wages from his sales.

When he filed his 2007 tax return, he included a Schedule C showing $0 of income and $26,303 of expenses. The Schedule C related to his sales work. According to Ramirez’s CPA, the Schedule C showed $0 of income because the $82,000 of sales income was already included on his W-2.

Naturally, the IRS audited Ramirez. The IRS believed the $26,000 of expenses were employee expenses that should have been shown as itemized deductions subject to the 2% of AGI limitation, rather than as Schedule C deductions.

Mr. Ramirez argued that his sales work was outside the scope of his regular work at the radio station and so the sales work should be treated as independent contractor wages.

To my surprise, the Tax Court agreed. They reclassified the $82,000 of sales income as Schedule C gross receipts and allowed the $26,000 of deductions against that income.

In Part 2, I’ll explain why I’m surprised at this entire arrangement based on my own experiences in my “prior life” in radio.

Deducting Miles Driven for Charity

An often overlooked charitable deduction is the deduction for mileage driven for charitable purposes.

Taxpayers can take a deduction of 14 cents/mile for mileage driven in giving services to a charitable organization, or taxpayers can take a deduction for the actual cost of gas and oil associated with giving services to a charitable organization. A deduction of 14 cents/mile isn’t huge but it is an extra deduction that’s available.

Iowa taxpayers are allowed to take 39-cents per mile as a deduction.  (Technically, the Iowa deduction is the standard 14-cents per mile as an itemized deduction, and then you can take another 25-cents per mile as an additional deduction.  The net effect is 39-cents per mile.)

Example
You volunteer to answer the phones once a week for a charitable organization.  The organization’s office is 10 miles from your home.  You can claim 20 miles (10 miles each way) as a deduction each week.  If you do this 52 weeks a year, that would be 1,040 miles.  At 14-cents per mile, the charitable mileage deduction would be $146.  If you live in Iowa, your total mileage deduction on your Iowa return would amount to $406.

Dinesen Tax Greatest Hits: Filing Separately on Your Iowa Return? Don’t Forget to Allocate Deductions

One last “greatest hits” post before regular, “new” posts resume next week!

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Originally published March 7, 2012

Married couples in Iowa who both have income will usually find that one of the “separate” filing statuses is the best to use on their Iowa taxes, rather than filing a joint Iowa return. The reason is, Iowa has just one tax bracket regardless of filing status, so two people filing a joint return will be taxed on their combined incomes at a high point in Iowa’s highly progressive tax bracket. Filing separate returns allows each spouse to be taxed at a lower point in the tax bracket.

Iowa offers two “separate” filing statuses — married filing separately on a combined return, and married filing separately on separate returns. A more thorough discussion of the differences between the two statuses is for another blog post on another day. The main point I want to make today is: under either of the separate filing statuses, you must allocate itemized deductions based on income.

Allocating Deductions

When a married couple files separately on their Iowa returns — either on a combined return or on a completely separate return — the couple MUST share itemized deductions based on income. This is true even if one spouse made 100% of the payments from their own separate funds.

Example

John and Jane are married in Iowa and file their Iowa taxes as married filing separately. John’s income is $50,000. Jane’s income is $25,000. On the Iowa return, John must claim 2/3 of the itemized deductions ($50,000 income/$75,000 total income of the couple) and Jane must claim 1/3 of the itemized deductions, regardless of who actually made the payments or whether the payments relate to separately held property.

This is a different concept from the married filing separately filing status on federal taxes. On a “separate” federal 1040, the itemized deductions generally go to whoever actually made the payment.

Image: renjith krishnan / FreeDigitalPhotos.net