Publication 911

Cat. No. 60031B Contents

Important Changes for 2003 ......... 1 Department

of the Direct Sellers Important Reminders .............. 2 Treasury

Internal Introduction ..................... 2

Revenue

Service For use in preparing Who Is a Direct Seller? ............. 2

Basic Tax Information ............. 3

2003 Returns

Business Income ................. 5

Capital Expenses ................. 6

Cost Recovery ................... 7

Business Expenses ............... 8

Business Use of Your Home ......... 10

Travel and Transportation ........... 11

Meals and Entertainment ........... 11

Business Gifts ................... 12

Not-for-Profit Limit ................ 13

Recordkeeping .................. 13

Sample Filled-In Forms ............. 15

How To Get Tax Help .............. 19

Index .......................... 20

Important Changes

for 2003

Standard mileage rate. The standard mileage rate for the cost of operating your car in

2003 is 36 cents a mile for all business miles.

Increased section 179 deduction limit. The

maximum section 179 deduction you can elect

for property you placed in service in 2003 is

$100,000. For more information, see Chapter 2

in Publication 946.

Addition of 50% special depreciation allowance. For qualified property you acquire after

May 5, 2003, and place in service in 2003, you

can take a special depreciation allowance that is

equal to 50% of the property’s depreciable basis. However, you can elect to claim an allowance at the 30% rate for property that qualifies

for the 50% rate, or elect to claim no special

allowance. For more information, see chapter 3

in Publication 946.

Depreciation limits on business cars. The Get forms and other information total section 179 deduction and depreciation (including the 30% or 50% special depreciation faster and easier by: allowance) you can take on a car you use in your

business and first place in service in 2003 is Internet • www.irs.gov or FTP • ftp.irs.gov generally limited. For those limits and additional

information, including the maximum deprecia- FAX • 703–368–9694 (from your fax machine) tion you can deduct in later years, see Passenger automobiles under Listed Property, later.
You can write to us at the following address:

Important Reminders Who Is a Direct Seller?

Internal Revenue Service

Business Forms and Publications You are a direct seller if you meet all the follow- Accounting methods. Certain small busi- SE:W:CAR:MP:T:B ing conditions. ness taxpayers that are qualifying taxpayers 1111 Constitution Ave. NW

or qualifying small business taxpayers may Washington, DC 20224 1) You are engaged in one of the following

be eligible to adopt or change to the cash trades or businesses.

method of accounting and may not be required We respond to many letters by telephone. a) Selling or soliciting the sale of con- to account for inventories. For more information, Therefore, it would be helpful if you would include your daytime phone number, including the sumer products, either— including the definitions of a qualifying taxpayer

area code, in your correspondence. and a qualifying small business taxpayer, see i) In a home or other place that is not

Publication 538, Accounting Periods and Meth- a permanent retail establishment, or

ods. Useful Items

You may want to see: ii) To any buyer on a buy-sell basis or

Photographs of missing children. The Inter- a deposit-commission basis for renal Revenue Service is a proud partner with the Publication sale in a home or other place that is

National Center for Missing and Exploited Chil- not a permanent retail establish- ❏ 1 Your Rights as a Taxpayer ment. dren. Photographs of missing children selected

❏ 15 Circular E, Employer’s Tax Guide by the Center may appear in this publication on b) Delivering or distributing newspapers or pages that would otherwise be blank. You can ❏ 15–A Employer’s Supplemental Tax shopping news (including any services help bring these children home by looking at the Guide directly related to that trade or busi- photographs and calling 1–800–THE–LOST ❏ 15–B Employer’s Tax Guide to Fringe ness). (1–800–843– 5678) if you recognize a child. Benefits

2) Substantially all your pay (whether paid in ❏ 334 Tax Guide for Small Business cash or not) for services described in (1) is

❏ 463 Travel, Entertainment, Gift, and Car directly related to sales or other output (inIntroduction Expenses cluding the performance of services) rather

than to the number of hours worked.

This publication explains general tax information ❏ 505 Tax Withholding and Estimated Tax

3) Your services are performed under a writ- of interest to direct sellers. It covers how to treat ❏ 525 Taxable and Nontaxable Income ten contract between you and the person income, expenses, and other items related to

❏ 533 Self-Employment Tax for whom you perform the services, and having a direct-sales business. It also illustrates the contract provides that you will not be two filled-in tax forms that most direct sellers ❏ 535 Business Expenses treated as an employee for federal tax pur- must file along with Form 1040. They are Sched- ❏ 538 Accounting Periods and Methods poses. ule C (Form 1040), Profit or Loss From Business, and Schedule SE (Form 1040), ❏ 583 Starting a Business and Keeping As a direct seller, you usually sign up with a

Self-Employment Tax. Records particular company to sell its product line. The

company may refer to you by one of the follow- ❏ 587 Business Use of Your Home ing titles. Who is a direct seller? Some of the charac- ❏ 946 How To Depreciate Property • Consultant teristics that identify direct sellers are listed below. A more complete discussion is contained Form (and Instructions) • Coordinator

under the heading Who Is a Direct Seller, later.

❏ SS–4 Application for Employer • Dealer

• How you sell. You sell consumer prod- Identification Number • Demonstrator

ucts to others on a person-to-person ba- ❏ Sch A (Form 1040) Itemized Deductions • Designer sis, usually working out of your home. Or,

you deliver or distribute newspapers or ❏ Sch C (Form 1040) Profit or Loss From • Director

Business shopping news. • Distributor or direct distributor

❏ Sch C–EZ (Form 1040) Net Profit From • Where you sell. You may sell Business • Instructor door-to-door, through the sales party plan,

or by appointment in someone else’s ❏ Sch SE (Form 1040) Self-Employment • Manager or supervisor

home. Tax • Representative or sales representative

• When you sell. You may sell on a regular ❏ 1040 U.S. Individual Income Tax Return

basis or only occasionally. You may sell ❏ 1040–ES Estimated Tax for Individuals Self-employed. Direct sellers are self-emfull-time or part-time, such as a sideline to ployed. This generally means you have to pay ❏ 1099–MISC Miscellaneous Income a regular job. self-employment tax (discussed later under

❏ 2210 Underpayment of Estimated Tax by Business Taxes).

Who is not a direct seller? You are not a Individuals, Estates, and Trusts Employee. You are a direct seller only if you direct seller if you are employed in a store, sell ❏ 4562 Depreciation and Amortization are in business for yourself. Selling consumer through a retail sales outlet, or sell your ❏ products as a company employee does not 8829 Expenses for Business Use of Your employer’s product away from the employer’s Home make you a direct seller. place of business. The fact that you work under another direct See How To Get Tax Help near the end of seller does not make you that person’s em- this publication for information about getting ployee. Comments and suggestions. We welcome publications and forms. your comments about this publication and your Recruiting. You are engaged in the trade or suggestions for future editions. business of selling or soliciting the sale of conYou can email us at *taxforms@irs.gov. sumer products if you attempt to increase the

Please put “Publications Comment” on the sub- sales of direct sellers who work under you (your

ject line. downline group) and your earnings depend in

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part on how much they sell. Recruiting, motivat- • Employment taxes tax you owe on income from your job and

ing, and training are examples of attempts to from direct selling.

increase sales. Your state, county, or city may impose other • Estimated tax. If you do not pay tax kinds of tax and licensing obligations. Host or hostess. You are not a direct seller if through withholding, or do not have

you simply host a party at which sales are made. enough withheld, you may have to pay Income tax. All businesses except partner- Nevertheless, some information in this publica- estimated tax. ships must file an annual income tax return. tion may still apply to you. (Partnerships file an information return.) For ex- Estimated tax is used to pay both income and The gift you receive for giving the party is a ample, if you operate your direct-selling busi- self-employment taxes. payment for helping the direct seller make sales. ness as a sole proprietor, you must file Schedule You must report it as income at its fair market C or Schedule C–EZ as part of your individual General rule for making estimated tax pay- value. See Other Income, later. income tax return (Form 1040). You are a sole ments. You must make estimated tax pay- Your out-of-pocket party expenses are sub- proprietor if you are self-employed (work for ments for 2004 if you expect to owe at least ject to the 50% limit for meal and entertainment yourself) and are the only owner of your unin- $1,000 in tax, after subtracting your withholding expenses, discussed under Meals and Enter- corporated business. and credits, and you expect your withholding tainment, later. These expenses are deductible and credits to be less than the smaller of the as miscellaneous itemized deductions subject to Self-employment tax. Self-employment tax is following. the 2%-of-adjusted-gross-income limit on a social security and Medicare tax primarily for Schedule A (Form 1040), but only up to the those who work for themselves. It is similar to • 90% of the tax to be shown on your 2004 amount of income you receive for giving the the social security and Medicare taxes withheld tax return. party. See Not-for-Profit Limit, later. from the pay of most wage earners. If you are a • 100% of the tax shown on your 2003 tax direct seller, you generally must pay this tax on

your income from direct selling. You must pay it return. Your 2003 tax return must cover all

whether you are a sole proprietor or a partner in 12 months for this rule to apply. Basic Tax Information a partnership. Use Schedule SE (Form 1040) to

figure your self-employment tax. For more infor- Paying estimated tax. You can use Form The following discussion gives basic tax infor- mation about self-employment tax, see Publica- 1040–ES to figure your estimated tax and make mation that may help if you have never been in tion 533. quarterly estimated tax payments. Or, you can business for yourself. For more information The Social Security Administration (SSA) make estimated tax payments by electronic about starting a business, see Publication 583. time limit for posting self-employment in- funds withdrawal or by credit card. See the Form

come. Generally, the SSA will give you credit 1040–ES instructions or How To Pay Estimated Employer Identification for self-employment income reported on a tax Tax in Publication 505. Number (EIN) return filed within 3 years, 3 months, and 15

days after the tax year you earned the income. If EINs are used to identify the tax accounts of Underpayment penalty. If you did not pay you file your tax return or report a change in your employers, certain sole proprietors, corpora- enough estimated tax or have enough income self-employment income after this time limit, the tions, partnerships, estates, trusts, and other tax withheld, you may be subject to a penalty for SSA may change its records, but only to remove entities. underpayment of tax. You can use Form 2210 to or reduce the amount. The SSA will not change If you do not already have an EIN, you need figure the penalty. In most cases, you can have its records to increase the amount of your to get one if any of the following apply to your the Internal Revenue Service figure the penalty self-employment income. business. for you. See Form 2210 to determine if you must

Employment taxes. If you have employees in complete the form. 1) You have employees. your business, you generally withhold and pay Exceptions. Generally, you do not have to 2) You have a qualified retirement plan. the following kinds of employment taxes. pay an underpayment penalty if you meet either

3) You operate your business as a corpora- • The federal income tax you withhold from of the following exceptions.

tion or partnership. employees’ wages. • Your total tax is less than $1,000. 4) You file returns for: • Social security and Medicare taxes—both • You had no tax liability last year. the amount you withhold from employees’ a) Employment taxes, wages and the amount you pay as the For more information on estimated tax, see b) Excise taxes, or employer. Publication 505.

c) Taxes on alcohol, tobacco, or firearms. • Federal unemployment (FUTA) tax (none

of which is withheld from the employees’ Information Returns

You can apply for an EIN in the following wages).

ways: For more information, see Publication 15. You must file an information return to report that

you made direct sales of at least $5,000 of • By going online—Click on the EIN link at

www.irs.gov/businesses/small. Other taxes. You can deduct personal prop- consumer products to a buyer for resale any- The EIN

erty and other taxes as a business expense if where other than a permanent retail establish- is issued immediately once the application

information is validated. you incur them in the ordinary course of your ment. The information return, Form

business. For information about deducting these 1099–MISC, must show the name, address, • By telephone at 1–800–829–4933 from taxes, see Taxes under Business Expenses, and identification number of the buyer (recipi- 7:30 a.m. to 5:30 p.m. in the applicant’s later. ent). Check box 9 of Form 1099–MISC to show local time zone. these sales. Do not enter a dollar amount.

• By mailing or faxing Form SS–4, Applica- Estimated Tax You must also provide a statement to the tion for Employer Identification Number. buyer by January 31 of the year following the The federal income tax is a pay-as-you-go tax. calendar year for which the information return is You must pay it as you earn or receive income Business Taxes filed, showing your name, address, phone num- during the year. There are two ways to pay as ber for contacting you, and identifying number. you go. The following kinds of federal business taxes The statement you give to the buyer for these

may apply to direct sellers. • Withholding. If you are an employee, direct sales may be in the form of a letter showyour employer likely withholds income tax ing this information along with commissions, • Income tax from your pay. By revising your W–4, you prizes, awards, etc. See the instructions for

• Self-employment tax can increase your withholding to cover the Form 1099–MISC for more information.

Page 3
Penalties Negligence. Negligence includes a failure secutive months ending on the last day of

to make a reasonable attempt to comply with any month except December.

The law imposes penalties for noncompliance provisions of the Internal Revenue Code. You generally adopt a tax year by filing your first with tax laws. Some of these penalties are dis- Disregard. Disregard means the careless, income tax return using that tax year. If you filed cussed next. If you underpay your tax due to reckless, or intentional disregard of rules or reg- your first return as a wage earner using the fraud, you could be subject to a civil fraud pen- ulations. calendar year and you later start your own busi- alty. In certain cases, you could be subject to ness, you must continue to use the calendar criminal prosecution. Substantial understatement of income tax. year as your business tax year. You generally For an individual, income tax is substantially Failure-to-file penalty. If you do not file your cannot change your tax year without IRS ap- understated if the understatement exceeds the

return by the due date (including extensions), proval. greater of the following amounts. you may have to pay a failure-to-file penalty. The For more information, see Publication 538. penalty is usually 5% of the tax not paid by the • 10% of the correct tax.

due date for each month or part of a month that • $5,000. the return is late. This penalty cannot exceed Accounting Methods 25% of your tax, and it is reduced by the Information reporting penalties. A penalty failure-to-pay penalty (discussed next) for any An accounting method is a set of rules used to

month both penalties apply. However, if you file applies if you do not file information returns by determine when and how income and expenses the due date, do not include all required informa- your return more than 60 days after the due date are reported. You must use the same accountor extended due date, the minimum penalty is tion, or do not report correct information. The ing method from year to year. The two most

the lesser of $100 or 100% of the unpaid tax. amount of the penalty is based on when you file common accounting methods are the cash

You will not have to pay the penalty if you show the correct information return, as follows. method and an accrual method. A third method,

that you failed to file on time because of reason- • Correct information returns filed within 30 called a hybrid method, is generally a combinaable cause and not because of willful neglect. days after the due date, $15 each. tion of cash and accrual.

The text and examples in this publication Failure-to-pay penalty. You may have to pay • Correct information returns filed after the generally assume you use the calendar year as a penalty of 1

/2 of 1% of your unpaid taxes for 30-day period but by August 1, $30 each. your tax year and either the cash or hybrid each month or part of a month after the due date • method as your accounting method. Generally, Information returns filed after August 1 or that the tax is not paid. This penalty cannot be not filed, $50 each. if inventories are needed to account for your more than 25% of your unpaid tax. You will not income, you must use an accrual method, dis- have to pay the penalty if you can show good Maximum limits apply to all these penalties. cussed later, for your sales and purchases. reason for not paying the tax on time. This pen- However, if you are a qualifying taxpayer or a alty does not apply during the automatic Failure to furnish correct payee statements. qualifying small business taxpayer, you can use 4-month extension of time to file if you paid at If you do not provide a complete, correct, and the cash method of accounting, even if you least 90% of your actual tax liability on or before timely copy of an information return (payee purchase or sell merchandise. You also can the due date of your return and you pay the statement), you may be subject to a penalty of account for inventoriable items as materials and balance when you file the return. $50 for each statement. If the failure is due to supplies that are not incidental. For more infor- The monthly rate of the failure-to-pay pen- intentional disregard of the requirements, the mation, including definitions of a qualifying tax- alty is half the usual rate (.25% instead of .50%) minimum penalty is $100 per statement with no payer, a qualifying small business taxpayer, and if an installment agreement is in effect for that maximum penalty. an explanation of materials and supplies that are month. You must have filed your return by the not incidental, see Publication 538. due date (including extensions) to qualify for this Failure to supply identification number. If

reduced penalty. you do not include your identification number Cash method. Under the cash method, you (SSN or EIN) or the identification number of report income in the year it is received, credited Penalty for frivolous return. You may have another person where required on a return, to your account, or made available to you on to pay a penalty of $500 if you file a return that statement, or other document, you may be sub- demand. You need not have physical posses- does not include enough information to figure ject to a penalty of $50 for each failure. You may sion of it. You deduct expenses in the year you the correct tax or that contains information also be subject to the penalty if you do not give pay them, even if they were incurred in an earlier clearly showing the tax you reported is substan- your identification number to another person year. tially incorrect. when it is required on a return, statement, or You will have to pay the penalty if you filed other document. Check received. If you receive a check

this kind of return for either of the following You will not have to pay the penalty if you before the end of the tax year, you must include reasons. can show the failure was due to reasonable it in income for the year you receive it even

cause and not willful neglect. though you do not cash or deposit it until the • A frivolous position on your part. next year. • A desire to delay or interfere with the administration of federal income tax laws. Accounting Periods Accrual method. Under an accrual method,

and Methods you generally report income for the tax year This penalty is in addition to any other penalty when all events have occurred that fix your right provided for by law. All income tax returns are prepared using an to receive the income and you can determine the

accounting period (tax year) and an accounting amount with reasonable accuracy. Generally, Accuracy-related penalty. An accuracy-re- method. you deduct or capitalize business expenses lated penalty of 20% applies to any underpay- when all events have occurred that fix the fact of

ment due to the following reasons. liability, the liability can be determined with rea-

• Negligence or disregard of rules or regula- Accounting Periods sonable accuracy, and economic performance

tions. has occurred. See Publication 538 for an expla- When preparing a statement of income and ex- nation of economic performance. • Substantial understatement of income tax. penses, you must use books and records for a

specific interval of time called an accounting Prepaid expenses. Expenses paid in ad- This penalty also applies to conditions not dis- period. The annual accounting period for your vance generally can only be deducted in the cussed here. tax return is called a tax year. You can generally year to which they apply under either the cash or

Even though an underpayment was due to an accrual method. (However, see use one of the following tax years. Exception for

both negligence and substantial underpayment, recurring items under Accrual Method in Publi- • A calendar year, which begins on Janu- the total accuracy-related penalty cannot ex- cation 538.) For example, suppose you have a ary 1 and ends on December 31. ceed 20% of the underpayment. The penalty is subscription to a direct-selling journal that runs

not imposed if you can show reasonable cause • A fiscal year (including a period of 52 or out at the end of 2003. It will cost you $30 to

and that you acted in good faith. 53 weeks). A regular fiscal year is 12 con- renew the subscription for one year or $54 for 2

Page 4
years. You decide to renew for 2 years and mail from the company (or from a direct seller you the cost of merchandise you bought for

your check at the end of November 2003. You your own use. work under). You either send the money directly

cannot deduct the $54 on your 2003 return. to the company with your orders, or you are 3) Subtract from this total the inventory on However, you can deduct half of the $54 in 2004 billed later. In either case, you are able to charge hand at the end of the year. The difference and the other half in 2005. your customers more than you pay for the is your cost of goods sold during the year. goods.

You are buying products wholesale and sellExample 1. Janet sells cookware on the ing them retail. The full amount received from Business Income sales-party plan. On December 31, 2002, she your customers is income from sales. did not have any cookware on hand to sell to

You must report all income you receive as a customers. She does not have a beginning in- Example 4. You keep a supply of goods that

direct seller. This includes any of the following. ventory for 2003. your customers regularly buy from you. This During the year, Janet spent $5,270 on allows you to fill their orders without delay. You • Income from sales—payments you re- goods in her product line. Of this amount, $130 order and pay for the goods before your custom- ceive from customers for products they was for cookware sets she gave for personal ers request them. buy from you. gifts and $40 was for a set for her own use. She You have purchased goods to resell to cus- • Commissions, bonuses, or percentages purchased $5,100 [$5,270 − ($130 + $40)] worth tomers. The full amount received from your cus- you receive for sales and the sales of of goods to sell to customers. tomers is income from sales. others who work under you. On December 31, 2003, Janet had several

sets of cookware in boxes for delivery to custom- • Prizes, awards, and gifts you receive from Example 5. You have recruited several ers. The cost of these sets was $220. Her end- your selling business. other direct sellers who order their products ing inventory for the year is $220, and her cost of through you. Commissions or bonuses paid to You must report this income regardless of goods sold for 2003 is $4,880 ($0 beginning you by the company are shared with the direct whether it is reported to you on an information inventory + $5,100 purchases − $220 ending sellers in your group based on sales, inventory). return. purchases, or some other formula established

by the company whose products you sell. You Example 2. Lisa is a direct seller of cosmet- Income From Sales keep the portion of the commissions you are not ics. She has an established clientele and knows

required to distribute to the direct sellers in your what items are steady sellers. When the com- You have income from sales if your customers group. pany has a special sale on these items, she buy directly from you and you buy the products The bonuses you receive from the company buys extra quantities for future sales. She had you sell from a company (or another direct are included in income as commissions, not as merchandise costing $200 on hand at the end of seller). income from sales. 2002 (which would be her beginning inventory If some of your customers buy their products for 2003) and merchandise costing $175 at the directly from the company, you, as the sales

Gross Profit end of 2003. During the year she purchased agent, do not have any sales income from these $3,250 of merchandise. Purchase returns and transactions. You will generally receive a commission or Gross receipts minus cost of goods sold equals allowances were $50. She withdrew $200 of bonus for making the sale, but you gross profit. cosmetics for personal use. Lisa figures her cost will have no direct income from the sale itself. If

of goods sold for 2003 as follows: all of your sales are handled this way, the rules If you have income from sales and you are

in this section do not apply to you. Report your filing Schedule C, Form 1040, figure your gross Beginning inventory ............. $200 commissions as other business income. For profit and the income to report by following these Add: Merchandise more information, see Other Income, later. steps. purchased during the Depending on the company with which you year ........... $3,250 are affiliated and the nature of its marketing and 1) Figure the total your customers paid you Subtract: Purchase returns and compensation plan, you may have income from during the year for goods you sold them. allowances . . . . . . 50

sales, commissions, bonuses, or all three. Include this in the gross receipts you re- Subtract: Goods withdrawn for

port on line 1 of Schedule C. personal use . . . . . 200 3,000 Example 1. Your customers pay you the 2) Subtract the amount (if any) your custom- Goods available for sale .......... $3,200

retail price for goods they order. You forward the Subtract: Ending inventory . . . . . . . . . 175 ers paid that you had to return in the form orders and payments to the company. The com- Cost of goods sold ............. $3,025 of refunds, rebates, or other allowances. pany sends the merchandise to fill the orders. Show this on line 2 of Schedule C. The company also sends you a commission. Lisa figures her gross profit by subtracting the

You are acting as a sales agent for the com- 3) Finally, subtract the cost of the goods sold cost of goods sold from her gross receipts

pany. You did not purchase the products to sell (line 4 of Schedule C). To figure the cost of ($5,375) for the year as follows:

to your customers. Your payment from the com- goods sold, you must know the value of

pany is commission income, not income from the inventory at the beginning and end of Gross receipts ................ $5,375

sales. Include the commission in your gross the year, and your purchases during the Minus: Cost of goods sold ........ 3,025

receipts. The amount your customers pay for the year. See Cost of Goods Sold, next, and Gross profit ................. $2,350

goods they order is not included in income. Inventory, later.

Purchases. When figuring cost of goods sold, Example 2. Your customers pay you a de- include the full cost of all merchandise you buy posit when you take their orders. You send the to sell to customers. This cost includes all post- Cost of Goods Sold orders to the company, but keep the deposits for age and freight charges incurred. yourself. The company fills the orders by ship- To figure your cost of goods sold, follow these Figure your purchases at the actual price you ping the merchandise to your customers. Your steps. pay. Deduct a cash discount or a trade discustomers pay the company the remainder of count in figuring the cost of your purchases. A the retail price (usually cash on delivery). 1) Start with the value of your inventory at the cash discount or a trade discount is the differYou are acting as a sales agent for the com- beginning of the tax year. This is usually ence between the invoice price and the actual pany. The deposit is your commission income. the same as the value of your inventory at price you have to pay. You have no income from sales. the end of the previous year. Valuing in- Purchase returns and allowances. Subtract ventory is discussed later under Inventory. Example 3. Your customers pay you for the purchase returns and allowances from your total

goods you sell them, either when you take their purchases for the year when figuring cost of 2) Add to your beginning inventory the cost of

orders or when you make deliveries. After your goods sold. This includes any rebates or refunds merchandise you bought during the year to

customers place orders, you order the goods you received off the purchase price. It also in- sell to customers. This does not include

Page 5
cludes any credit you received for returned mer- sell it and collect the retail price from the cus- Prizes, awards, and gifts. If you receive

chandise. tomer. prizes, awards, or gifts in your role as a direct

seller, report their full value as business income.

Personal withdrawals. Subtract from your Identifying the cost. The second step in figur- The following are examples of items that must

purchases for the year the cost of goods in your ing your inventory is to identify the cost of inven- be included in income.

product line that you bought for personal use tory items. Use the specific identification

method • Cash. and the cost of goods you withdrew from inven- when you can identify and match the

tory. Merchandise is considered withdrawn from actual cost to the items in inventory. Most direct • Free merchandise.

inventory when it is no longer available for sale sellers will be able to use this method. • Expense-paid trips. to customers. For example, if you sell a particu- If you cannot identify specific items with their

lar kind of soap and give some as a gift or use invoices, you must make an assumption about • Use of a car.

some yourself, you must withdraw the soap from which items were sold during the year and which • Jewelry signifying your level of achieve- inventory because it is no longer available for remain. Make this assumption using either the

ment as a direct seller. sale. Follow this procedure for all products with- first-in first-out (FIFO) method or the last-in

drawn for personal use, even if you are using the first-out (LIFO) method. • Membership in organizations or clubs. product only to familiarize yourself with its char- The FIFO method assumes that the first • Tickets to sporting events, shows, or con- acteristics or to demonstrate loyalty to the com- items you purchased or produced are the first

certs. pany whose products you sell. items you sold, consumed, or otherwise disposed of.

The LIFO method assumes that the last Value of goods or services received. Report Inventory items that you purchased are sold, consumed, income received in the form of goods or services or otherwise disposed of first. at their fair market value. Fair market value is Many direct sellers have little or no inventory. the price agreed on between a willing buyer and Others keep a considerable inventory on hand. Valuing the inventory. The third step in figur- a willing seller when both have reasonable If you must account for an inventory in your ing your inventory is to value the items you have knowledge of the facts and neither is forced to business, you must use an accrual method of in inventory. The value of your inventory is a buy or sell. accounting for your purchases and sales. How- major factor in figuring your taxable income. The

ever, see Qualifying taxpayer and Qualifying method you use is very important. Value of use of property. If you receive the small business taxpayer in the discussion on The two most common methods to value free use of property through your direct-sales exceptions under Inventories in Publication 538. non-LIFO inventory are the cost method and performance, you must include the fair market If you have income from sales, you need to the lower of cost or market method. LIFO value of the use of the property in your business know how to figure your inventory at the end of inventory may only be valued at cost.

income. There are special rules for the free use each tax year. Your inventory practices must be Cost method. If you use the cost method to of an automobile and certain other property. For consistent from year to year. value your inventory items, the value of each more information, see Valuation of Fringe Bene- Figuring inventory involves: item is usually its invoice price. Add transporta- fits in Publication 525.

tion, shipping, and other necessary costs to ac- 1) Taking inventory, quire the items. Subtract appropriate discounts

2) Identifying the cost, and you received.

3) Valuing the inventory. Lower of cost or market method. See Capital Expenses

Publication 538 for a discussion of the lower of You need to know your inventory at the begin- cost or market method. You must capitalize some costs rather than de- ning and end of each tax year to figure your cost duct them. These costs are a part of your invest- of goods sold. Beginning inventory will usually New business. For a new business not us- ment in your business and are called capital be the same as the prior year’s ending inventory. ing LIFO, you may choose either method to expenses. When you capitalize a cost, you add Any differences must be explained in a schedule value your inventory. You must use the same it to the basis of the property to which it relates. attached to your return. method to value your entire inventory, and you Although you generally cannot take a current cannot change the method without first ob- Taking inventory. The first step is to identify deduction for a capital expense, you may be taining IRS approval.

and count all merchandise in your inventory. able to take deductions for these costs over a

period of years as explained later under Cost

end of the year. This generally will be any goods

Include all goods to which you have title at the Other Income Recovery.

you have on hand and have not yet sold to You must report on your tax return all income customers. you receive from your business unless it is ex- Kinds of Capital Expenses

Include merchandise you have purchased, if cluded by law. In most cases, your business You must capitalize the following costs. title has passed to you even if you have not yet income will be in the form of cash, checks, and

physically received the goods. You may have credit card charges. But business income can • Going into business. The costs of getting title to goods that were shipped to you but are be in other forms, such as property or services. started in business, before you are author- still in transit and not yet received. If the risk of These and other types of income are explained ized to start selling your company’s prod- loss during shipment is yours, you will probably next. ucts, are capital expenses. These start-up have title to the goods during shipment. If you costs include the cost of exploring differ- buy merchandise that is sent C.O.D., title Commissions, bonuses, and percentages. ent direct-selling opportunities, the cost of passes when payment and delivery occur. Many direct sellers receive a commission on any training you must have before becom- their sales or purchases. Your commission Goods not yet paid for. You may have title ing a direct seller for your product line, any might be called a bonus or percentage, and it to goods purchased but not yet paid for. If you fees you must pay to the company to be- might be based on both your own sales and the are billed for merchandise, you must usually pay come a direct seller, and similar costs. sales of other direct sellers working under you, the bill within a certain time. In this case, you See chapter 9 of Publication 535 for infor- or on purchases from the company with which have title to the goods and must include them in mation on how to treat these costs. you are affiliated. inventory, provided they are not sold by the end Report the full amount of any commissions • Business assets. The cost of any asset of the year. you receive as business income, even if you pay (property) that will last substantially beConsignments. Merchandise you receive part of it to other direct sellers working under yond the tax year it is placed in service is

on consignment is not purchased by you and is you. You can usually deduct the part you pay to a capital expense. Examples of business

never included in your inventory. You have mer- others as a business expense. For more infor- assets include office furniture, business

chandise on consignment if you do not have to mation, see Commissions under Other Ex- vehicles, and storage shelves. See Cost

pay for what you have in stock until the time you penses, later. Recovery, later.

Page 6
• Improvements. The costs of making im- The demonstrator kits last less than one year Dollar limit. The maximum section 179 cost

provements to a business asset are capi- and are not sold to customers. Some are ruined you can choose to deduct for 2003 is generally

tal expenses if the improvements add to and thrown away. Their cost is a business ex- $100,000.

the value of the asset, appreciably pense. Certain benefits, including an increased seclengthen the time you can use it, or adapt tion 179 deduction, are available for certain

it to a different use. However, normal re- property you place in service in the New York More than one year of use. If you use a

pair expenses are deducted as current Liberty Zone or in an empowerment zone. demonstrator for more than one year, its cost is

business expenses and are not capital- a capital expense. However, if you expect to Business income limit. The total cost you ized. For example, if you have a car you eventually sell the demonstrator, include it in can deduct each year after you apply the dollar use only for business, you can deduct as your inventory of goods for sale. limit is further limited to the taxable income from business expenses, maintenance and re- the active conduct of any trade or business dur- pair costs such as tune-ups, new head- Example 1. Mike sells educational books ing the year. lights, or brake repairs. The cost of door-to-door. He carries copies of the books to Any cost not deductible in one year because overhauling the engine, however, would show potential customers. If someone wants a of this limit can be carried to the next tax year. be a capital expense. book, he takes a deposit and delivers the book

at a later time. More information. For more information, see

His product line changes little from year to chapter 2 in Publication 946. Demonstrators year, so Mike can use a book as a demonstrator

If you keep your company’s products on hand to for a long time. Although he periodically re- Depreciation

places his demonstrators with new ones and show to potential customers, their cost may be sells the old ones at a discount, he has kept If you do not choose a section 179 deduction or part of the cost of goods sold, a capital expense, some books as demonstrators for up to 3 years. you choose a section 179 deduction and do not a business expense, or a personal expense, recover all your cost, you can take a deprecia- depending on the circumstances. The cost of a Because Mike eventually sells his demon- tion deduction (which may include a special de- product you use yourself is a personal expense, strators, they remain part of his inventory of preciation allowance for qualified property) for even if you occasionally show it to prospective goods for sale. part or all of the cost you did not claim as a customers.

Example 2. section 179 deduction. Janet sells the same line of edProperty whose cost can be recovered Example. Sheila is a direct seller who uses ucational books as Mike in Example 1. She tries

through depreciation is depreciable property. many of the products in her own home. When to use her demonstrators as long as possible.

She puts the books in plastic jackets to protect Depreciable property includes most types of tan- potential customers come to her house, she can gible property (except land), such as buildings, show them drapes she bought from the com- them, and ordinarily only stops using them as machinery, vehicles, furniture, and equipment. pany, as well as her lawn chairs, toaster, grill, demonstrators when the company comes out

with a new edition. Janet never sells the old Depreciable property also includes certain in- tea set, and spice cabinet. By showing these tangible property. items in her own home, she hopes to interest demonstrators. She can recover the cost of the

You can depreciate property if it meets the people in buying from her company or in becom- books she uses as demonstrators as discussed

following requirements. under Cost Recovery, next. ing direct sellers themselves.

Sheila cannot take a deduction for the cost of • It must be property you own.

any of these products. Because she uses them • It must be used in your business or in her own home for personal reasons, their cost income-producing activity. is not a cost of doing business. Cost Recovery • It must have a determinable useful life. Used one year or less. If you have a product You can usually recover (subtract from income) This means it is something that wears out, you use as a demonstrator for one year or less your cost for capital expenses over a number of decays, gets used up, becomes obsolete, and the demonstrator itself is not available for years. Each year a part of your basis is recov- or loses value from natural causes. purchase by your customers, its cost is a busi- ered through depreciation or amortization. Use ness expense. • It must be expected to last more than one depreciation to recover capital expenses for If the demonstrator itself can be bought by year. most tangible business assets. Use amortiza- your customers, include it in your inventory. tion to recover the cost of intangible assets, such • It must not be excepted property, such as

as start-up costs. Amortization is discussed in property placed in service and disposed of Example 1. Constance is a direct seller of chapter 9 of Publication 535. in the same year. kitchenware. Customers must order items from

Under certain circumstances, you may be a catalog, but she keeps at least one of each able to recover a limited amount of the cost of You must use the modified accelerated cost type on hand to show buyers. When her product qualifying property as a current expense by recovery system (MACRS) to depreciate most line changes and an item is discontinued, she electing the section 179 deduction property placed in service after 1986. rather than either starts using the demonstrator in her own For information about the depreciation of recover the cost as a capital expense. The sec- kitchen or tries to sell it. When she had a garage property placed in service after 1986, see Publi- tion 179 deduction is discussed later. sale, she sold a number of unused demonstra- cation 946. Chapter 4 contains a detailed dis- tors. cussion on figuring depreciation under MACRS. Constance includes her demonstrators, in- Form 4562. Generally, use Form 4562 to re- For information about the depreciation of cluding those for discontinued products, in her port depreciation, amortization, and the section property placed in service before 1987, see 179 deduction. A filled-in Form 4562 is illus- inventory of goods for sale. When she sells a Publication 534, Depreciating Property Placed demonstrator, including those she sold at the trated in an example in Publication 946. in Service Before 1987. garage sale, she includes the income in her

gross business receipts. Section 179 Deduction Special depreciation allowance. You can

When Constance starts using a demonstra- take a special depreciation allowance to recover

tor in her own kitchen, it is a withdrawal of You can elect to deduct all or part of the cost of part of the cost of qualified property placed in

inventory for personal use. She subtracts the certain qualifying property in the year you place service during the tax year. An allowance apcost of the item from her purchases for the year. it in service. Property is placed in service when it plies for the first year you place the property in

See Personal withdrawals under Cost of Goods is first made ready and available for a specific service. For qualified property acquired before

Sold, earlier. use. May 6, 2003, it is an additional 30% deduction.

For qualified property acquired after May 5,

Example 2. Lydia sells needlework kits at Qualifying property. Qualifying property in- 2003, it is an additional 50% deduction, or you

sales parties. She has catalogs and a number of cludes tangible personal property for which de- can elect to take an additional deduction deterkits to show customers. She uses these kits to preciation is allowable. See chapter 2 in mined at the 30% rate. You can take the addidemonstrate various needlework techniques. Publication 946 for more information. tional 30% or 50% deduction after any section

Page 7
179 deduction and before you figure regular If your business/investment use of the You can also deduct registration fees for the

depreciation under MACRS for the year you automobile is less than 100%, you right to use property within a state or local area.

place the property in service. For more informa- CAUTION must reduce the maximum deduction

!

amount proportionately. Example. May and Julius Winter drove their tion, see chapter 3 in Publication 946.

car 7,000 business miles out of a total of 10,000

Example. Peter purchases a used car this miles during the tax year. They had to pay $25 Listed Property for their annual state license tags and $20 for year for $4,500 and he uses it 60% for business.

The car is not qualified property for the 30% or their city registration sticker. They also paid Listed property includes property which lends $235 in city personal property tax on the car, for itself to personal use such as property used for 50% special depreciation allowance. He a total of $280. They are claiming their actual car transportation, entertainment equipment, cer- chooses to take a section 179 deduction for the

expenses for the year. Because they used the tain computers, and cellular phones. In addition, car. The cost of Peter’s car that qualifies for the car 70% for business, they can deduct 70% of section 179 deduction is $2,700 ($4,500 × 60%). there are recordkeeping requirements and rules

However, Peter’s section 179 deduction is lim- the $280, or $196, as a business expense. you must follow when depreciating listed prop- ited to $1,836 ($3,060 × 60%). erty. If listed property is not used more than 50% Sales tax. Treat any sales tax you pay on a for a qualified business use during any tax year, service or on the purchase or use of property as you cannot claim the section 179 deduction or a part of the cost of the service or property. If the special depreciation allowance and special rules Business Expenses service or the cost or use of the property is a apply to the depreciation deduction. See chapter deductible business expense, you can deduct

5 in Publication 946. the tax as part of that service or cost. If the The operating costs of running your business property is merchandise bought for resale, the are called business expenses. These are costs sales tax is part of the cost of the merchandise. If Passenger automobiles. For most passen- you do not have to capitalize or include in the the property is depreciable, add the sales tax to ger automobiles, the section 179 deduction and cost of goods sold. the basis for depreciation. See Publication 551, depreciation deduction (including the special Keep business expenses separate from per- Basis of Assets, for information about the basis depreciation allowance) you can claim is limited. sonal expenses. If you have an expense that is of property. See Publication 946 for limits that apply for partly for business and partly personal, deduct

trucks, vans and electric passenger automobiles only the business part on your business return. Do not deduct state and local sales

placed in service in 2003. To be deductible, a business expense must taxes imposed on the buyer that you

be both ordinary and necessary. An ordinary CAUTION must collect and pay over to the state

!

For a passenger automobile that is qualified expense is one that is common and accepted in or local government. Do not include these taxes property for a special depreciation allowance your trade or business. A necessary expense is in gross receipts or sales. (see definitions below) placed in service during one that is appropriate and helpful for your trade 2003, the total of your section 179 deduction and or business. An expense does not have to be Fuel taxes. Taxes on gasoline, diesel fuel, depreciation deduction (including the special indispensable to be considered necessary. and other motor fuels that you use in your busi- depreciation allowance) cannot be more than This section discusses business expenses ness usually are included as part of the cost of $10,710 for a car acquired after May 5, 2003 you might have as a direct seller. For more the fuel. Do not deduct these taxes as a sepa- ($7,660 for a car acquired before May 6, 2003). information on business expenses, see Publica- rate item. If you elected not to claim the special deprecia- tion 535.

tion allowance for the automobile or if the automobile is not qualified property, the limit is Interest Salaries and Wages generally $3,060. For 2004 and 2005, the maxi- Interest is the amount charged for the use of mum deduction amounts for a passenger auto- You can generally deduct the pay you give your borrowed money. You can generally deduct as a mobile placed in service in 2003 are $4,900 and employees for the services they perform for your business expense all interest you pay or accrue $2,950 respectively. The maximum deduction business. The pay may be in cash, property, or during the tax year on debts related to your trade for each year after 2005 is $1,775. services. It may include wages, salaries, vaca- or business.

Qualified property for the 30% special depre- tion allowances, bonuses, commissions, and You can deduct interest on a debt only if you

ciation allowance includes a car that meets all fringe benefits. meet all the following requirements.

If you are a sole proprietor, you cannot de- the following requirements. • You are legally liable for that debt. duct your own salary or any personal withdraw-

• You bought the car new after September als you make from your business. You are not • Both you and the lender intend that the

10, 2001. an employee of the business. debt be repaid.

For detailed discussions of salaries, wages, • You placed the car in service for business • You and the lender have a true and other payments to employees, see Publica- in 2003. debtor-creditor relationship. tions 15 and 15–A, and chapter 2 in Publication

• You used the car more than 50% in a 535.

No deduction is allowed for interest paid or qualified business use. accrued on personal loans. If a loan is part Taxes business and part personal, allocate the interest Qualified property for the 50% special depre- between the two. For more information, see ciation allowance includes a car that meets all You can deduct as a business expense various chapter 5 in Publication 535. the following requirements. federal, state, local, and foreign taxes directly

attributable to your direct-selling business. Example. During the tax year, you paid • You bought the car new after May 5, 2003. Some of these taxes were discussed earlier $600 interest on a car loan. You used the car under Business Taxes and others are discussed • You placed the car in service for business 60% for business and 40% for personal pur- next. after May 5, 2003. poses. You can deduct $360 (60% x $600) as a

Income taxes. Most income taxes, including business expense on your Schedule C (Form • You used the car more than 50% in a 1040) or Schedule C–EZ (Form 1040). The qualified business use. federal income taxes, cannot be deducted as a remaining interest ($240) is a nondeductible business expense. You can generally deduct personal expense. personal state and local income taxes as an You can elect to claim the 30% special itemized deduction on Schedule A (Form 1040). depreciation allowance instead of the Insurance

50% special depreciation allowance for Personal property tax. You can deduct as a

TIP

property that qualifies for the 50% allowance. business expense any tax imposed by a state or You can generally deduct premiums you pay for

This election applies to all property in the same local government on personal property used in the following kinds of insurance related to your

property class placed in service during the year. your direct-selling business. trade or business. This list is not all inclusive.

Page 8
Example 2. Mary and George run an active $400) for their March sales. She deducts the • Fire, theft, flood, or similar insurance. direct-selling business out of their home. For total, $56, as a business expense on her tax

• Car and other vehicle insurance on vehi- February, their phone bill was $65 ($20 for basic return.

cles used in your business if you do not telephone service and $45 for long-distance Computer. If you use a computer in your di- use the standard mileage rate to figure calls). rect sales business, you can depreciate it. How- your car expenses. The total charge for long-distance business ever, if you use it 50% or less in your business, calls on their bill is $31. Mary and George can • Credit insurance to cover losses from you must use the Alternative Depreciation Sys- deduct $31 as a business expense. business bad debts. tem (ADS) under MACRS to figure your depreciAway from home. If you travel away from ation deduction. For more information, see • Liability insurance. home and make a business phone call, you can chapter 5 in Publication 946.

• Use and occupancy and business inter- deduct the cost of the call, whether or not the Home meetings. If you have business meet- ruption insurance. This insurance pays for rest of your travel expenses are deductible. ings in your home, you can deduct expenses for lost profits if your business is shut down Business and personal calls. You can de- the meetings as entertainment expenses and as due to a fire or other cause. Report the duct telephone expenses only for business calls. expenses related to the business use of your proceeds as ordinary income. Personal calls do not become business calls home only when they meet certain tests.

You generally cannot deduct the cost of life because some business is discussed. • The expenses of entertaining business as- insurance paid on your own life. However, see sociates in your home are deductible as chapter 7 in Publication 535 for information on Example. Lydia is interested in sponsoring entertainment expenses if they meet the when life insurance premiums are deductible. others as direct sellers for her product line. She rules discussed under Meals and Enter- often talks by phone with her sister who lives 50 tainment, later, and you can prove your Business and personal. If you pay premiums miles away. They talk about personal matters. expenses as discussed later under Re- for insurance coverage that is both business and When Lydia mentions her direct-selling work, cordkeeping. personal, deduct only the part that is for busi- she usually says something to encourage her

ness coverage. For example, if you use your car sister to become a direct seller. • The expenses of maintaining your home

25% in your direct-selling business and 75% for Lydia’s phone calls to her sister are personal as a place of business are deductible if

personal transportation, you can deduct 25% of and nondeductible. Their primary purpose is not you meet the tests discussed under Busiyour car insurance premiums if you claim actual ness Use of Your Home, later. to recruit her sister as a direct seller, but to

expenses for the use of the car. continue their personal relationship.

Example. Barbara and Bill hold biweekly When to deduct. You generally cannot de- Other Expenses meetings in their home for the direct sellers who duct expenses in advance, even if you pay them work under them. They discuss selling tech- in advance. This rule applies to both the cash Discussed next are other expenses you may niques, solve business problems, and listen to and accrual methods. If you make an advance have as a direct seller. presentations by company representatives. payment on an insurance policy that provides Because the meetings are for business, Bar- coverage substantially beyond the end of the Licenses and regulatory fees. License and bara and Bill can deduct 50% of the cost of the current tax year, deduct only the part for the regulatory fees for your business paid each year food and beverages they provide. The 50% limit current tax year. You must wait until the follow- to state or local governments are generally de- is explained later under Meals and Entertain- ing tax year to deduct the part for that year, and ductible business expenses. Some licenses and ment. They keep a copy of their grocery receipts so on. fees may have to be amortized. See chapter 9 of for these refreshments, and record the date, Publication 535 for information on amortization. time, and business nature of each meeting. Be- Example. You are a direct seller. In June Catalogs. The cost of catalogs you use in your cause the meetings are held in their living room 2003, you pay $1,200 in premiums for theft in- selling business for more than one year must be rather than in a special area set aside only for surance effective July 2003 through June 2005 capitalized. The cost can then be recovered as business, they cannot deduct any of their home ($50 per month). You can deduct $300 in 2003 explained under Cost Recovery, earlier. If the expenses for the meetings. ($50 × 6 months), $600 in 2004 ($50 × 12 catalogs are used in your selling business for months), and $300 in 2005. Journal subscriptions. If you subscribe to a one year or less, you can deduct their full cost in journal for direct sellers, you can deduct the the tax year you pay for them. Dividends. An insurance dividend is a return annual subscription fee as a business expense.

of part of the premiums you paid. If you receive Commissions. If you must pay a bonus, per- Club dues and membership fees. Generally, dividends from business insurance premiums centage, or other type of commission to direct you cannot deduct amounts you pay or incur for you deducted in an earlier year, report all or part sellers working under you, you can deduct it. membership in any club organized for business, of the dividend as business income. For more Report the full amount of any commissions you pleasure, recreation, or any other social pur- information on recovery of prior deductions, see receive as business income, and deduct the pose. This includes country clubs, golf and ath- Publication 525. commissions you pay as ordinary and neces- letic clubs, hotel clubs, sporting clubs, airline sary business expenses. clubs, and clubs operated to provide meals Telephone under circumstances generally considered to be Example. Freda has her own direct-selling conducive to business discussions. The pur- You cannot deduct the cost of basic local tele- business and sponsors two other direct sellers. pose and activities of a club, not its name, will phone service (including any taxes) for the first These direct sellers report their sales to her determine whether or not you can deduct the telephone line you have in your home, even if each month. She in turn adds their sales to hers dues. you have an office in your home. However, and reports the total to the direct seller who

charges for business long distance phone calls sponsored her. In March, the people working Exception. None of the following organizaon that line, as well as the cost of a second line under her each had $400 in sales and she had tions will be treated as a club organized for

into your home used exclusively for business, $500 in sales of her own. She reports to the business, pleasure, recreation, or other social

are deductible business expenses. company (or her sponsor) $1,300 ($400 + $400 purpose, unless one of its main purposes is to

+ $500) in monthly sales for her group even conduct entertainment activities for members or

Example 1. Leo had a separate telephone though her income is only $500. their guests or to provide members or their

line installed in his home for his direct-selling Freda received a commission or perform- guests with access to entertainment facilities.

business. He had this phone number printed on ance bonus for March equal to 10% of the • Boards of trade. his business cards and always uses it only for $1,300, or $130, in sales. She reports the entire

business calls. $130 as business income on her tax return. • Business leagues.

Leo can deduct the full amount of his busi- Freda must pay the direct sellers working • Chambers of commerce. ness phone bill because the phone is used ex- under her a commission of 7% on their monthly

clusively for business. sales of $400. She paid each of them $28 (7% of • Civic or public service organizations.

Page 9
• Professional associations. regular use test even if you do not use that part Qualifying for a Deduction for any other purpose. • Trade associations. To deduct expenses related to the business use

of part of your home, you must meet the follow- Principal place of business. Your home ofLegal and professional fees. Legal and pro- fice will qualify as a principal place of business if ing tests. Even if you meet the tests, your deducfessional fees, such as fees charged by ac- you meet both the following requirements. tion may be limited. See Deduction limit, later.

countants, that are ordinary and necessary • You use it exclusively and regularly for the expenses directly related to operating your busi- 1) Your use of the business part of your administrative or management activities of ness are deductible as business expenses. home must be: your trade or business. However, you usually cannot deduct legal fees a) Exclusive (however, see Exception paid to acquire business assets. Those are ad- • You have no other fixed location where

under Exclusive use, later), ded to the basis of the property. you conduct substantial administrative or

If the fees include payments for work of a b) Regular, management activities of your trade or

personal nature (such as making a will), you can business.

c) For your trade or business, AND take a business deduction only for the part of the

fee related to your business. The personal por- Alternatively, if you do business at more than 2) The business part of your home must be tion of legal fees for producing or collecting tax- one location and your home office does not one of the following: able income, doing or keeping your job, or for tax qualify as your principal place of business based

advice may be deductible on Schedule A (Form on these rules, you determine your principal a) Your principal place of business (de- 1040) if you itemize deductions. See Publication place of business based on the following factors. fined later), 529, Miscellaneous Deductions.

b) A place where you meet or deal with 1) The relative importance of the activities

Tax preparation fees. You can deduct as a clients or customers in the normal performed at each location.

trade or business expense the cost of preparing course of your trade or business, or 2) The time spent at each location if the rela- that part of your tax return relating to your busic) A separate structure (not attached to tive importance factor does not determine ness as a sole proprietor. The remaining cost

may be deductible on Schedule A (Form 1040) if your home) used in connection with your principal place of business.

you itemize deductions. your trade or business.

You can also take a business deduction for Place to meet clients or customers. If you

the amount you pay or incur in resolving as- meet with clients or customers in your home in Exclusive use. Exclusive use means you use serted tax deficiencies against your business as the normal course of your direct selling busi- a specific part of your home solely for carrying a sole proprietor. ness, even though you also carry on business at on your direct-selling business. You do not meet another location, you can deduct your expenses Samples and promotional items. You can the exclusive use test if you use the area in for the part of your home used exclusively and deduct the cost of samples you give to your question for your direct-selling business and that regularly for business if both the following apply. customers and the cost of promotional items same part for personal purposes. such as posters. You cannot deduct the cost of • You physically meet with clients or cusany samples you use personally. Example. You use a den in your home to tomers on your premises.

write orders and do the paperwork for your busi- Service charges. You can deduct service • Their use of your home is substantial and ness. The den also is used by your children to do charges you pay on orders for goods. The serv- integral to the conduct of your business. their homework. You cannot claim any business ice charge can be a flat charge or it can be deduction for the use of the room. based on other criteria. You do not qualify to deduct expenses for the

Exception. If you use part of your home for business use of your home if you have only Supplies. Unless you have deducted the cost occasional meetings or telephone calls. the storage of inventory or product samples, you in any earlier year, you generally can deduct the can claim expenses for the business use of your cost of materials and supplies actually con- Separate structure. You can deduct the ex- home without meeting the exclusive use test. sumed and used during the tax year. However, you must meet all the following tests. penses for a separate free-standing structure, If you keep incidental materials and supplies such as a studio, garage, or barn, if you use it on hand, you can deduct the cost of the inciden- • You keep the inventory or product sam- exclusively and regularly for your business. This tal materials and supplies you bought during the ples in your home for use in your structure does not have to be your principal tax year if all three of the following requirements direct-selling business. place of business or a place where you meet are met. clients or customers. • Your home is the only fixed location of • You do not keep a record of when they are your business.

used. Deduction limit. If the gross income from the

• You use the storage space on a regular business use of your home equals or exceeds • You do not take an inventory of the basis. your total business expenses (including depreci- amount on hand at the beginning and end ation), you can deduct all your business ex- • The space you use is separately identifi- of the tax year. penses related to the use of your home. If your able and suitable for storage. • Your taxable income is clearly reflected by gross income from the business use of your

home is less than your total business expenses, this method.

Example. Your home is the only fixed loca- your deduction for certain expenses for the busition of your business. You regularly use half your ness use of your home is limited.

basement for storing inventory as well as for

personal purposes. You can deduct the ex- Where to deduct. If you qualify to deduct ex- Business Use penses for the storage space even though this penses for the business use of your home, you

part of your basement is not used exclusively for must figure your deduction on Form 8829 and of Your Home business. attach it to Form 1040. You deduct the expenses

on Schedule C (Form 1040).

Many direct sellers work out of their homes and Regular use. Regular use means you use a

have business expenses for using their homes. specific part of your home for business on a More information. For more information, inYou can deduct expenses for using your home if continuing basis. Occasional or incidental busi- cluding how to figure the deduction, see Publicayou meet certain tests. ness use of part of your home does not meet the tion 587.

Page 10
Transportation Entertainment. Include as entertainment any

Travel and activity generally considered to provide enterYou can deduct transportation expenses for tainment, amusement, or recreation. This inTransportation your business when you are not traveling away cludes entertaining guests at nightclubs; at

from home. Transportation expenses include social, athletic, and sporting clubs; at theaters;

Travel expenses generally are those the costs of getting from one workplace to an- at sporting events; on yachts; and on hunting,

other in the course of your business when travel- fishing, and vacation trips or on similar outings. It business-related expenses for trips that require ing within the city or general area that is your tax can also include meeting your customers’ per- you to sleep or rest while traveling away from home, and of getting from your home to a tem- sonal, living, or family needs, such as providing your tax home, explained later, for substantially porary work location. They also include the fol- meals, a hotel suite, or a car. However, see Not longer than an ordinary day’s work—for exam- lowing kinds of trips you make in the area where directly related, later. ple, the cost of travel to a distant city to attend a you live and work. business-related function or convention. Transportation expenses generally are those • Visiting clients or customers. Directly Related

business-related expenses for trips you make in • Attending business meetings away from or Associated

the area of your tax home—for example, the your workplace. cost of transportation to call on customers or To be deductible, meal and entertainment exmake deliveries in the city where you work and Transportation expenses include train, bus, and penses must be ordinary and necessary excab fares, car rental fees, and the cost of driving penses of carrying on your direct-selling its suburbs.

and maintaining your car for business transpor- business and you must be able to prove them as You must be able to prove your expenses for tation. Meals and lodging are not included in explained later under Proving Your Deductions. travel and transportation. Deductions for travel transportation expenses. Unless certain exceptions apply, you must be and transportation are looked at closely when able to show that entertainment expenses (in- the IRS examines returns. For more information, Commuting expenses. You cannot deduct cluding expenses for entertainment-related see Recordkeeping, later. the cost of transportation between your home meals) are directly related to or associated

and your main or regular place of work. The cost with the active conduct of your business. Travel of commuting is a nondeductible personal ex- For more information, see chapter 2 of Publi- pense, regardless of the distance or whether cation 463. Generally, your tax home is your regular place work is performed during the trip. of business or post of duty, regardless of where Directly related. For entertainment expenses you maintain your family home. Example. Elaine works full time as a bank to meet the directly-related test, all the following If you temporarily travel away from your tax teller. She also sells cosmetics part time to her must apply. home on business, you generally can deduct co-workers at the bank. After her customers

your ordinary and necessary travel expenses. select items from a catalog, she sends the or- • You had more than a general expectation

You cannot deduct lavish or extravagant ex- ders to the cosmetics company. She delivers the of getting income or some other specific

penses or those for personal or vacation pur- items to the bank when she receives them from business benefit from the expense.

poses. the company. • You engaged in business with the person Elaine’s expense of delivering items is not You can deduct all your ordinary and neces- during the entertainment period. deductible. Her cost of getting to the bank is a sary travel expenses, subject to certain limits,

discussed later, if your trip was entirely business commuting expense. The fact that she carries • The main purpose of the combined busirelated. This includes expenses for attending a cosmetics does not make her commuting ex- ness and entertainment was the active

pense a deductible business expense. conduct of business. seminar, meeting, convention, or other function

if you can show that your attendance benefits Two places of work. If you work at two places

your business. If your trip was primarily for busi- in one day, you can deduct the expense of You do not have to show that business

ness and, while at your business destination, getting from one workplace to the other. How- income or another business benefit acyou extended your stay for a vacation, made a ever, if you do not go directly from one location tually resulted from each entertainment

TIP

nonbusiness side trip, or had other nonbusiness to the other, deduct only the amount it would expense.

activities, you can deduct only your business-re- have cost you to go directly from the first location It is not necessary to devote more time to lated travel expenses. These expenses include to the second. business than to the entertainment. However, if

the travel costs of getting to and from your busi- Deductible expenses. If you use your vehicle the business discussion is only incidental to the ness destination and any business-related ex- in your business, see Publication 463 for infor- entertainment, it does not qualify as directly re- penses at your business destination. mation on how to figure your expenses for busi- lated.

ness transportation. Example. You live in and conduct your di- Example. You are a direct seller of women’s

rect selling business from Atlanta and take a cosmetics. A state women’s organization is

business trip to New Orleans. On your way holding its annual convention in a local hotel and

home, you stop in Mobile to visit your parents. Meals and you decide to display your products in a hospitalYou spend $830 for the 9 days you are away ity room in the hotel. You also provide entertainfrom home for transportation, meals, lodging, Entertainment ment and give out product samples. You can

and other travel expenses. If you had not deduct the cost of the hospitality room and enstopped in Mobile, you would have been gone Because you are in the selling business, you tertainment provided.

only 6 days, and your total cost would have been may take business associates to lunch or other-

$730. You can deduct $730 for your trip, includ- wise entertain them. The cost can be a deducti- Not directly related. Generally, expenses are

ing the cost of round-trip transportation to and ble business expense. However, certain not directly related if you are not there, or there

from New Orleans. The cost of your meals is conditions must be met before you can take a are substantial distractions that prevent you

subject to the 50% limit on meals explained deduction for business meals and entertain- from actively conducting business. The followlater. ment, and you generally can deduct only 50% of ing are situations where there are substantial

If your trip was primarily for personal rea- the cost. This section discusses those rules. distractions.

sons, such as a vacation, the entire cost of the Meals. Include as meals the amounts spent on 1) A meeting or discussion at a nightclub, trip is a nondeductible personal expense. How- food and beverages and the taxes and tips on theater, or sporting event. ever, you can deduct any expenses you have those amounts. Generally, no deduction is alwhile at your destination that are directly related lowed for an entertainment-related meal unless 2) A meeting or discussion during what is esto your business. you or your employee is present when the food sentially a social gathering, such as a

For more information, see Publication 463. or beverages are provided. cocktail party.

Page 11
3) A meeting with a group that includes per- the cost of entertaining the customer’s spouse

sons who are not business associates at as an ordinary and necessary business ex- Business Gifts

places such as cocktail lounges, country pense. Furthermore, if your spouse joins the

clubs, golf clubs, athletic clubs, or vacation party because the customer’s spouse is present, Giving prizes, awards, and gifts may be an ordiresorts. the cost of the entertainment for your spouse nary and necessary part of doing business as a

You may prove the entertainment is directly also is deductible as an ordinary and necessary direct seller. In each of the following situations

business expense. you can deduct the cost as a business expense. related by clearly establishing you had a substantial business discussion during the enter- Situation 1. You do your direct selling on the tainment. Lavish or extravagant expenses. You can- sales party plan. As an incentive for people to When entertainment takes place on a hunt- not deduct expenses for meals and entertain- host your parties, you offer them a variety of ing or fishing trip, or on a yacht or pleasure boat, ment to the extent they are lavish or gifts. The choice of gift depends on the success the conduct of business is not considered the extravagant. An expense is not considered lav- of the party—the higher the volume of sales, the main reason for the combined business and ish or extravagant if it is reasonable considering more valuable the gift. entertainment unless you clearly show other- the facts and circumstances. Expenses will not In this situation, your gift to the host or host- wise. be disallowed merely because they are more ess is actually payment for hosting the party,

than a fixed dollar amount or take place at a and the host or hostess must report the fair Associated. You can deduct entertainment deluxe restaurant, hotel, nightclub, or resort. market value of the gift as income. expenses (including expenses for You can deduct the cost of the gift. If you give entertainment-related meals) that do not meet Your meals. Generally, you can deduct your hosts and hostesses items from your inventory the directly-related test if both the following ap- business meal expenses while traveling away or items you purchase from the company at the ply. from home for business (other than lavish or same time you purchase goods you sell, their

• The expenses are associated with your extravagant amounts). However, if you entertain cost will be included in the cost of goods sold.

direct-selling business. a business customer locally and the conditions You cannot deduct their cost again as a busidiscussed earlier are met, the cost of your own ness expense. However, if you purchase the • The entertainment is directly before or afmeal is deductible only to the extent the cost gifts separately from the goods you sell, deduct ter a substantial business discussion. their cost as an ordinary and necessary busi- exceeds the amount you would normally have An ordinary and necessary entertainment ex- ness expense. spent for personal purposes. pense is generally associated with your Situation 2. You have several direct sellers direct-selling business if you can show you had Limit working under you. Because your income de- a clear business purpose for the expense. The pends in part on their sales, you regularly meet purpose may be to get new business or to encourage the continuation of an existing business You usually can deduct only 50% of your un- with them, encourage them, and provide them

reimbursed business-related meal and enter- with incentives and support. As an incentive to relationship. tainment expenses. The 50% limit applies, for make sales, you sometimes offer a prize, such

example, to expenses you incur while traveling as an evening on the town or tickets to a sporting Substantial business discussion. Whether

away from home on business (whether eating event, to the person who sells the most during a business discussion is substantial depends alone or with others), entertaining business cus- the month. upon the facts and circumstances in each case.

tomers at your place of business or a restaurant, In this situation, the prizes you give are actu- You must show that you actively engaged in a

or attending a business function, convention, or ally payments for the winners’ selling efforts. discussion, meeting, negotiation, or other busireception. You can deduct the cost of the prizes as ordinary ness transaction to get income for your business and necessary business expenses. The direct or another specific business benefit. Taxes and tips related to a business meal or sellers who receive your incentive prizes must The meeting does not have to be for a speci- entertainment activity are included in the report them as income at their fair market value. fied length of time. However, you must show that amount subject to the 50% limit. Expenses such For more information, see Other Income, earlier. the business discussion was substantial in rela- as cover charges to a nightclub, rent for a room

tion to the entertainment. It is not necessary to where you hold a dinner or cocktail party, or the Situation 3. You sell cosmetics door-to-door.

devote more time to business than to the enter- amount paid for parking at a sports arena are To spur sales, you often give away small sam- tainment and you do not have to discuss busi- subject to the 50% limit. However, the cost of ples. ness during the meal or entertainment. transportation to and from an otherwise allowa- In this situation, you can deduct the cost of

ble business meal or entertainment activity is the samples. If you purchase samples sepa- Business and nonbusiness guests. You

not subject to the 50% limit. rately from the products you sell, you can deduct must divide your entertainment expenses be- their cost as an ordinary and necessary busi- tween business and nonbusiness expenses. If you have one expense that includes the

ness expense. You can deduct only the business part. If you costs of meals, entertainment, and other services (such as lodging or transportation), you Do not deduct the cost of the same item cannot establish the part of the expense for each

must reasonably allocate the expense between twice. If the item was included in inventory, you person participating, you can allocate the ex- cannot later deduct it as a business expense. pense to each participant on a pro rata basis. the cost of meals and entertainment and the cost

The item will already be part of the cost of goods For example, if you entertain a group of 11 of other services. For example, you must make sold. (including yourself)—three business prospects an allocation if a hotel includes one or more

and seven social guests—deduct only meals in its room charge. Gift limit. You cannot deduct more than $25

four-elevenths of the expense. Apply the 50% limit after figuring the amount for business gifts you give directly or indirectly to

that would otherwise qualify for a deduction. any one person during the year (see the excep- Expenses for spouses. You generally cannot First determine the amount of meal and enter- tions discussed later). Personal gifts are not deduct the cost of entertainment for your spouse deductible. tainment expenses that would be deductible or for the spouse of a business customer. How- under the rules discussed earlier. Then apply ever, you can deduct these costs if you can Figuring the limit. A gift to the spouse (or the 50% limit to figure the deductible amount. show that you had a clear business purpose, family member) of a customer is generally conrather than a personal or social purpose, for sidered an indirect gift to the customer. How- Example. You spend $100 for a providing the entertainment. ever, if you have bona fide independent business-related meal. If $40 of that amount is business connections with the spouse (or family not allowable because it is lavish and extrava- Example. You entertain a business cus- member) and the gift is not intended for the

tomer. The cost is an ordinary and necessary customer’s eventual use, this rule does not ap- gant, the remaining $60 is subject to the 50%

limit. You cannot deduct more than $30 (50% of business expense and is allowed under the en- ply. $60). tertainment rules. The customer’s spouse joins If you and your spouse both give gifts, you

you because it is impractical to entertain the are treated as one taxpayer for the $25 limit. It Exceptions to the 50% limit are discussed in

customer without the spouse. You can deduct does not matter whether you have separate Publication 463.

Page 12
businesses or independent connections with the • Whether you are depending on income • Keep your records. You must keep your

recipient. from direct selling for your livelihood. business books and records available at

all times for inspection by the IRS. You Incidental cost. Costs that do not add sub- • Whether your losses are due to circum- must keep the records as long as they stantial value to a gift, such as engraving on stances beyond your control (or are nor- may be needed in the administration of jewelry, packaging, insuring, and mailing, are mal in the start-up phase of direct selling). any Internal Revenue law. You should generally not included in determining the cost of • Whether you change your methods of op- also keep copies of your tax returns to a gift for purposes of the $25 limit. For example, eration in an attempt to improve profitabil- help prepare future returns or file claims the cost of gift wrapping is considered an inci- for refunds. ity. dental cost. However, the purchase of an ornamental basket for packaging fruit is not • Whether you, or your advisors, have the • Support your entries. File cancelled

considered an incidental cost if the basket’s knowledge needed to carry on direct sell- checks, paid bills, duplicate deposit slips,

value is substantial in relation to the value of the ing as a successful business. and other items that support entries in

fruit. your books and on your tax return in an • Whether you were successful in making a orderly manner and store them in a safe Exceptions. The following items are not in- profit in similar activities in the past. place. For instance, organize them by year cluded in the $25 limit for business gifts. • Whether your direct selling makes a profit and type of expense.

• Items that cost $4 or less, on which your in some years, and how much profit it business name is clearly and permanently makes. If you cannot provide a cancelled check to

imprinted, and which are part of a number prove payment of an expense item, you may be

of identical items you widely distribute. • Whether you can expect to make a future able to prove it with certain financial account

This includes such items as pens, desk profit from the appreciation of the assets statements prepared by financial institutions.

sets, and plastic bags and cases. used in your direct-selling business. These include account statements prepared for

the financial institutions by a third party. These • Signs, display racks, or other promotional If the IRS inquires about your tax return, you account statements must be highly legible. The material to be used on the business prem- may be asked to provide proof that your following table lists acceptable account state- ises of the recipient. direct-selling activity is carried on for profit. How- ments.

ever, your direct selling is presumed to be carGift or entertainment. Any item that might be ried on for profit if it produced a profit in at least 3 IF payment is THEN the statement

considered either a gift or entertainment will of the last 5 tax years, including the current year, by... must show the...

generally be considered entertainment and not unless the IRS establishes otherwise.

subject to the $25 limit. However, if you give a If you are starting a business and do not Check • Check number.

customer packaged food or beverages to be have 3 years showing a profit, you may want to • Amount.

used later, they are gifts. elect to have the presumption made after you • Payee’s name. If you provide business associates with tick- have the 5 years of experience allowed by the • Date the check

ets to a theater performance or a sporting event test. For more information on postponing any amount was posted to and you do not accompany them, you may treat determination that your direct selling is not car- the account by the the tickets as either a gift or entertainment, financial institution. ried on for profit, see Using the presumption whichever is to your advantage. However, if you later under Not-for-Profit Activities in chapter 1 go to the event with them, you must treat the of Publication 535. Electronic funds • Amount transferred. cost of the tickets as an entertainment expense. transfer • Payee’s name.

• Date the transfer was

posted to the account

Recordkeeping by the financial Not-for-Profit Limit institution.

If you do not carry on your direct-selling activity You must keep records to correctly fig- Credit card • Amount charged. to make a profit, there is a limit on the deduc- ure your taxes. Your records must be • Payee’s name. tions you can take. If the not-for-profit limits RECORDS permanent, accurate, complete, and • Transaction date. apply, you cannot use a loss from direct selling clearly establish your income, deductions, and

to offset any other income. credits. The law does not require you to keep This limit applies, for example, if you go into records in any particular way. But if you have direct selling primarily for the business deduc- Proof of payment alone does not es- more than one business, you should keep a tions you can take. It also applies if you become tablish that you are entitled to a tax complete and separate set of books and records a direct seller only so you and your friends can deduction. You should also keep other CAUTION

!

for each business.

buy products at reduced rates. documents as discussed in Proving Your De- Publication 583 provides information about ductions, next. If the not-for-profit limit applies, you can take setting up a recordkeeping system, the types of the deductions allowed only if you itemize them books and records included in a typical system on Schedule A (Form 1040). See Limit on Defor a small business, and sample records. Proving Your Deductions ductions and Losses under Not-for-Profit Activities in chapter 1 of Publication 535 for Publication 463 provides information on the The IRS may ask you to prove your deductions

information on how to figure your allowable de- records to keep if you use your car in your for business expenses.

ductions. Do not use a business tax return, such business.

as Schedule C (Form 1040). The following are suggestions for keeping

adequate business records. Travel Expenses Not for profit. In deciding whether your direct

selling is carried on for profit, take into account • Keep a business bank account. Deposit For travel expenses, you must be able to prove all facts about the activity. No one factor alone is all business receipts in a separate bank the following items. decisive. The following are factors to consider. account. Make all payments by check, if • Each separate amount you spent for travel • Whether you carry on your direct selling in possible. Then business income and busi- away from home, such as the cost of your a businesslike manner and maintain com- ness expenses will be well documented. transportation or lodging. A receipt, bill, or plete and accurate books and records. • Make a record. Record all your business other documentary evidence generally is

• Whether the time and effort you put into required for all lodging expenses. You can transactions in separate account books

direct selling indicates you intend to make total the daily cost of your breakfast, and keep a monthly summary of your busiit profitable. ness income and expenses. lunch, dinner, and other incidental travel

Page 13
costs if they are listed in reasonable cate- Business relationship. If you entertain a Expenses of a similar nature occurring durgories, such as meals, gas and oil, and readily identifiable group of people, you do not ing the course of a single event will be considtaxi fares. have to record the name of each person. It is ered a single expense. For example, if during

enough to designate the group. For example, if entertainment at a cocktail lounge you pay sepa- • The dates you left and returned home for you entertain all the members of a garden club, rately for each serving of refreshments, treat the each trip, and the number of days spent an entry such as “members of the Hillcrest Gar- total expense for the refreshments as a single on business while traveling away from den Club” is enough. expense. home.

Some items can be totaled in categories. • The destination or area of your travel, de- You can make one daily entry for such catego- scribed by the name of the city or town. Gift Expenses ries as taxi fares, telephone calls away from

• The business reasons for your travel or home, gas and oil, and other incidental travel For gift expenses, you must be able to prove the the business benefit you gained or ex- costs. Meals should be a separate category. following. pected to gain from it. Include tips for meal-related services with the

• The cost of the gift. costs of the meals.

Entertainment Expenses • The date you gave the gift. Documentary evidence. A receipt or bill is

For entertainment expenses, including ex- • A description of the gift. often the best evidence to prove the amount of

penses for entertainment-related meals, you an expense. Documentary evidence is needed • Your reason for giving the gift or any busimust be able to prove the following. for all your lodging expenses unless, under an ness benefit you gained (or expected to

gain) from giving it. accountable plan, your employer pays you a per 1) The amount of each separate entertain- diem reimbursement of no more than the gov- ment expense. You can total incidental ex- • The occupation or other information about ernment rate in effect at that time and in that

penses, such as taxi fares and telephone the person receiving the gift, including area. It is also generally needed for any other calls, on a daily basis. name, title, or other information establish- expense of $75 or more. ing a business relationship to you. 2) The date the entertainment took place. Documentary evidence will ordinarily be considered adequate if it shows the amount, date, 3) The name and address or location of the The name of each recipient of a business gift place, and essential character of the expense. place of entertainment. Include the type of does not always have to be recorded. A general For example, a hotel receipt is enough to sup- entertainment, such as dinner or the thea- listing will be enough if it is evident that you are port expenses for business travel if it has the ter, if the information is not clear from the not trying to avoid the $25 annual limit on the name and location of the hotel, the dates you name or designation of the place. deduction for gifts to any one person. For exam- stayed there, and separate amounts for charges ple, if you buy a large number of tickets to local 4) The occupation or other information about such as lodging, meals, and telephone calls. A high school basketball games and give one or the persons for whom you are claiming an restaurant receipt is enough to prove an ex- two tickets to each of many customers, it is entertainment expense. Include their pense for a business meal if it has the name and usually enough to record a general description names, titles, or other information suffi- location of the restaurant, the number of people of the recipients. cient to establish their business relation- served, and the date and amount of the ex- ship to you. pense. If a charge is made for items other than

5) The business reason for the entertainment Records meals and beverages, the receipt must show

or the business benefit you gained or ex- that this is the case.

pected to gain from it and the nature of You should keep proof of travel, meal, entertain- Canceled check. A canceled check, to- any business discussion or activity that ment, and gift expenses in an account book, gether with a bill from the payee, usually estab- diary, statement of expense, or similar record. took place. lishes the cost. However, a canceled check by You should also keep adequate documentary 6) The presence of you or your employee if itself does not prove a business expense without evidence to support each element of an ex- the entertainment was a business meal other evidence to show a business purpose. pense. given for a client. You do not have to record information shown Incomplete records. If you do not have ade- on a receipt if your records and receipts comple- Business discussion. If the entertainment quate records to prove an element of an ex- ment each other in an orderly manner. took place before or after a substantial and bona pense, you must prove the element by providing Keep your records up to date. Record your fide business discussion, in addition to the infor- both of the following.

mation in (1), (2), (3), (4), and (6) above, you expenses in your account book at or near the

must be able to prove the following. time of the expense. Entries made later, when • Your own statement, whether written or

you may not remember them accurately, do not oral, containing specific information about • The date, place, and duration of the busi- have as much value as entries made at or near the element. ness discussion. the time of the expense. • Other supporting evidence sufficient to es- • The nature of the business discussion. tablish the element. Separating expenses. Usually, each sepa- • The business reason for the entertainment rate payment you make must be recorded as a or the business benefit you gained or ex- separate expense. For example, if you entertain Additional proof. You may be required to pro- pected to gain from entertaining. someone at dinner and then go to the theater, vide additional information to the IRS to clarify or

• The identification of the persons who par- the dinner expense and the cost of the theater establish the accuracy or reliability of the inforticipated in both the business discussion tickets are separate expenses. You must record mation in your records, statements, testimony,

and the entertainment activity. them separately in your records. or documentary evidence.

Page 14
Line 4. Kathleen uses Part III to figure her cost Line 27. This line is for other direct-selling

Sample of goods sold for the year. She has no inventory expenses not listed separately on the schedule.

at the beginning or end of the year. Therefore, These expenses are listed in Part V on page 2.

Filled-In Forms she has no entry on line 35 or line 41 of Part III. Kathleen paid $35 to her bank for check printing

She purchased $10,000 worth of household and account charges for her separate business

This section will familiarize you with Schedule C products during 2003 for $9,490. (She received bank account. She paid membership dues of

(Form 1040), used to report business income or trade discounts of $510.) She enters her net cost $30 to a local business association and $38 for a

of $9,490 ($10,000 − $510) on line 36. She also 1-year subscription to a retail sales magazine. loss, and Schedule SE (Form 1040), used to

figure self-employment tax. The line numbers in enters this amount on lines 40 and 42 of Part III She enters these expenses, along with the $199

bold type follow the line numbers on the form and on line 4 of Part I. she paid for catalogs, in Part V. She totals the

being discussed. expenses, $302, on line 48 and enters the total Line 5. Gross profit, $5,110, is the difference on line 27. between Kathleen’s net receipts of $14,600 on Schedule C line 3 and the cost of goods sold of $9,490 on Line 28. Kathleen adds all her business deline 4. ductions listed on lines 8 through 27 and enters If you are the sole owner of an unincorporated

Line 6. Kathleen reports the $200 received as the total of $3,147 on this line. trade or business, report business income and

expenses on Schedule C (Form 1040) or Sched- a bonus on line 6. She does not include on

Line 29. Kathleen subtracts her total deduc- ule C–EZ (Form 1040). If you and your spouse Schedule C any income not related to her tions on line 28 from her Schedule C gross each own one separate business, file a separate direct-selling business, such as income from income on line 7. Because her gross business Schedule C or C–EZ for each business. If a investments or her salary. She reports such in- income is greater than her total deductions, she person, as a sole owner, has more than one come on other lines of Form 1040.

has a tentative profit of $2,163. business, that person must file a Schedule C for Line 7. Kathleen’s gross income from direct each separate business. selling is $5,310, the sum of her gross profit of Line 30. Kathleen did not use any part of her Samples of Schedule C and Schedule SE for $5,110 on line 5 and the bonus of $200 on line 6. home for business, so she does not make an Kathleen Woods are illustrated on the following entry here. pages. (Amounts have been rounded to the Line 8. Kathleen gave her customers samples

nearest dollar.) that cost $48. This amount was not included in Line 31. Kathleen has a net profit of $2,163 Kathleen Woods is a secretary for a small the cost of goods sold on line 4. (line 29 − line 30). She enters her net profit here, firm. She reports her salary of $25,000 on line 7 Line 9. Kathleen’s business mileage was on line 12 of Form 1040, and on line 2, Section A

of Form 1040. 2,100 miles, and her total 2003 mileage was of Schedule SE (Form 1040). Kathleen is also a direct seller of household 6,000 miles. She used her car 35% for business. cleaning products manufactured and distributed She uses the standard mileage rate to figure the Line 32. Kathleen does not have a loss, so she

by Spotless, Inc. She reports the income and skips this line. If she had a loss and was not at deduction of $756 (2,100 × .36). expenses of her selling business on Schedule C Kathleen must also complete Part IV of risk for all her investment in the business, she

because she is self-employed. Schedule C. would have to attach Form 6198. See the

Kathleen uses the cash method of account- Schedule C instructions for the meaning of at

ing and files her return on a calendar-year basis. Line 16b. $280 is 35% of the total interest of risk.

She has no employees and does not keep an $800 paid during the year on Kathleen’s car

inventory of the products she sells. Any products loan. Short Schedule SE ordered for personal use are not shown in Line 18. Kathleen spent $260 for various of- purchases, sales, cost of goods sold, or inven- Kathleen uses Short Schedule SE (Form 1040), fice supplies and postage for her direct-selling tory. business. because her net earnings from self-employment

Kathleen’s customers select the products are more than $400 and the total of her net

they want from a catalog listing retail prices for Line 22. Kathleen paid $392 in 2003 for order earnings plus her wages subject to social secureach item. She places an order with Spotless blanks, bags, and miscellaneous selling sup- ity and Medicare taxes (FICA) are not more than

every 10 days, at which time she also pays for plies. $87,000.

her prior order. She receives the items ordered Line 23. $168 is 35% of the personal property with an invoice payable within 10 days or, if Line 2. Kathleen enters $2,163, the amount tax of $480 Kathleen paid on her car in 2003. sooner, with the next order. When she delivers from line 31 of Schedule C (Form 1040).

the merchandise, she collects the retail (catalog) Line 24. Kathleen attended two direct-selling

price for each item. She can get full credit for any seminars during 2003. Her travel expenses, in- Line 3. Kathleen enters the amount from line

items returned to Spotless within 10 days. cluding lodging, were $515, which she entered 2, $2,163.

Kathleen’s cost for each item is 65% of the on line 24a. Her meals and entertainment, subject to the 50% limit, were $200 and were en- Line 4. Kathleen multiplies her net profit by retail price. During 2003, she had total retail .9235 and enters the result, $1,998. sales of $14,600. She paid Spotless $9,490 for tered on line 24b. The nondeductible amount of

the merchandise she received in 2003. She also $100 is shown on line 24c and the net deduction Line 5. Kathleen multiplies $1,998 (line 4) by received an award of $200 in January for having of $100 is shown on line 24d. .153 and enters $306 as her self-employment over $20,000 in total sales in 2002. Line 25. Kathleen uses her second telephone tax. She also enters this amount on line 55 of

Lines 1–3. Kathleen reports $14,600 as her 100% for business purposes. She paid $264 for Form 1040.

gross sales on line 1. On line 2, she would enter local service on her second phone and $62 for

any refunds she had to give on merchandise, as long-distance calls. She enters the total of $326 Line 6. Kathleen enters one-half of the amount

well as adjustments made to customers’ on this line. She has no deduction for other from line 5. She also enters this amount on line

purchases. Since she has no entry on line 2, she utilities because she does not use any part of 28 of Form 1040 as an adjustment to income.

enters $14,600 on line 3. her home exclusively for business.

Page 15
Kathleen Woods 123 00 6789

Sales -- Household Cleaning Products 4

1111 Lake Forest Ave., Hometown, VA 22315

X

X

14,600

14,600

9,490

5,110

200

5,310

48

756

280

260

200

100

392

168

515

100

326

302

3,147

2,163

2,163

54390

SCHEDULE C OMB No. 1545-0074

(Form 1040)

Profit or Loss From Business

(Sole Proprietorship)

 Partnerships, joint ventures, etc., must file Form 1065 or 1065-B.

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040 or 1041.  See Instructions for Schedule C (Form 1040). Sequence No. 09

Name of proprietor Social security number (SSN)

A Principal business or profession, including product or service (see page C-2 of the instructions) B Enter code from pages C-7, 8, & 9



C Business name. If no separate business name, leave blank. D Employer ID number (EIN), if any

Accounting method:

E

F

G Yes No

H

Did you “materially participate” in the operation of this business during 2003? If “No,” see page C-3 for limit on losses

If you started or acquired this business during 2003, check here 

Income

Gross receipts or sales. Caution. If this income was reported to you on Form W-2 and the “Statutory

employee” box on that form was checked, see page C-3 and check here 

1

1

2 Returns and allowances 2

3 Subtract line 2 from line 1 3

4 Cost of goods sold (from line 42 on page 2) 4

5 Gross profit. Subtract line 4 from line 3 5

6 Other income, including Federal and state gasoline or fuel tax credit or refund (see page C-3) 6

7 Gross income. Add lines 5 and 6  7

Expenses. Enter expenses for business use of your home only on line 30.

8

21 Repairs and maintenance 21

8 Advertising

22 Supplies (not included in Part III) 22

23

9

23 Taxes and licenses

10

24 Travel, meals, and entertainment:

Car and truck expenses

(see page C-3)

9

24a

11

a Travel

10 Commissions and fees

12 Depletion 12

Meals and

entertainment

b

Depreciation and section 179

expense deduction (not included

in Part III) (see page C-4)

13

Enter nondeductible amount included on line 24b

(see page C-5)

c

13

14 Employee benefit programs

(other than on line 19)

24d

14

d Subtract line 24c from line 24b

25

15

25 Utilities

15 Insurance (other than health)

26 Wages (less employment credits) 26

16 Interest:

a Mortgage (paid to banks, etc.) 16a

Other expenses (from line 48 on

page 2)

27

b Other 16b

17

Legal and professional

services

17

18 Office expense 18

19 Pension and profit-sharing plans 19

20 Rent or lease (see page C-5):

a Vehicles, machinery, and equipment 20a

b Other business property 20b

28 Total expenses before expenses for business use of home. Add lines 8 through 27 in columns  28

31

31

32a All investment is at risk.

32

Some investment is not

at risk.

32b

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule C (Form 1040) 2003

(1) Cash (2) Accrual (3) Other (specify) 

Business address (including suite or room no.) 

City, town or post office, state, and ZIP code

Cat. No. 11334P

29

30

Tentative profit (loss). Subtract line 28 from line 7

Expenses for business use of your home. Attach Form 8829

29

30



Part I

Part II

27

Net profit or (loss). Subtract line 30 from line 29.

● If a profit, enter on Form 1040, line 12, and also on Schedule SE, line 2 (statutory employees,

see page C-6). Estates and trusts, enter on Form 1041, line 3.

● If a loss, you must go to line 32.

If you have a loss, check the box that describes your investment in this activity (see page C-6).

● If you checked 32a, enter the loss on Form 1040, line 12, and also on Schedule SE, line 2

(statutory employees, see page C-6). Estates and trusts, enter on Form 1041, line 3.

● If you checked 32b, you must attach Form 6198.



(99)

2003

Contract labor

(see page C-4)

11

Page 16
X

X

$10,000 - $510 (Trade Discounts) 9,490

9,490

9,490

6 1 01

2,100 3,900

X

X

X

X

Bank Service Charges

Dues

Publications

Catalogs

35

30

38

199

302

Schedule C (Form 1040) 2003 Page 2

Cost of Goods Sold (see page C-6)

Inventory at beginning of year. If different from last year’s closing inventory, attach explanation 35

33

Purchases less cost of items withdrawn for personal use 36

34

Cost of labor. Do not include any amounts paid to yourself 37

35

Materials and supplies 38

36

Other costs 39

37

Add lines 35 through 39 40

38

Inventory at end of year 41

39

Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on page 1, line 4

40

42

Part IV

Part III

Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on

line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 on page

C-4 to find out if you must file Form 4562.

41

When did you place your vehicle in service for business purposes? (month, day, year)  .

42

Of the total number of miles you drove your vehicle during 2003, enter the number of miles you used your vehicle for:

a Business b Commuting c Other

45 Do you (or your spouse) have another vehicle available for personal use?

46 Was your vehicle available for personal use during off-duty hours?

47a Do you have evidence to support your deduction?

b If “Yes,” is the evidence written?

Yes No

Other Expenses. List below business expenses not included on lines 8–26 or line 30.

48 Total other expenses. Enter here and on page 1, line 27

/ /

Yes No

Yes No

Yes No

48

Part V

Method(s) used to

value closing inventory: Cost b Other (attach explanation)

Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If

“Yes,” attach explanation

a Lower of cost or market c

Yes No

43

44

Schedule C (Form 1040) 2003

Page 17
Kathleen Woods 123 00 6789

2,163

2,163

1,998

306

153

SCHEDULE SE OMB No. 1545-0074

(Form 1040) Self-Employment Tax

Department of the Treasury

Internal Revenue Service

Attachment

 Attach to Form 1040.  See Instructions for Schedule SE (Form 1040). Sequence No. 17

Name of person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income 

Who Must File Schedule SE

You must file Schedule SE if:

● You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more or

Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Science

practitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,

write “Exempt–Form 4361” on Form 1040, line 55.

Section A—Short Schedule SE. Caution. Read above to see if you can use Short Schedule SE.

Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form

1065), line 15a

1

1

Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-1 (Form 1065),

line 15a (other than farming); and Schedule K-1 (Form 1065-B), box 9. Ministers and members

of religious orders, see page SE-1 for amounts to report on this line. See page SE-2 for other

income to report

2

2

3 Combine lines 1 and 2 3

Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400,

do not file this schedule; you do not owe self-employment tax 

4

4

5 Self-employment tax. If the amount on line 4 is: 

For Paperwork Reduction Act Notice, see Form 1040 instructions. Schedule SE (Form 1040) 2003

● You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of a

religious order is not church employee income (see page SE-1).

Cat. No. 11358Z

Deduction for one-half of self-employment tax. Multiply line 5 by

50% (.5). Enter the result here and on Form 1040, line 28

● $87,000 or less, multiply line 4 by 15.3% (.153). Enter the result here and on 

Form 1040, line 55.

● More than $87,000, multiply line 4 by 2.9% (.029). Then, add $10,788.00 to the

result. Enter the total here and on Form 1040, line 55.

May I Use Short Schedule SE or Must I Use Long Schedule SE?

Did You Receive Wages or Tips in 2003?

Was the total of your wages and tips subject to social security

or railroad retirement tax plus your net earnings from

self-employment more than $87,000?

Did you receive tips subject to social security or Medicare tax

that you did not report to your employer?

Are you using one of the optional methods to figure your net

earnings (see page SE-3)?

Are you a minister, member of a religious order, or Christian

Science practitioner who received IRS approval not to be taxed

on earnings from these sources, but you owe self-employment

tax on other earnings?

Did you receive church employee income reported on Form

W-2 of $108.28 or more?

You May Use Short Schedule SE Below You Must Use Long Schedule SE on page 2





Yes



No Yes







No

No

No

No

Yes



Yes



Yes



Yes



 







No

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and

use either “optional method” in Part II of Long Schedule SE (see page SE-3).

6

5

6



(99)

2003

Page 18
• Send us comments or request help by certain forms, instructions, and publicaHow To Get Tax Help email. tions. Some IRS offices, libraries, grocery

stores, copy centers, city and county gov- • Sign up to receive local and national tax

You can get help with unresolved tax issues, ernment offices, credit unions, and office news by email.

order free publications and forms, ask tax ques- supply stores have a collection of products • Get information on starting and operating tions, and get more information from the IRS in available to print from a CD-ROM or pho- a small business. several ways. By selecting the method that is tocopy from reproducible proofs.

best for you, you will have quick and easy ac- You can also reach us using File Transfer • Services. You can walk in to your local cess to tax help. Protocol at ftp.irs.gov. Taxpayer Assistance Center every business day to ask tax questions or get help Contacting your Taxpayer Advocate. If you Fax. You can get over 100 of the most with a tax problem. have attempted to deal with an IRS problem requested forms and instructions 24

unsuccessfully, you should contact your Tax- hours a day, 7 days a week, by fax. Mail. You can send your order for payer Advocate. Just call 703–368–9694 from your fax ma- forms, instructions, and publications to The Taxpayer Advocate independently rep- chine. When you order forms, enter the catalog the Distribution Center nearest to you resents your interests and concerns within the number for the form you need. and receive a response within 10 workdays after IRS by protecting your rights and resolving For help with transmission problems, call your request is received. Use the address that problems that have not been fixed through nor- 703–487–4608.

mal channels. While Taxpayer Advocates can- applies to your part of the country. Long-distance charges may apply. not change the tax law or make a technical tax • Western part of U.S.:

decision, they can clear up problems that re- Phone. Many services are available by Western Area Distribution Center

sulted from previous contacts and ensure that phone. Rancho Cordova, CA 95743–0001 your case is given a complete and impartial • Central part of U.S.: review. • Ordering forms, instructions, and publica- Central Area Distribution Center To contact your Taxpayer Advocate: tions. Call 1–800–829–3676 to order P.O. Box 8903 forms, instructions, and publications. You • Call the Taxpayer Advocate toll free at Bloomington, IL 61702–8903 should receive your order within 10 days. 1–877–777–4778. • Eastern part of U.S. and foreign • Asking tax questions. Call the IRS with • Call, write, or fax the Taxpayer Advocate addresses: your tax questions at 1–800–829–4933. office in your area. Eastern Area Distribution Center • Solving problems. You can get • Call 1–800–829–4059 if you are a P.O. Box 85074

face-to-face help solving tax problems TTY/TDD user. Richmond, VA 23261–5074 every business day in IRS Taxpayer As-

• Visit the website at www.irs.gov/advo- sistance Centers. To find the number, go CD-ROM for tax products. You can cate. to www.irs.gov or look in the phone book order IRS Publication 1796, Federal under “United States Government, Internal Tax Products on CD-ROM, and obtain: For more information, see Publication 1546, Revenue Service.”

The Taxpayer Advocate Service of the IRS. • Current-year forms, instructions, and pub- • TTY/TDD equipment. If you have access lications. to TTY/TDD equipment, call 1–800– Free tax services. To find out what services 829–4059 to ask tax or account questions • Prior-year forms and instructions. are available, get Publication 910, Guide to Free or to order forms and publications. Tax Services. It contains a list of free tax publi- • Frequently requested tax forms that may

cations and an index of tax topics. It also de- • TeleTax topics. Call 1–800–829–4477 to be filled in electronically, printed out for

scribes other free tax information services. listen to pre-recorded messages covering submission, and saved for recordkeeping. various tax topics. Internet. You can access the IRS web-

• Refund information. Buy the CD-ROM from National Technical In- site 24 hours a day, 7 days a week, at If you would like to

www.irs.gov check the status of your 2003 refund, call formation Service (NTIS) on the Internet at to:

1–800–829–4477 for automated refund www.irs.gov/cdorders for $22 (no handling • E-file. Access commercial tax preparation information and follow the recorded in- fee) or call 1–877–233–6767 toll free to buy and e-file services available for free to eli- structions or call 1–800–829–1954. Be the CD-ROM for $22 (plus a $5 handling fee). gible taxpayers. sure to wait at least 6 weeks from the date The first release is available in early January

• Check the amount of advance child tax you filed your return (3 weeks if you filed and the final release is available in late Februcredit payments you received in 2003. electronically) and have your 2003 tax re- ary. turn available because you will need to • Check the status of your 2003 refund. know your filing status and the exact CD-ROM for small businesses. IRS Click on “Where’s My Refund.” Be sure to whole dollar amount of your refund. Publication 3207, Small Business Re- wait at least 6 weeks from the date you source Guide, is a must for every small filed your return (3 weeks if you filed elec- business owner or any taxpayer about to start a Evaluating the quality of our telephone serv- tronically) and have your 2003 tax return business. This handy, interactive CD contains available because you will need to know ices. To ensure that IRS representatives give all the business tax forms, instructions and pub- your filing status and the exact whole dol- accurate, courteous, and professional answers,

we use several methods to evaluate the quality lications needed to successfully manage a busi- lar amount of your refund.

of our telephone services. One method is for a ness. In addition, the CD provides an • Download forms, instructions, and publica- second IRS representative to sometimes listen abundance of other helpful information, such as tions. in on or record telephone calls. Another is to ask how to prepare a business plan, finding financ-

• Order IRS products online. some callers to complete a short survey at the ing for your business, and much more. The deend of the call. sign of the CD makes finding information easy • See answers to frequently asked tax ques- and quick and incorporates file formats and tions. Walk-in. Many products and services browsers that can be run on virtually any

• Search publications online by topic or are available on a walk-in basis. desktop or laptop computer. It is available in

keyword. early April. You can get a free copy by calling

1–800–829–3676 or by visiting the website at • Figure your withholding allowances using • Products. You can walk in to many post

our Form W–4 calculator. www.irs.gov/smallbiz. offices, libraries, and IRS offices to pick up

Page 19
To help us develop a more useful index, please let us know if you have ideas for index entries. Index See “Comments and Suggestions” in the “Introduction” for the ways you can reach us.

A Direct seller, defined ...... 2 Inventory ............... 6 S

Accounting methods . . . . 2, 4 Salaries and wages ....... 8

Accounting periods ....... 4 E L Samples . . . . . . . . . . . . . . 10

Assistance (See Tax help) Employer identification Legal fees . . . . . . . . . . . . . 10 Section 179 deduction ..... 7

number .............. 3 Licenses ............... 9 Subscriptions ........... 9

B Entertainment . . . . . . . . . . 11 Listed property .......... 8 Suggestions ............ 2

Bonuses ............... 6 Supplies . . . . . . . . . . . . . . 10

Business: F M

Expenses ............. 8 Free tax services . . . . . . . . 19 Meals . . . . . . . . . . . . . . . . 11 T

Income ............... 5 Membership fees ......... 9 Tax help . . . . . . . . . . . . . . 19

Not for profit . . . . . . . . . . 13 More information Taxes: G (See Tax help)

Employment ........... 3 Gifts . . . . . . . . . . . . . . . . . 12 C Estimated ............. 3 Gross profit ............. 5 N

Capital expenses ......... 6 Income . . . . . . . . . . . . . 3, 8 Not-for-profit limit . . . . . . . 13 Personal property ........ 8 Catalogs ............... 9 H Sales ................ 8 Club dues .............. 9 Help (See Tax help) Self-employment P ........ 3 Comments ............. 2 Home: Taxpayer Advocate Passenger automobiles .... 8 . . . . . . 19 Commissions . . . . . . . . . 6, 9 Business use . . . . . . . . . . 10 Penalties ............... 4 Telephone .............. 9 Commuting costs . . . . . . . 11 Meetings .............. 9 Prepaid expenses ........ 4 Transportation, local . . . . . 11 Computer .............. 9 Host or hostess .......... 3 Prizes and awards ........ 6 Travel . . . . . . . . . . . . . . . . 11 Cost of goods sold ........ 5

Professional fees . . . . . . . . 10 TTY/TDD information . . . . . 19 Cost recovery ........... 7 I Publications (See Tax help) ■

Income from sales ........ 5 Purchases .............. 5 D Information returns ....... 3

Demonstrators ........... 7 Insurance .............. 8 R Depreciation ............ 7 Interest ................ 8 Recordkeeping . . . . . . . . . 13

Page 20