Today TaxMama® hears from Bill in the Tax Quips Forum who raises a good question. “I have a lot of independent distributors asking about deducting their autoship of product for personal use. They say that their tax person said you can claim the deduction because you have to “be a product of the product” or because that is one of the ways to be commission qualified. I say no, because it is for personal use. I know on cost of goods sold that you pull out ‘items for personal use”; but haven’t yet found anyplace that says that you can’t use it anyplace else as a deduction. Does anyone have a ready reference on this?”

Dear Bill,

You’re absolutely right.

And IRS does pursue chains of multi-level marketing organization members once they find one of their ilk taking fraudulent deductions. They also have a tendency to audit all the tax returns prepared by preparers who engage in these practices – and to prosecute – and to publicize those prosecutions.

So you’re making a good call here. Please point your distributors to IRS’s Audit Guide for Direct Sellers. If you look at the INVENTORY section of the audit guide, you will see IRS’s specific statement about personal use. Point that out to them.

• Starter Kit – How does the direct seller account for the cost of the kit and related items?


• Discontinued Display Items – When products become obsolete (discontinued) where do they go? Are they sold at a discount, converted to personal use, or given away as a gift?


• Other Income – For items taken out of the kit and/or inventory and disposed of by sale, where income is reported, and was fair market value or adjusted basis used to calculate income? If converted to personal use or given away as a gift, how is this reported on the books?

And remember, you can find answers to all kinds of questions about direct sellers, MLM, network marketing and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Stephanie in the Tax Quips Forum with a very valid concern. “I’m concerned about this requirement that PayPal report my sales numbers via the 1099-K. The clients I work with will also have to send me a 1099-MISC. Won’t that be income that is double reported? Usually I just enter my total income and ignore any 1099’s I receive since I keep track on my own and claim every last penny I earn. I am Not sure how this is going to work with this new requirement.”

Dear Stephanie,

You are right to be concerned. The new system could very result in double reporting, until people get their accounting systems up to date to separate payments they made via PayPal and credit cards from payments made by check.

There is an easy way around this – and I will show you what to do in a moment. First of all, I applaud you for keeping excellent books. But I must caution you never to ignore the 1099s you receive.

They may be wrong. Or they may report more income than you have received due to timing differences. For instance, a 1099-MISC might include a payment they made on December 31st, that you didn’t receive until the next year. It would be correct from their perspective – but it would too much from your perspective. You must always report ALL the 1099 income you receive, even when it’s too high – to match the number in the IRS computer.

Here’s how – in three easy steps:

1) On the new line for 1099-K income, report all the 1099-Ks you receive.

2) On the line for other income report two sets of numbers:

a) All the income from all the 1099-MISCs you receive.

b) All the other income shown on your tax return, that is higher than all the 1099s you’ve gotten.

3) What’s if the total of the 1099s are too high? Easy. Report the excess income on one of the blank lines on page 2 of your Schedule C (or among the Other Expenses on your corporate or partnership return). Call it “Duplicate 1099 Income.”

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Yesterday TaxMama® started discussing employee reimbursement plans. Today, TaxMama® explains how company reimbursement policies affect tax audits.

Over the years, I have worked on quite a number of audits, often as a consultant to other tax professionals. Sometimes, I have taken over audits of other tax pros’ tax returns because even the tax pros fear IRS.

One of the most important things I’ve learned, when it comes to employee business expenses is – IRS will look at the company’s written reimbursement policy. If the employee is a member of a union, IRS will look at the reimbursement policy dictated by the union contract. Here are some key points that are important to your tax deduction.

1) When the employer’s reimbursement plan says they will reimburse an expense, you must submit the expense to the employer for reimbursement. If you don’t submit the expense, because you think it’s too high, or because the company has an unwritten policy that they won’t reimburse it – you won’t get to take the tax deduction.

2) When you own your own business, as a partner or shareholder, you must have a written reimbursement plan. You must handle your reimbursements based on the written plan.

3) Written plans may have limits. For instance, the employer’s plan may say that they will reimburse all expenses up to $1,000 for the year. Any additional expenses are your responsibility. You may deduct those on your tax return.

4) The written plan must be consistent for all people in the same position or at the same level of the company’s organization chart.

5) When the company’s actual reimbursement practices don’t match the written policy, it’s time to update the written policy to match the practice. If the practice was changed several years ago, update the written plan as of the date the reimbursement practices changed. Memorialize this in the company’s minutes, or other official documents.

It’s important that actions always match the written word. Bring this up with your company’s management. They may be annoyed at first. But in the long-run, they will really appreciate you.

And remember, you can find answers to all kinds of questions about employee business expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama® hears from Josh in the TaxQuips Forum with a complex question about reimbursement plans. So, TaxMama wants to explain the overall concept.

Dear Family,

When you’re an employee, it’s important to understand the difference between the two ways your company can reimburse you for your business expenses – and the different tax costs to you. There are accountable plans and nonaccountable plans.

1) Accountable plans – You turn in all receipts to your employer. You get reimbursed for all your expenses. If you get an advance, you return the difference if your costs are lower. Tax impact? You break even. You do not pay any extra taxes. You do not need to include your business expenses on your tax return.

2) Nonaccountable plan – You get money from your employer, perhaps as a monthly allowance; or perhaps, per trip or event. You use the money cover your expenses and keep any excess. Tax Impact? The full amount of the allowance or advance is included in your wages.

o You pay 7.65% FICA/Medicare and all taxes on those funds, as if they were wages.

o To recoup the income taxes, you must use itemized deductions on your tax return. Often, you cannot, because you don’t have enough other itemized deductions.

o AND even when you do, your expenses are reduced by 2% of your adjusted gross income.

o When it comes to meals and entertainment, you lose 50% of the deduction.

Tomorrow, I will explain more about the company’s written policy and how it impacts a tax audit.

And remember, you can find answers to all kinds of questions about employee business expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Jimmy in the TaxQuips Forum with a distressing problem. “I received a notice from the State of Ohio Tax Bureau that I owe a large sum of taxes for 2004 and 2005. My taxes are taken directly out of my paycheck by my employer and I know that I paid my taxes for those years. However, I filed on my own and cannot find the copies of those returns. The State of Ohio sent this to a collector who sent me a notice that I had 60 days to pay the past due taxes. I have had little success in getting anyone to return my calls. I spoke to a person at the collection law firm who said they would check and get back to me, thinking that maybe the State lost my returns. But no one has called me back. I went onto the Federal Tax site and researched how to get my W-2’s from those years and it is going to cost several hundred dollars per W-2.

My question is this…how can I remedy this is the least costly way? Short of paying a tax attorney for help, is there a way for the “little guy” to prove he has paid his fair taxes?”

Dear Jimmy,

It should not cost you a fortune to get your W-2s. You only need copies of two year’s tax returns with the W-2s – 2004 and 2005. It will cost you $57 per year to get those copies. Use Form 4506 . That’s $114.00 total. (Transcripts of the W-2s are free – but they don’t include state information.)

Since it’s so long ago, it may take a few weeks to get those copies. So, ask the collections folks to put the collections actions on hold until you can prove that you don’t owe this money.

Look what I found for you! The State of Ohio has a problem resolution office. Give them a call and get their help on this. It’s free.

See, this is why I always tell people to keep a copy of all tax returns. Never throw them out! It’s usually the states that do this to you.

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Today TaxMama hears from Pam in the TaxQuips Forum with this problem. “My husband and I bought a house for $59.000 five years ago. Our daughter lived in the house, rent-free. Her name was on the title. We sold the house this spring for $48.000. We were issued a 1099 in our name (not our daughter’s) for the sale. There was no mortgage on the house, since we paid cash for it 5 yrs ago. Are we going to have to pay taxes on this sale? How do we handle this sale on our tax return?”

Dear Pam,

Aaawww, I’m sorry to see that you sold it at a loss. But, at least your daughter had a nice home for a while. The good news is, you won’t be paying taxes on this sale.

You will report this sale on Schedule D. There is a new version of this form this year, which has us starting with a new form – Form 8949. Read the instructions to Schedule D & Form 8949 carefully to see how to report a home sale. It just got a bit complicated.

However, if you’re using tax software, just let it know about the sale of a personal residence and it will ask you the right questions.

Since this was a personal residence (your daughter’s), you cannot get a deduction for the loss. I know it wasn’t your personal residence. But, for tax purposes, the effect is the same. Yes, your daughter should be the one to report it. But since it has your SSN on the form, it’s easier if you do.

And remember, you can find answers to all kinds of questions about selling property and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Donna in the TaxQuips Forum with a good question. “Do I need to 1099 the gardener that is paid $250.00 per month?”

Dear Donna,

Let me clarify the concept of the 1099-MISC. It is designed to be sent out by businesses that want to claim a business deduction for payments paid for services rendered.

So, if your gardener is strictly working on your personal home, not for a home office…No! You don’t need to send him a 1099-MISC.

However, the amount you are paying him, $3,000 per year, brings up another issue – household employees. Since you are paying the gardener more than $1,700 (2011) or $1,800 (2012), it’s a good idea to get a copy of his business license, and his business card. Keep them in your files to prove he is in business for himself and not your household employee.

Otherwise, you could be faced with treating him as an employee, with a W-2, and quarterly payroll tax returns, etc. The State of California has even more complicated rules – you have to file all the forms that any regular employer would have to file.

You and I know he’s not your employee. So, avoid all the hassle and just keep proof in your file. And if he doesn’t have a business license – tell him to get one! Immediately.

And remember, you can find answers to all kinds of questions about 1099s and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Sue in the TaxQuips Forum with a timely question. “I was wondering if LLC’s are exempt from getting a 1099 MISC form from our company?”

Rita Lewis, EA in Fairfield County, CT provides a good answer. She says:

Look at the Form W-9 you got them to send you. If a corporation, either C or S, then you do not have to issue a Form 1099-MISC; however, you can. To any entity other than a corporation, you must issue Form 1099 if they meet or exceed the minimum dollar amount, $600, for the type of payments you made to them, and can issue for lower amounts. The instructions are very thorough.

TaxMama adds. If the company if a legal or medical corporation, you will need to issue them a 1099-MISC, as well.

You should start each new year, and each new vendor relationship with a Form W-9. If you do this before you issue the first check of the year to the vendor, you will get two instant benefits.

1) The vendors will know, from the outset, that the money they are receiving will be taxed – and can quote their rates accordingly. This will avoid those nasty, sometimes violent confrontations at the beginning of the following year when you are trying to get 1099s done.

2) You will have a record of their business entity, even when they are LLCs. You will know if they file as individuals, partnerships or corporations. That will help you determine if they should get a 1099 or not.

And remember, you can find answers to all kinds of questions about 1099s and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Gary in the TaxQuips Forum with a planning question. “We need advice on the logistics for purchasing a home to presently rent, with the intention of living in this home when we retire in a few years. We need more information on this topic to ensure we make wise decisions.”

Dear Gary,

David Toelkes, our real estate investment guru from South Carolina provides an extensive reply about things to consider when dealing with rental properties. Some of the tips he gives include:

1) Hiring a good property manager.

2) Watching the property cash flow carefully – rents vs. costs – until you retire.

3) Planning for the large expenditures – surprise repairs, etc.

4) A warning – your long-range plans might change. So, TaxMama® suggests you find a property that will still make sense as a rental, even if you don’t retire there.

TaxMama® adds a bit of advice about how to avoid using a property management firm, if you’d like to save that cost, without undue risk:

1) Take your time and screen applicants until you find a good, solid tenant.

2) Work with a local insurance agent/broker – and get their recommendations for repair and maintenance service providers (electrician, plumber, handyman, gardener, etc.)

Of course, once you know more about the questions you have, come on back and ask us. Team TaxMama® will be here to help!

And remember, you can find answers to all kinds of questions about real estate, and retirement planning and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Today TaxMama hears from Susan in the TaxQuips Forum with an ever more common situation. “My dad (age 88) is in a nursing home because my mom can no longer care for him. I wanted to know which nursing home expenses are considered medical expenses.”

You got an excellent response from Susan Holtgrefe, EA in Erie, Pennsylvania.

Susan says your father’s care, including the room and board portion, are considered medical expenses.

She adds a valuable tip. I am not sure if you are asking this on behalf of your mom or yourself, but if you provide more than half of his support then he can be considered a dependent, as parents do not have to live with you to be your dependent. If you are single, then that means you can use the Head Of Household filing status. Medical and Dental expenses are explained in IRS Publication 502. It is worth looking into as you might see something that you paid for in 2011 that you did not know could be a deductible medical expense.

If only Congress would let us deduct the cost of gas that the family uses to drive back and forth from the nursing home! You can deduct mileage for trips to the doctor though.

And remember, you can find answers to all kinds of questions about aging, medical expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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