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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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I am an independent distributor of health products. My customers

Resolved Question:

I am an independent distributor of health products. My customers go online and purchase products and I get money from this. I do not purchase goods for resale. Do I need to report Cost of Goods sold?
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear XXXXX,

 

This sounds like you are doing drop shipments.

 

Tell me, does any part of your money get paid to the source for product.

 

in otherwards, you may not be purchasing goods to resell, but you may be paying a pecentage of your gross to the source for ordering the product.

Customer: replied 5 years ago.
No, none of the money gets paid back to the source. I earn commissions only.
Expert:  Ed Johnson replied 5 years ago.

Dear XXXXX,

 

I appreciate your patience while I collect sufficient information to properly charachterize your income.

 

So you get paid a commission by the source or by the customers who pays you directly?

 

I am trying to understand here. YOu state you are a distributer. So do the customers pay you, and you keep the money?

 

Or the customers are pyaing the source and you get a percentage from the source?

 

Does the source report you income on form 1099?

Customer: replied 5 years ago.
The customer pays the source for products they purchase and the source pays me the commissions I earn.
I should have mentioned it's network marketing ...so I have an upline and a downline that I'm starting to build. I did not get a 1099 from them but I just started in December and earned $50, though I did have some business expenses of about $300 getting set up that I would like to report. I just thought leaving the COGS section blank appeared odd so I thought maybe I was supposed to report the customer's cost (what they paid the source) as my COGS and the commission check I earned as my profit. thank you
Customer: replied 5 years ago.
...I should add...if it were reported this way the gross sales would then be what they paid the source for purchases plus my commission.

But the question is...maybe there is no COGS and just the commission check $50 as my gross sales and profit.thank you. END
Expert:  Ed Johnson replied 5 years ago.

Dear XXXXX,

 

Super, that is great information. I can deal with this now.

 

You did not get a 1099 because they are not required to give you a 1099 unless they pay you 600 dollars or more.

 

I do understand that you wish to capture the expenses of setting up business and so you need to file a schedule C. You claim the income of 50 dollars, and when you apply expenses, you will have a net business loss.

 

Since you do not maintain an inventory, you most likely do not have a cost of goods sold entry. The reason is that you would back out any labor costs for selling.

 

It may look odd, but in network marketing it is not unusual for a person to not have a cost of goods sold entry.

 

If the customer paid you for the product, and then you paid the source a price for the product, then what you paid would be considered part of the COGS. But in this case, the customer pays the source directly, and you collect a commission. Hence, no COGS.

 

If you counted as income all that the customers paid to the source, then you could list a cogs which would be what the customer paid minus your commission, but that is not how these transactions are set up.

 

What you describe does not appear to be of a nature to require a COGS. Essentially, you are in to direct sales. (another phrase to describe network marketing).

 

 

Customer: replied 5 years ago.
Thank you! One last question and I can accept, I just saw that the $50 I received wasn't paid to me until January...can I still report the $300 in set-up expenses on my 2008 return or do you need income in order to report any business expenses? thanks again
Expert:  Ed Johnson replied 5 years ago.

Dear XXXXX,

 

The IRS position on this is stated as:

 

As long as you started up the business with the intention of making a profit, and you are a cash accounting tax payer, with calender year reporting, you can report this in the year you incurred the expenses.

 

The 50 dollar check may be different.

 

The income you receive is counted in the year it was "constructively received".

 

This means, simply, when it was made available to you, regardless of when you may have actually received it.

 

So when you say it was paid to you, I have no idea what you mean by that.

 

In situations where a check is post marked before the end of the year, and dated in December, but not received until sometime in January, the IRS has ruled it was constructively received in the prior year.

 

My recommendation is if the check was postmarked and bears a 2008 date, that you should count it in 2008 income, regardless of when you might have received it.

 

See constructive receipt in this publication. http://www.irs.gov/pub/irs-pdf/p538.pdf

 

 

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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