Automotive Manufacturer's Incentive Program to Vehicle Salesmen

Did you know that incentive payments paid by an automotive manufacturer whether directly to individual salespersons or through a dealer are taxable income?

The good news is that these payments, reported on Form 1099-MISC, Miscellaneous Income, are not treated as wages. Therefore these incentive payments from the manufacturer ar not subject to Federal income tax withholding, social security, Medicare, or Federal unemployment tax. Also, these payments are not considered to be self-employment income and therefore are not subject to self-employment tax.

If you are the recipient of a manufacturers' incentive payment, you need to report the income on a Form 1040, U. S. Individual Income Tax Return, Page 1, under Income (line titled "Other Income"), when you file your income tax return. The expenses that you incur to get the incentive payment may be deductible on Schedule A, Itemized Deductions (Form 1040), under Job Expenses and Most Other Miscellaneous Deductions (line titled "Other Expenses") and are subject to the 2% adjusted gross income limitation.

Please note: this income may not be reported on Schedule C (Form 1040), Profit and Loss from Business, because recipients of these payments are not engaged in an individual trade or business and are therefore not self-employed. Similarly, no expenses may be taken on Schedule C to offset incentive payment income.

If your tax return is prepared by someone other than yourself, make sure that the preparer is aware of the filing guidelines described previously for incentive payments.

For information on taxable income to include bonuses and awards, see Publication 525, Taxable and Nontaxable Income.

Is Mary Kay Cosmetics A Hobby, Trade or Business?

Ladies, this is one that you need to take great heed from. Before you invest in all those Pampered Chef, cosmetic sales and even “pleasure toy” shows, you might want to talk with Brenda Konchar, a Mary Kay Cosmetics representative who took her case before the Tax Court in Ralph D. Konchar, et ux. V. Commissioner, Tax Court Summary Opinion 2004-59.

Brenda Konchar reported net losses on Schedule C for her Mary Kay activity in 1996, 1997, and 1998. The IRS disallowed the business losses, since the activity was not a trade or business entered into for profit. It was a hobby. Furthermore, even if the activity had been conducted with a profit motive, most of her business expenses could not be substantiated.


Under §183(b), if an activity is not engaged in for profit, expenses are generally only deductible to the extent of the gross income from the activity. The deductions that exceed gross income cannot create a business loss.


An activity is conducted for profit if deductions are allowable under


1. §162 as ordinary and necessary trade or business expenses; or
2. §212 as expenses for the production or collection of income.


Under either section, the taxpayer must intend to make a profit. Whether an activity is conducted with a profit motive is based upon all relevant facts and circumstances.


Under §1.183-2(b), the Courts consider nine nonexclusive factors to determine whether an activity is engaged in for profit:


1. The manner in which the taxpayer carried on the activity.
2. The expertise of the taxpayer or his advisors.
3. The time and effort expended by the taxpayer in carrying on the activity.
4. The expectation that the assets used in the activity may appreciate in value.
5. The success of the taxpayer in carrying on other similar or dissimilar activities.
6. The taxpayer’s history of income or loss with respect to the activity.
7. The amount of occasional profits that are earned.
8. The financial status of the taxpayer.
9. Whether elements of personal pleasure or recreation are involved.


The Court determined that Brenda Konchar did not intend to make a profit in her Mary Kay activity based upon the following factors:


1. She did not conduct the activity as a business. She did not maintain a separate checking account or any business cards.
2. In general, her returns and allowances plus cost of goods sold exceeded her gross receipts, which indicate that she was selling her products at or near cost.
3. She had an element of personal pleasure in the activity, since most of her customers were family and friends. She took huge business mileage deductions for long distance travel to visit these customers for business and personal reasons.
4. She had no experience in operating her own business, and she did not seek any professional advice.
5. She had large losses each year and no possibility of ever recovering those losses. She never developed a plan to improve her profitability.


The Court concluded and ruled that Brenda did not have an honest objective to make a profit. She conducted her Mary Kay activity as a hobby. As a result, her business deductions were limited to the gross income from the activity. No business losses were allowed.

Tax Help - Moonlighting with Two Businesses

What do you do when your an independent consultant for two companies and also have an Ebay business on the side.

Should you have a separate business account for each business? Or can you have one account; and make sure to keep good records?”

When it comes to your tax return, you will need two separate Schedule Cs – one for each business.

You can set up your bookkeeping to accomplish this fairly easily. Either set up separate company files in your accounting system. Or, if you use QuickBooks, you can get the same result by setting up a CLASS for each of the businesses.

When you code the entries properly, you can get a full report by each CLASS for your tax return.
But do you need separate bank accounts?

Not in the early stages of the Ebay business. Once you see that your sales are about to be high enough to support you – set it up as a full-blown business, with bank account, appropriate licenses – and all.

OR if you already have a solid long-term plan in place to generate volume sales, set the business up properly right from the start.

Additional Resource Material:

Schedule C - The IRS Way

Tax Help - Do You Have a Profit Motive?

Schedules C, E and F

Do you file either of these forms on your yearly return?

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit.

The facts and circumstances of each case determine whether an activity is a trade or business.

The regularity of activities and transactions and the production of income are important elements. Taxpayers do not need to actually make a profit to be in a trade or business as long as they have a profit motive. Taxpayers do need, however, to make ongoing efforts to further the interests of their business.

The IRS is wary of taxpayers who have years of consecutive losses in their business. While there are businesses where long-term down turns occur, it is possible for the IRS to question their profit motive if they have losses year after year. It is important that you be able to substantiate your expenses and efforts to turn a profit in your business endeavors.

No Income Reported or Large Amounts of Deductions

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit. To be deductible, a business expense must be both ordinary and necessary.

An ordinary expense is one that is common and accepted in a taxpayer's trade or business. A necessary expense is one that is helpful and appropriate for a taxpayer's trade or business. And expense does not have to be indispensable to be considered necessary.

Taxpayers with large deductions and expenses that tend to "zero out" their profits year after year may come under increased scrutiny from the IRS. While many businesses have large expenses in their first year of operations and in years of transition, few have expenses that equal their incomes year after year.

Make sure that you understand the differences between business expenses and personal expenses. If questioned by the IRS, you will need to be able to substantiate all of your expenses. Expenses that are not ordinary and necessary or that are personal will not be allowed.