1. Order and Pay for Product in December and Recieve in January?
2. Can I write off cost of computer for both business and personal use?
3. Can I write off a computer bought before I became a Mary Kay representative?
4. Do I get a deduction for business miles driven or actual costs associated with a automobile?
5. How do I handle sales tax collected on my Mary Kay product sales?
6. If I stop selling Mary Kay, do I get a tax deduction for product that is remaining on my shelf and will not be sold?
7. Can I show a loss for tax purposes for more than 3 consecutive years?

There are several common questions that we get from Mary Kay professionals regarding Mary Kay taxes and the Mary Kay business. You will find some of those questions and the answers to those questions below. Please check back frequently, as we will always be adding more questions.

Q:  What happens if you order product in December (and pay for it in December) but don't receive the product until January of the following year?

A:  Since you are on the cash basis of accounting, you should include the December purchases (as long as it was paid for in December) in the current year.  You should remember to add this purchase to the Income Advisory Statement (IAS) because the IAS only includes purchases from January through November of the current year.  Also, when you include the December order in your current year purchases, you must include the order in your ending inventory even if you haven't received it yet.  Count your December 31 inventory and add that last purchase to the total inventory.  You are therefore matching purchases to your inventory and reporting an accurate cost of goods sold.

Example: Beg. Inventory $1,000 December Purchase
Beginning Inv. $3,000 $3,000
Purchases (IAS Dec) $2,000 $3,000
Goods Available $5,000 $6,000
Less: End Inventory $2,200 $3,200
Cost of Good Sold $2,800 $2,800

As you can see,  by accurately matching your purchases and ending inventory, your cost of goods sold doesn't change.

Q: Can you write off the cost of a new computer that was bought for both personal and business use?

A: Yes, you can write off the cost of a new computer, but you can only write off the portion that is business use. To determine business use, you must come up with a percentage of business to personal use. This can be determined by keeping a log of minutes used for both personal and business purposes and taking the business minutes divided by the total minutes to get you business use percentage. You can also use an estimate of business use, but the more evidence you have to back up your percentage, the better. Once you've figured out the business use percentage, then you can elect to write off the entire amount in one year or depreciate the cost over 5 years. If you are unsure what to do, then please contact us and we will advise you how to proceed.

Example: You purchase a computer in 2006 for $1,000. You decide that the business use % of the computer is 50%. You can either deduct $500 in 2006 ($1,000*50%) or deduct $100 ($500/5 years) in 2006, 2007, 2008, 2009, and 2010.

Q: I am a new consultant and I use a computer that I previously bought for business. Can I deduct the cost of that computer?

A: Yes, you can deduct a portion of the cost of the computer. Using the same formula above, you will need to calculate a business use % for the computer and multiply that by the total cost of the computer. You then will need to multiply that amount by the amount of years left in the computers useful life. According to the IRS, a computer has a useful life of 5 years and thus needs to be depreciated over 5 years. If you had the computer for 2 years before you became a consultant, then you have 3 years left (or 60%) to depreciate. Multiply the deduction amount calculated earlier by the remianing depreciation percentage to determine how much you can deduct for that computer.

Example: You purchased a computer in 2004 for $1,000. In 2006, you become a Mary Kay consultant and begin using that computer 50% for business. You can deduct $300 ($1,000 * 50% * 60% (3 years left of 5 years useful life) of the cost of the computer in 2006 or $100 over the next 3 years.

Q: Do I get a deduction for business miles driven or actual costs associated with a automobile?

A: You have the option of deducting business miles driven or actual costs, but not both. The IRS allows a deduction for business miles driven. The mileage rate for 2007 is 48.5 cents per mile. To calculate the deduction, simply multiply the total business miles driven during the year by the mileage rate. However, if you have high costs associated with a car, then it may be more beneficial to take a deduction for the actual costs for the year. Actual costs include gas, lease payments, insurance, repairs, maintenance, oil changes, car washes, etc. If you own a car, then you need to calculate the annual depreciation amount for the car and add that to your total costs. To calculate the deduction, you need to divide the business miles driven during the year by the total miles driven during the year. This will give you the business use % for the car. Multiply your total actual costs by the business % to arrive at the deduction for the year. If the actual costs deduction is higher than the actual miles deduction, then you should take the actual costs deduction, and vice versa.

Generally speaking, Mary Kay consultants are better off taking the mileage deduction while Mary Kay Directors are better off taking the actual costs deduction. There are several reasons for this. Typically, consultants drive fewer miles than directors, so their business use % is going to be lower, thus creating a smaller deduction for actual costs. The mileage deduction is also much easier to calculate than the actual costs deduction since you only need to keep track of your business miles driven during the year. You do not need to keep all of your gas, repairs, and wash receipts if you take the mileage deduction. Another reason directors are better off taking the actual costs deduction is that they frequently drive a Mary Kay car (i.e. Cadillac, Grand Prix). They are making lease payments on these cars and the lease payments are typically several thousand dollars each year, increasing your actual costs for the year and thus, increasing your actual costs deduction for the year.

Q: How do I handle sales tax collected on my Mary Kay product sales?

A: Mary Kay policy requires that you pay sales tax when you purchase your product from Mary Kay. When you purchase your product, you essentially prepay sales tax based on the suggested retail selling prices. In turn, the Company remits the sales taxes to the appropriate state and local jurisdictions. Your prepayment of sales tax is recouped when you make the sale at suggested retail prices. It is important to remember that the percentage of sales tax, which you collect, is based upon the tax rate, which applies in the jurisdiction where the retail sale is made. Be aware the sales tax system charges the highest rate for a local area, which will prevent underpayment of taxes to your local tax jurisdiction. Many Independent Beauty Consultants sell product across taxing jurisdiction lines, and each sale could be subject to different tax rates. Therefore, if you sell your product in a different taxing jurisdiction, the tax rate could be different from the tax rate you prepaid the Company. If this is the case, then you have a couple of options. If you sell products to customers in lower sales tax areas than the sales tax rate you are charged, you may apply for a refund on the non-recovered portion of sales tax. To apply for a refund, simply request a form titled Sales Tax Refund Claim Form from your branch, or you can access a form from the Mary Kay InTouch® Community Web site. The Sales Tax Refund Claim Form is located on LearnMKTM. Complete and sign the form and remit it, along with copies of your retail sales tickets, to your branch. Or you may deduct this nonrecovered portion of sales tax on your Federal Income Tax Return, Schedule C. If the difference of sales tax collected from your customer is greater than the sales tax you prepaid the Company, you must remit the additional tax to your distribution center. With your remittance, please send copies of the retail sales tickets that include the location and tax rate of the sale. You may run into a similar situation if you sell your product at a discount and charge sales tax on the discounted amount. This situation is the same as selling to a customer in a lower sales area than what you paid the company, and the same recovery options apply to you.

Please note, depending on your state, you may apply for a sales tax license with the state. The sales tax license must be in your name, not a company name. You also must have approval from the Mary Kay Inc. Tax Department in Dallas. Once you have obtained approval, the Company will no longer charge you sales tax. You will be responsible for collecting and remitting sales and use tax directly to your taxing jurisdiction. Please see the Mary Kay InTouch®Community Web site for additional tax information." If you decide to do this, we recommend consulting with a tax advisor to ensure you are in compliance with all the sales and use tax regulations of your state.

Q: If I stop selling Mary Kay, do I get a tax deduction for product that is remaining on my shelf and will not be sold?

A: If you quit the Mary Kay business and have inventory remaining on your shelf, then you can deduct the remaining amount as obsolete inventory. It is best to give the product to a charity of some sort, at which point your product donation becomes a charitable contribution. Do not take a deduction for disposed product if you use the product personally, give it away as gifts, or for any other non-business reason.

Q: Can I show a loss for tax purposes for more than 3 consecutive years?

A: The IRS rules state that losses incurred in a for-profit business can be deducted in full, while losses incurred in a "hobby" business cannot be deducted and expenses can only be taken to the extent of income from the hobby. The IRS has a rule that tries to distinguish between for-profit businesses and hobbies. This rule state that if a business shows a loss for 3 out of 5 years, then that is one factor to consider in determining whether the business is a hobby or a for-profit business. However, there are several other factors to consider in determining whether your business is for-profit or a hobby. These factors try to determine whether you are operating your business to make a profit and are as follows:

1) Do you have a separate bank account for the business?
2) Do you attend trade meetings?
3) Are you actively recruiting new customers and consultants?
4) Do you keep good records?
5) Do you have a profit motive.

If you can answer yes to any or all of these questions, then you are most likely operating your business to make a profit and can deduct losses in full as long as you continue to operate to make a profit. If you answer no to any or all of these questions, then the IRS may consider your Mary Kay business a hobby and disallow the losses that you have taken.

These are just a few of the factors to consider. There are also other factors that may need to be considered in order to determine whether or not you are operating your business to make a profit. You can find additional information on determining whether or not your business is a for-profit business or a hobby and on keeping good records in our August Newsletter and our July Newsletter, respectively.