Deducting "Seminars"

[Patrick Michael]

New client started a Sch C business as a "Life Coach" this year.  He has signed up with a "company" to sell their books, video's, courses, etc. online.  He has to pay the company a "membership" fee and is required to attend "seminars" at least 4 times a year to receive training on the "company's" products and to learn how to attract clients for their merchandise and services and to bring new people into the "company".  His day job is in a completely different field.  He had sales of about $600, for which the "company' sent a 1099.  The company charges him to attend the seminars and he has travel out of town to attend.  Total expenses for the seminars and travel are about $8K.  What do you think about deducting the seminar fees and travel expenses?  I'm not sure at what point these seminars change from qualifying him for a new trade or business to  maintaining or his  improving skills.

 

And yes, he did try to talk me to attending a seminar.

[Lee B]

Reminds me of  those wonderful business opportunities with Amway and Mary Kay

[Patrick Michael]

My thoughts exactly.  I searched on the "company" and there were several hits about this being a MLM and pyramid scam.  They have him convinced he will be a millionaire if he just follows the plan.

 

How does the IRS view these types of enterprises?

[Abby Normal]

Make it a hobby and amortized the startup costs. When you know he'll never make a profit, don't deduct the losses.

[Pacun]

Make it a hobby and amortized the startup costs. When you know he'll never make a profit, don't deduct the losses.

 

I like your answer and I will add:

 

Since your client invited you to the seminar, I would tell your client that you are not interested to go to the seminars but you would love to be his accountant if he starts making a lot of money as promised. I bet you that if you ask him, "when people start making good money?", he will say, "max 3 three years". Then tell him that he will NOT be able to deduct his losses this year but if he starts making real money within three years, you will amend his return from hobby to a real business venture and all his loses will be accounted for.

[michaelmars]

who cares if there are losses, the rules state a valid business purpose, and operating in a for profit manor etc etc.  Take the losses while you can.  many businesses lose money the first few years and that doesn't mean its a hobby.

[Jack from Ohio]

who cares if there are losses, the rules state a valid business purpose, and operating in a for profit manor etc etc.  Take the losses while you can.  many businesses lose money the first few years and that doesn't mean its a hobby.

Michalemars is correct.  Follow the regs.  It is not our place to make a judgment call based on our experiences.  If he can show business intent and profit motive based on the parameters established by the IRS, he is eligible for the losses.

[Catherine]

I agree with michaelmars and Jack from Ohio.  He is in this with a profit motive.  You can see the likely train wreck -- but he can't; he still thinks he's going to strike it rich.  Who knows, maybe he will be the one who does!

 

I know one person who actually makes enough from selling Mary Kay to live on.  That doesn't mean all the tried-and-failed women in her downline weren't serious - it means they didn't have the (1) natural market this lady (former nurse) had, (2) the time/money available to put in the HUGE startup time investment, or (3) the go-for-the-jugular sales push (or ability).  But they *wanted* to be profitable.  

[Patrick Michael]

I don't have a problem with showing a loss.  My concern is if the seminars he is attending to teach him how to run the business are qualifying him for a new trade or business (not deductible) or are maintaining or improving his skills (deductible).  He is an engineer by trade and has no business experience.  So where is the line between the two drawn?  I am thinking of deducting only the seminars that he attended after his first sale. 

[Abby Normal]

It takes a LOT more than just a profit motive:

 

In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

[Jack from Ohio]

 

It takes a LOT more than just a profit motive:

 

In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

 

Those items show business intent.  The safe harbor is a profit in three of 5 years.  This would make it a business automatically.

[Jack from Ohio]

I agree with michaelmars and Jack from Ohio.  He is in this with a profit motive.  You can see the likely train wreck -- but he can't; he still thinks he's going to strike it rich.  Who knows, maybe he will be the one who does!

 

I know one person who actually makes enough from selling Mary Kay to live on.  That doesn't mean all the tried-and-failed women in her downline weren't serious - it means they didn't have the (1) natural market this lady (former nurse) had, (2) the time/money available to put in the HUGE startup time investment, or (3) the go-for-the-jugular sales push (or ability).  But they *wanted* to be profitable.  

At the firm, we have over 200 clients with 6 figure Mary Kay income.

[Abby Normal]

Here's an IRS page on Direct Selling businesses. I didn't read it.

 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Retail-Industry-ATG-Chapter-3-Examination-Techniques-for-Specific-Industries-Direct-Sellers

[RitaB]

Here's an IRS page on Direct Selling businesses. I didn't read it.

 

 

 

Bahahahaha, best qualifier ever.  Crying.

[kcjenkins]

It might be a business, if he's serious about it.  But do remind him of the 'reasonable and necessary' rule, 8k in expense for $600 in sales is hard to call 'reasonable and necessary'.  But neither does it fall into the 'hobby' category, so I'd give him at least one year of full deductions IF he's going about it in a 'business-like manner', good records, no mixing family visits as business travel, etc.

[RitaB]

He has to pay the company a "membership" fee and is required to attend "seminars" at least 4 times a year to receive training on the "company's" products and to learn how to attract clients for their merchandise and services and to bring new people into the "company"...  I'm not sure at what point these seminars change from qualifying him for a new trade or business to  maintaining or his  improving skills.

 

 

 

I don't have a problem with showing a loss.  My concern is if the seminars he is attending to teach him how to run the business are qualifying him for a new trade or business (not deductible) or are maintaining or improving his skills (deductible). 

 

I think I'd interrogate the client, and ask him what percentage he considers the seminars to be:

 

1) training him for this job, or

2) maintaining / improving his job skills

 

I would carefully explain training vs maintaining/improving.  I would not tell him why I'm asking until after I got his answer.

 

I do this type of thing with people who give me what I suspect are business plus commuting miles as business miles.   I explain commuting, do not tell them that commuting miles are not deductible, and ask them how many of these miles are commuting.  Cause, you know, the IRS wants to know.   I do explain that commuting miles are not deductible after I get an answer.

[MsTabbyKats]

If this is a Schedule C deduction...as opposed to an A.....you can train for your business.

 

It's not "a job".  It's your investment.

[jshtax]

I agree that you should take it as a business deduction while you can especially if it is new to him this past year. Yes there has to be business intent but that is never brought up after the first year or two. Now lets fast forward to year 3 and forward it could become a problem. One other trick I have seen the IRS pull is to make it a passive activity. They have a really hard time seeing how someone can have more than 1 job/career.