Amway Business Math?

[Leftus]

For obvious reasons IBOs are not trained to be accountants but they are certainly supplied with enough information to know better than this post indicates.

Yeah.

In other words, even though he's Amway business lost money, he was overall financially better off.

Not buying it.

 

[mutile]

Yes, but it's a refund he wouldn't have gotten if he didn't have his Amway business. In other words, even though he's Amway business lost money, he was overall financially better off.

So if my hobby is taking photographs and I pay $10,000 for a digital camera and I decide to sell it for $10 on ebay at the end of the year I am overall financially better off because it is $10 I would not have made if it weren't for my hobby?

 

[marplots]

I'm not at all interested in a tax debate, since it wasn't my point, but you are incorrect here. If previously non-deductable personal expenses become deductable business expenses it is indeed possible for it to be beneficial.

This is plainly wrong and I am shocked that someone schooled in business by Amway wouldn't know it. Personal expenses cannot become business expenses by some sort of magic. Business expenses are just that - money spent to run a business.

Business deductions can only be claimed against business profits - you can never turn them into profits themselves. If you make zero profit, all the deductions in the world won't turn that into a credit. If it worked like that article implied, we'd all start businesses, burn them down, and make huge money.

Again, if the blogger was trained by Amway, he should get his money back for the schooling. Frankly, it's embarrassing although, it may actually be a true picture of how poorly IBOs understand their situation.

 

[icerat]

I am always willing to learn something new, can you provide an example of an expense that is beneficial to somebodies financial position?

Seriously? Inputs on any profitable business. Education is highly correlated with increased incomes. Buy a house (an expense) renovate it (more expenses) sell it at a large profit.

Lots of expenses that are ultimately beneficial to ones financial position.

 

[fuelair]

This is plainly wrong and I am shocked that someone schooled in business by Amway wouldn't know it. Personal expenses cannot become business expenses by some sort of magic. Business expenses are just that - money spent to run a business.

Business deductions can only be claimed against business profits - you can never turn them into profits themselves. If you make zero profit, all the deductions in the world won't turn that into a credit. If it worked like that article implied, we'd all start businesses, burn them down, and make huge money.

Again, if the blogger was trained by Amway, he should get his money back for the schooling. Frankly, it's embarrassing although, it may actually be a true picture of how poorly IBOs understand their situation.

I forget how long it goes but the IRS in the older days when I was out at cons selling did allow a loss to apply re:taxes for the first or the first two years of a business. After that, it was not able to help you if you had a loss - it was then considered a hobby.

 

[icerat]

This is plainly wrong and I am shocked that someone schooled in business by Amway wouldn't know it. Personal expenses cannot become business expenses by some sort of magic. Business expenses are just that - money spent to run a business.

And I'm shocked that someone who professes to know so much about business is so ignorant. Actually I'm not, you're not ignorant, you're simply argumentative.

Right now I'm sitting at my office at home. Using a computer at home I also use for business.

This room would have existed if I had no business at all. It's now a significant deductable expense. I still would have bought this computer if I'd had no business, since I have businesses and use it for business, it's a deductable business expense. My internet, my telephone, the dinner I had tonight with a business partner.

All of these expenses that would entirely have been personal expenses are now deductible business expenses.

My car is owned by one of my companies. The company pays half the sales tax on it that I would have to pay if I'd bought it personally, not to mention it's an expense that is subtracted from the companies income before tax is paid not after tax is paid.

I frankly do not believe you are not aware of all of these kinds of examples

Business deductions can only be claimed against business profits - you can never turn them into profits themselves.

Who said they would?

If you make zero profit, all the deductions in the world won't turn that into a credit. If it worked like that article implied, we'd all start businesses, burn them down, and make huge money.

That's not even close to what he implied.

Here you seem to be considering tax implications from the perspective of an incorporated business, not a home base business that can partially convert previous personal expenses in to business expenses and offset that against taxes paid against employment income.

Here is a Canadian article that discusses this, the key sentence for you -

Surprisingly, many people do not realize how easily they may be able to reduce taxes on existing employment income simply by having a home-based business.

Here's another one from a Texas newspaper, Savvy Shopper: Working from home could help reduce your taxes -

To truly save money, the trick is to conduct your business in a way to make your normal living expenses tax deductible.

Again, if the blogger was trained by Amway, he should get his money back for the schooling. Frankly, it's embarrassing although, it may actually be a true picture of how poorly IBOs understand their situation.

Again, Amway distributors are independent contractors. It's up to them to take advantage of any training provided. I happen to be registered Microsoft reseller. It's worth noting that Microsoft has provided me with zero bookkeeping or accounting training.

If I screw up my bookkeeping, do you think I should blame Microsoft?

Either way, based on our past discussions I don't believe you are ignorant of the tax advantages of home based businesses, I think you're merely being argumentative and dismissive because of your acknowledged existing biases in this area.

 

[mutile]

Seriously? Inputs on any profitable business. Education is highly correlated with increased incomes. Buy a house (an expense) renovate it (more expenses) sell it at a large profit.

Lots of expenses that are ultimately beneficial to ones financial position.

This reasoning appears so fundamentally flawed I don't know where to start, firstly buying a house is not an expense, it is trading one asset (cash) for another.

Secondly food is not an expense that improves your financial position, despite the fact if you don't eat you couldn't work and would die.

Lastly the implication is that the expense is beneficial divorced from the benefit it provides. It is being compared to zero expense, as an expense increases it never leads to a better financial position regardless of tax implications, deductions do not work that way. It is like someone claiming they are better off financially if they go to the supermarket and buy tomatoes for $1 each rather than if they were given away for free.

 

[icerat]

This reasoning appears so fundamentally flawed I don't know where to start, firstly buying a house is not an expense, it is trading one asset (cash) for another.

I assume by "this reasoning" you were referring to what you typed immediately afterwards?

Secondly food is not an expense that improves your financial position, despite the fact if you don't eat you couldn't work and would die.

Ok, so next week I have dinner with a potential investor. My company pays for the dinner. Let's say the investor decides to put a million dollars in to the project.

The dinner was not an expense and it hasn't improved our financial position?

Or in the current thread example. Let's say a part-time Amway distributor takes a friend and potential customer to dinner. At the dinner he fails to close a sale.

The dinner (food) is a business expense. Not only is it a business expense, but if it contributes to a loss in his Amway business, that dinner can contribute to lowering his taxable income from his day job. He can also get refunds of any sales taxes (depends on jurisdiction)

If he'd just taken the friend to dinner he's be paying full taxes and getting no lowering of his taxable income.

Lastly the implication is that the expense is beneficial divorced from the benefit it provides. It is being compared to zero expense, as an expense increases it never leads to a better financial position regardless of tax implications, deductions do not work that way. It is like someone claiming they are better off financially if they go to the supermarket and buy tomatoes for $1 each rather than if they were given away for free.

Wrong, as per the example I just gave.

How about a highly simplified example and assume tax authorities agree you were legitimately operating a business.

Let's say every Sunday evening I have friends around for tomato soup. I buy $10 worth of tomatoes.

I start a home based business and invite my friends around Sunday evening as usual, but tell them I'd like them to check out a business idea to see if they want to work with me. I buy $10 worth of tomatoes.

Nobody "buys in" to my idea.

Those tomatoes are a business expense. My business makes a loss of $10.

In my day job I earn $X and pay Y% tax on $X.

I can deduct my tomato soup business expense from $X, so now I pay Y% tax on ($X-$10)

(Y% * ($X-10)) < (Y% * $X)

My expenses has not changed, but I'm paying less tax. I'm financially better off.

 

[psionl0]

Let's say every Sunday evening I have friends around for tomato soup. I buy $10 worth of tomatoes that I would not otherwise have purchased..

I start a home based business and invite my friends around Sunday evening as usual, but tell them I'd like them to check out a business idea to see if they want to work with me. I buy $10 worth of tomatoes.

Nobody "buys in" to my idea.

Those tomatoes are a business expense. My business makes a loss of $10.

In my day job I earn $X and pay Y% tax on $X.

I can deduct my tomato soup business expense from $X, so now I pay Y% tax on ($X-$10)

(Y% * ($X-10)) < (Y% * $X)

My expenses has not changed, but I'm paying less tax. I'm financially better off.

You spend an extra $10 ($10 - Y% of $10 after taxes) but your expenses don't change?

No wonder Amway is considered a scam.

 

[icerat]

You spend an extra $10 ($10 - Y% of $10 after taxes) but your expenses don't change?

No wonder Amway is considered a scam.

Yes, apparently it's considered by some a scam because they can't (or won't) read and dishonestly edit people's quotes. What I actually said was -

Let's say every Sunday evening I have friends around for tomato soup. I buy $10 worth of tomatoes.

Psionl0 added the rest, apparently in order to mislead. These are tomatoes that I do indeed "buy otherwise" before I started any business. No extra money is being spent.

 

[JoeMorgue]

This all seems like a lot of fluff and equations to simply explain away "People don't tend to see expenses as expenses if it is something they were going to buy anyway."

There's a difference between a business expense and "something you've always wanted to buy and finally have an excuse to do so."

 

[Joecool]

I think icerat is mistakenly comparing the legitimate business expenses of a legitimate business against this IBO's expenses and his Amway business. Apparently, the $2900+ that the IBO spent on training, travel, etc, did not result in an increase in sales. Thus if audited by the IRS, most if not all of his deductions might be disallowed.

And the other insidious part of the story is how this IBO and others I've seen before, seem to think that a tax refund is income from their Amway business when clearly it's not. This IBO truly believes he made a profit and to top it off, he wrote a similar blog post in 2012.

If he doesn't snap out of it, he'll go on losing money while bragging about how he made a profit. And that's the scam.

 

[marplots]

This all seems like a lot of fluff and equations to simply explain away "People don't tend to see expenses as expenses if it is something they were going to buy anyway."

There's a difference between a business expense and "something you've always wanted to buy and finally have an excuse to do so."

What's worse is they don't seem to introduce the idea of comingling. It's a recipe for tax fraud.

 

[psionl0]

Psionl0 added the rest, apparently in order to mislead. These are tomatoes that I do indeed "buy otherwise" before I started any business. No extra money is being spent.

Now I see how the saving works. You spend $10 a week on tomatoes for your visiting friends. Suddenly you turn the friendly visits into an Amway promoting session. Your friends stop coming around so you don't have to buy those tomatoes anymore.

Money saved.

 

[Giordano]

I think icerat is mistakenly comparing the legitimate business expenses of a legitimate business against this IBO's expenses and his Amway business. Apparently, the $2900+ that the IBO spent on training, travel, etc, did not result in an increase in sales. Thus if audited by the IRS, most if not all of his deductions might be disallowed.

And the other insidious part of the story is how this IBO and others I've seen before, seem to think that a tax refund is income from their Amway business when clearly it's not. This IBO truly believes he made a profit and to top it off, he wrote a similar blog post in 2012.

If he doesn't snap out of it, he'll go on losing money while bragging about how he made a profit. And that's the scam.

Like some people I know, he can just gamble his money at a casino and only count the money won and not count the money lost...

I think it is important here to note that the IRS officially only counts the expenses that you can show are involved in running a business and does count every thing you spend and "say" it was involved in running a business, The IRS is particularly skeptical about "businesses" that consistently lose money. They can also be nasty about requiring rigid documentation that the computer, for example, that you use to run your business is only deducted for the demonstrated hours it was used to run your business. In the absence of proof (usually logs or other evidential material) you can deduct whatever you want, but will run into big trouble if you are ever audited.

 

[Giordano]

Quick, two tens for a five?

 

[marplots]

Right now I'm sitting at my office at home. Using a computer at home I also use for business.

The portion of that computer you use for business is tax deductible. If you claimed the entire cost, you shouldn't be using it for personal use.

This room would have existed if I had no business at all. It's now a significant deductable expense.

It is deductible because it is an expense; if it isn't an expense (a negative cost), you shouldn't be deducting it.

I still would have bought this computer if I'd had no business, since I have businesses and use it for business, it's a deductible business expense. My internet, my telephone, the dinner I had tonight with a business partner.

Yes, the business use of items is deductible. But you wouldn't be doing/using that stuff for business otherwise. You should not be deducting all your phone costs, for example, if you only call clients once a month.

All of these expenses that would entirely have been personal expenses are now deductible business expenses.

They wouldn't be personal expenses when you used them for business if you weren't in business. If you weren't in business, you wouldn't be using the phone as much, the computer as much or anything else.

My car is owned by one of my companies. The company pays half the sales tax on it that I would have to pay if I'd bought it personally, not to mention it's an expense that is subtracted from the companies income before tax is paid not after tax is paid.

So long as the car is used for business purposes, this is fine. If you are simply saying it's for business and then using it for personal stuff, the company is committing tax fraud.

I frankly do not believe you are not aware of all of these kinds of examples

I am aware of them, and many more. I am also aware that small business people abuse the idea, either because they do not understand it or because they are willfully participating in fraud.

 

[marplots]

Since you used math in this comment, I feel it deserves a response.

How about a highly simplified example and assume tax authorities agree you were legitimately operating a business.

Let's say every Sunday evening I have friends around for tomato soup. I buy $10 worth of tomatoes.

I start a home based business and invite my friends around Sunday evening as usual, but tell them I'd like them to check out a business idea to see if they want to work with me. I buy $10 worth of tomatoes.

Nobody "buys in" to my idea.

Those tomatoes are a business expense. My business makes a loss of $10.

In my day job I earn $X and pay Y% tax on $X.

I can deduct my tomato soup business expense from $X, so now I pay Y% tax on ($X-$10)

(Y% * ($X-10)) < (Y% * $X)

My expenses has not changed, but I'm paying less tax. I'm financially better off.

Math looks OK.

Your expenses did change. You spent time you otherwise would have spent enjoying the company of your friends on a sales pitch. This time has a value, or should have. You deserve to be compensated for the time, as well as those material goods you spent money on creating the "business situation."

If the argument is that you are doing nothing different in the two cases, then claiming it as a deduction is fraud. If there is some aspect that makes the two cases different, then it very well might be tax deductible.

It is interesting that these examples all share one attribute: they depend on losing money with an Amway IBO. This part, at least, I deem quite realistic.

Naturally, if someone were able to make money, they would be paying taxes on their profits. All actual businesses accept this, and in fact, strive to make money despite this. One measure of business health is taxes paid on profits made - this isn't a bad thing at all. I am happy to say I pay taxes on my business income, because, well... I make money.

 

[Giordano]

Since you used math in this comment, I feel it deserves a response.



Math looks OK.

Your expenses did change. You spent time you otherwise would have spent enjoying the company of your friends on a sales pitch. This time has a value, or should have. You deserve to be compensated for the time, as well as those material goods you spent money on creating the "business situation."

If the argument is that you are doing nothing different in the two cases, then claiming it as a deduction is fraud. If there is some aspect that makes the two cases different, then it very well might be tax deductible.

It is interesting that these examples all share one attribute: they depend on losing money with an Amway IBO. This part, at least, I deem quite realistic.

Naturally, if someone were able to make money, they would be paying taxes on their profits. All actual businesses accept this, and in fact, strive to make money despite this. One measure of business health is taxes paid on profits made - this isn't a bad thing at all. I am happy to say I pay taxes on my business income, because, well... I make money.

I fully agree! One- the IRS is fully aware that some people have created businesses that are a shame designed only to lose money for tax purposes, and consider this a tax fraud when they discover this. You can try to deduct it, but it is fraud legally speaking. If you always lose money, the IRS is likely to look into it.

Two- you can legally deduct only the part of anything that is an actual business expense (part of a computer, part of a room used for a business office, etc.).
If you invite people over for dinner, you can only deduct the percent of the gathering used to discuss business. If you had them over before, the IRS is likely to demand that you prove the deduction reflects a true business expense. And I suspect the smaller and less influential you are, the stronger the IRS demands. Again- you can claim anything- until you are audited.

 

[marplots]

An older article discusses a tax court loss for an Amway IBO:
http://www.hiddenmysteries.org/conspiracy/conspiracy/amwaybush5.shtml

After considering these factors, the court determined that the Olletts did not have an actual and honest objective of making a profit, in part because: (1) they did not have any sales experience prior to becoming distributors and yet they relied solely on their upline for advice and training; (2) they did not seek independent business advice at the beginning of their venture to assess its potential for success; and (3) they did not seek advice on turning around years of operating losses.

But most importantly, the court said, the Olletts reported no significant revenue from their Amway activity and no reason for them to believe they ever were going to have any significant revenue from this activity.

And here's the IRS on distinguishing between a business and a hobby:
http://www.irs.gov/uac/Business-or-Hobby?-Answer-Has-Implications-for-Deductions

Please note: it isn't up to the taxpayer to determine their own definitions for the terms used - that falls to the IRS and tax court.