Discussion:Mary Kay

She is like an indendant consulant for May Kay. She will probably get a 1099-MISC from them. Or she purchases their product at a cheap rate and resells it to her customers. She may have to pay sales tax.

"The idea is that they are not cost of goods sold, e.g. Mark Kay, but rather expensed supplies or materials."

Huh? Nah... I'll keep doing it the way I've been doing it for the last 32 years. Merchandise purchased for resale is Purchases under COGS. I don't know whose "idea" this is, but I'll have to disagree. And I'm too tired to read Publication 538 right now.  :)

Sch C Instructions

I'm curious if anyone else is incorrectly reporting this.

I have a Mary Kay seller. It took me two tax seasons to get things in line.

Your client will hand you a load of paperwork and her order books. There are 26 of each. One for each of the 26 campaigns during the year.

One of the type sheets will show Mary Kay's projected sales and other crap on it. Politely collect these sheets and place them at the bottom of your pile. Keep them handy in case you run out of toilet paper. This is not what your client made.

It's important to remember that Mary Kay does not pay your client nor will it issue a 1099. Your client makes her money on the money she collects from her sales. You need to go through each order book (all 26) and tally each order. Yes....INCLUDE the amount she collects for sales tax. Will explain further down. The total of the orders is her GROSS.

You will also come into possesion of a a sheet containing her charges and billing. This is worth it's weight in gold. The only figure you need to concern yourself with is the amount that your client remitted to Mary Kay. That amount is her COGS. MK is her VENDOR. You will notice that she gets 'billed' for 'sales tax collected'. This amount may not jibe with the actual amount collected. This is because MK projects this based on the projected selling price not the actual. Your client does not remit sales tax to the state, MK does. If you client discounts her sales, she will collect less than that 'billed'. Since it's bundled in her remittance, you need to keep it included in her order totals, don't parse them out.

In addition, she is billed for brochures and 'samples' for each campaign. You will lose your mind if you try to parse out the costs.... they just get expensed anyway. Besides, everything she gets from them is sellable. MK bills her for her charges...period. She pays them that amount - her COGS. She keeps the rest.

In addition, DO NOT bother with inventory. They are all COGS purchases. She is not required to maintain inventory under Rev Proc. 2001-10 Sec 4 - Small Taxpayer Exception. I make mention of that in a statement with the return. Her method is CASH.

Make sure she identifies she personal purchases/sales. If you sell MK, you give it as gifts during the holidays. Don't let her write off Christmas . Also, inform your client that the profit margin on MK is slim enough. If she discounts, she will be losing money.

The MK sheets will take care of COGS and the order books handle the amount collected. Any additional expenses she incurs will be out of pocket and not through MK.

I hope this helps.

Anything she orders is something that she paid for and was billed for. Keep those in the equation.

What do you bill to go through all those books, RG? And do you do it in the middle of tax season?

Before I saw the light, I would spend hours/days trying to make sense of the paperwork.

"Use a consultant order form to record the products you will use for your personal use. Add them up at the end of the year as above, and also figure non-collected sales tax on the retail amount that you can use as a tax deduction."

I figured anything used for personal use was not deductible and deducted from total purchases? In fact, I think I read that in an older version of Pub. 911 I found online.

I'm still curious about the supplies vs. COGS issue. I have always reported all direct costs of selling items/services as cost of goods sold.

The issue is, however, that many times these sales people sell their products at discounted prices. I guess when the business ceases, there would be some adjustment in the deduction to "true it up" to the actual amount spent on purchases over the years. Otherwise, it seems to me that more less deduction is taken than should have been. The other problem with the discounts, as someone else pointed out, is that too much tax is paid. I guess a lot of the people who get into these businesses do it mainly because they like to use the products themselves, enjoy the camaraderie it generates, and aren't too concerned about the extra expense.

Using the markup method seems like it's just making up numbers based on what MK says the price should be.

There should be records of purchases and revenues somewhere.

Solomon, you are incorrect. Inventory is NOT deducted as "supplies" on Schedule C.

Revenue Procedure 2001-10 is applicable to the Mary Kay client. She qualifies if her average annual gross receipts were $1,000,000 or less (I'm sure I'm pretty safe in assuming she did not go over this amount for 2006). This small taxpayer exception allows her to do 3 things:

1. She is a nonstore retailer, so she would normally be required to use the accrual method under Sec. 446. However, under Rev. Procedure 2001-10 she is allowed to use the cash method of accounting instead of the accrual method of accounting.

2. She is a nonstore retailer, so she would normally be required to account for inventory under IRC Sec. 471. However, under Rev. Procedure 2001-10 she is allowed to "treat" the inventory as nonincidental materials or supplies under Regulation section 1.162-3 (NOT "deduct" the inventory as "supplies" on Schedule C).

This part means that the cost of her inventory items are deductible in the LATER of

a. The year in which they are consumed or used, or

b. The year in which the she actually pays for them.

She CANNOT deduct the inventory as "supplies" on Schedule C as Solomon erroneously posted. That is just begging the IRS to audit her return. If it is audited, the auditor will realize that this issue was done incorrectly and they will then often expand the scope of the audit to see what else on the rest of the return was "creatively" prepared.

The inventory is deducted under COGS as Deback first correctly pointed out.

3. For open accounts receivable (due in 120 days or less) that is actually or constructively received, she must include those amounts as income.

"Supplies Page 1. See Reg. 1.162-3. This is taxes not GAAP. Also, see Rev. Proc. 2002-28."

"Read Rev. Proc. 2000-28 - especially the examples. The Reg. has everything to do with the Rev. Proc. - namely, when the supplies are deductible."

Solomon, you are incorrect on both of your statements.

Revenue Procedure 2002-28 is for small businesses with average annual gross receipts between $1,000,000 and 10,000,000, and it specifically states it does NOT apply to retail businesses.

Yes, purchases of merchandise for resale should go under Purchases in COGS. Materials and Supplies in COGS is for businesses that buy materials, parts, supplies, etc, such as, auto repair shops, carpenters, builders, etc.

If there is a negative gross profit, then purchases are overstated or ending inventory is understated. Did you ask your client if she included any items in purchases used for personal use? Did she use the retail value? I've had tons of direct sellers that have no clue on how to figure purchases. Sometimes, they give me the amounts using retail value or include their personal use in the total purchases. You have to question them until the gross profit comes out about right.

Point blank, MK doesn't require and inventory, but they HIGHLY encourage one.

I do another Direct Sales business now and find it easier to work with and it works better with the show by show than does MK. Don't like it and tell everyone that considers it to do any other Direct Sales Schedule C than that. Oh yeah, make sure that you get them to list their personal use for you. One of the big things that MK promoters like to say is that personal use of the inventory is tax deductable... keep your eyes open for that.

I setup a simple spreadsheet journal for her to use until I could find an easy financial software for her to use. I am currently reading through everything (on-line) I can find. But in the process, I have become more confused by issues arising from sales tax to personal use of the products.

This website has been very informative.

[By the way, I used Quickbooks Pro 2005 in my own business. However, a lack of sales and the business & QB went on the shelf. QB is registered in the business name and Intuit refuses to allow me to use it to track my friends MK business.]

Thanks for all the insight.

JamesJmjr5257 11:48, 11 May 2007 (CDT)

Most wives know how to refuse until asked nicely. I'd suggest practice. Don't give up.

I'll take Kevinh5's suggestion and call back and ask nicely. Maybe they won't remember me and my bad manners. Until I find a program my friend can use, I'll hold all the questions that seem to be mounting as it pertains to the bookkeeping methods she is being told to use by her "Director" (if an independent contractory can have one).

Go to File/new company and enter the information.

If you want payroll service, etc. with quickbooks for a new company, then yes, there will be a new company charge, but to only do after the fact bookkeeping, then how in the he double hockey sticks does Intuit "know" that you are doing another set of books?

Busy setting it up now. thanks... jmJmjr5257 14:01, 21 May 2007 (CDT)

When I called them "Personal Use" my friend convinced me that she advertises her MK products by using MK products. She used MK products very little if any before she became a Consultant; in fact she used over the counter products for years. Although convinced it could advertising, I'm still not sure the IRS would be as convinced. Does anyone have a client that the use of the product is for advertisement and is a legitimate expense?

A quick search didn't turn up any rulings or cases on this particular issue, but did produce a number of Tax Court cases where Mary Kay representatives' net losses were disallowed because they had not engaged in the activity for profit. In general these taxpayers did not keep separate books and records for the activity, did not have a business plan or any projections showing the possibility of making a profit, and generally did not conduct it in a businesslike manner.

Being new, in general their record keeping was pretty bad. So the losses could probably have been greater should they have more substantiation on their expenses.

This is half-true. What you haven't mentioned is that MK reps also earn commissions and bonuses from their recruiting efforts. MK does indeed send a 1099, not only to report those commissions, but to report any other perks including what the company pays for their "free car". They include, on tghe 1099 product ordered which exceeds $5,000 as well as the value of other company issued prizes on that 1099.'

Products given away as gifts are ONLY deductible separately on your return if they are not included in your beginning or ending inventories at all. The IRS considers it already deducted if it isn't included in your ending inventory. I recently survived an IRS audit and was disallowed deductions for "freebies" listed under "other" because of that. (And, I gave a lot of freebies away!)

Another big mistake MK reps make is wshen they claim a deduction for an entire room which is NOT used exclusively for their business (ie, the dining room). Oftentimes, they claim the kitchen, dining, family area as "business use" because conduct classes or facials from time to time. The IRS WILL come to your house if you claim business use to insure that the room you are claiming as a deduction is EXCLUSIVELY dedicated to the business.

I've learned a lot about this from talking to others on my site The Pinking Shears and will definitely link to this discussion forum from my website!