6 MLM Business Mistakes The IRS Loves

The IRS lives to find money people leave on the table. You know it, I know it, the IRS knows it. Unfortunately, some folks in the network marketing industry claim deductions they think takes that money off the table.

As they say in the Hertz commercial, "Well … not exactly."

The problem here is this usually gets the IRS' attention and the home business owner gets a love letter inviting them to sit down and talk about those "disallowed deductions" over a nice hot cup of anxiety.

You need a top tax guy.

In MLM many people, who are in a home based business to make extra money, rely on their sponsor or a relative "who did it once" for tax deduction tips. The fact is their information rarely qualifies as professional tax law info.

For this reason it's critical for anyone in MLM to know how to present their tax information to the IRS in a way that is both legitimate and most advantageous to their home business income bottom line.

So, the smart entrepreneur looks to experts in the tax industry to fill that need. And, of course, I rely on just such a "tax guy" for my tax information needs.

In his May 16, 2008 issue of "Tax Tips You Can Bank On" Mr. Mueller shared his thoughts on the tax deductions that scream to the IRS, "I want to be audited!" Here they are:

The Top-6 "Audit-Attracting" Deductions

1. The IRS hates estimates:
Even if a tax deduction actually does come out to an even $500, you might want to change it to $497. Even though $500 may BE precise, $497 LOOKS more precise.

2. Your "Business Use of the Home" deduction:
This should include ONLY the portion of your home used regularly and EXCLUSIVELY for business. If you claim your bedroom, be prepared to prove that you don't sleep. If your Business Use Percentage (BUP) is greater than 10-20% you might want to attach an explanation, using IRS Form 8275, "Disclosure Statement."

3. Personal vehicle used 100% for business purposes:
If it's true, claim it. But if you claim it because you have a sign on your car, that does NOT make it automatically 100% deductible. A "wrap" doesn't do it either.

4. Paying your 8-year-old $100 a week wages as a business employee:
A minor CAN earn up to $5,450 tax-free, but the wages you pay must be "reasonable and appropriate," given their age and type of duties they are performing. (Also, be sure you are following all the steps listed in Chapter 6 of "It's How Much You KEEP, That Counts! Not how much you Make.")

5. Claiming a home-office for a W-2 job:
This can work, BUT it has to be for the convenience of the employer (your boss), not the employee (you). To survive an audit, have a written,signed statement from your employer (on letterhead) stating that you are REQUIRED to have a home-office.

6. Auto-ship or ADP:
If your company's product is nutritional, claiming that you must be a "product of the product" won't pass muster with an auditor. There are other ways to potentially deduct autoship, so don't use this "product of the product" one.

This is just as important as any mlm training you can offer.

In MLM it's important to know how to build a team, train them, and retain them … but unless you're a tax expert willing to give away your time and knowledge to that team, then you also need to give your team access to real professional tax help.

There are a few experts in MLM tax law, and you may want to look for them too, but here's a really good place to start.

Ronald R. (Ron) Mueller, MBA, Ph.D.
Author of "It's How Much You KEEP, That Counts! Not how much you Make".

If you've always dreamed of getting up-close and personal with an IRS auditor, then just ignor the above. Who knows, you might make a friend.

However, if you want to be sure you're IRS bullet proof, then you must make sure you know what you can and cannot deduct. Folks like Mr. Mueller can help you and your team with that.

I appreciate you,

Bill Tessore

MLM Comp Plans - The Stair Step Love Affair

In my last post "MLM Comp Plans - Uni-level Breakage" I revealed where breakage is in a Uni-Level comp plan. Now we’ll venture into the tawdry romance between MLM companies and the Stair Step Break Away compensation plan.

The early years of the twentieth century gave rise to many innovations; among them was the marketing concept of multi-level marketing. This brave new adventure gave birth to the granddaddy of all network marketing industry comp plans called the Stair Step Breakaway.

Here's how the stair step breakaway works.

A Stair Step Break Away comp plan has two types of distributors: managers and non-managers. Whatever the title, when a distributor achieves a certain performance level, he becomes a manager and “breaks away” from his original manager. Now the original manager receives a percentage override from the sales of the entire breakaway organization in place of her original managerial overrides.

How do companies love the stair step? Let us count the ways.


1. Retail vs. Wholesale
Up to 4 times what you'd pay at a place like Wal-Mart.

2. Qualification Hoops to Get Paid
A dog and pony show generally requiring 2 forms of volume (ex.: personal and group volume).

3. Astronomical Bonus Qualification Requirements
Titanic burdens that would bring even Hercules to his knees.

4. The "Break Away"
Almost like starting over from scratch, the override of a new manager's group volume can be up to 60% less than that of the personal volume override from a non-manager distributor.

MLM company owners love the Stair Step Break Away comp plan because the many forms of breakage makes it a very lucrative plan for them. The effect of the "break away", unrealistic qualification expectations, and ridiculous retail rates spells failure for all but the elite recruiting machines. Oh, and lest we forget, super recruiters never see duplication in their teams.

Are you a robo-recruiter? If so, then never mind.

However ...

If you’re one of the 97% of the world that can’t recruit at will, then I suggest bypassing the Stair Step comp plans in favor of something that rewards you for all your hard work instead of swatting you in the nose, throwing you out into the cold, and then tossing you a bone.

Bill Tessore