Not-for-Profit Limit

If you do not carry on your direct-selling activity to make a profit, there is a limit on the deductions you can take. If the not-for-profit limits apply, you cannot use a loss from direct selling to offset any other income.

This limit applies, for example, if you go into direct selling primarily for the business deductions you can take. It also applies if you become a direct seller only so you and your friends can buy products at reduced rates.

If the not-for-profit limit applies, you must take the deductions allowed on Schedule A (Form 1040). See Limit on Deductions and Losses under Not-for-Profit Activities in chapter 1 of Publication 535 for information on how to figure your allowable deductions. Do not use a business tax return, such as Schedule C (Form 1040).

Not for profit. In deciding whether your direct selling is carried on for profit, take into account all facts about the activity. No one factor alone is decisive. The following are factors to consider.

• Whether you carry on your direct selling in a businesslike manner and maintain complete and accurate books and records.
• Whether the time and effort you put into direct selling indicates you intend to make it profitable.
• Whether you are depending on income from direct selling for your livelihood.
• Whether your losses are due to circumstances beyond your control (or are normal in the start-up phase of direct selling).
• Whether you change your methods of operation in an attempt to improve profitability.
• Whether you, or your advisors, have the knowledge needed to carry on direct selling as a successful business.
• Whether you were successful in making a profit in similar activities in the past.
• Whether your direct selling makes a profit in some years and how much profit it makes.
• Whether you can expect to make a future profit from the appreciation of the assets used in your direct-selling business.

If the IRS inquires about your tax return, you may be asked to provide proof that your direct selling activity is carried on for profit. However, your direct selling is presumed to be carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year, unless the IRS establishes otherwise.

If you are starting a business and do not have 3 years showing a profit, you may want to elect to have the presumption made, after you have the 5 years of experience allowed by the test. For more information on postponing any determination that your direct selling is not carried on for profit, see Using the presumption later under Not-for-Profit Activities in chapter 1 of Publication 535.