Gym fees and marijuana: Influencers mix up what's deductible versus taxable
When Grant Dougherty, an enrolled agent and founder of Dougherty Tax Solutions, worked on the taxes for a content creator who makes rap videos, one business deduction jumped out at him.
"They have these transactions that are totaling up like over $10,000 from a pot smoking shop,” Dougherty told Yahoo Finance. “And he told me that's the marijuana that they've been buying, [it’s] in the video, and so he deducts [it] like a supply."
Dougherty, who laughed while recounting the tax no-no, removed the expenses because marijuana still remains illegal under federal law.
As implausible as it may seem, Dougherty’s experience isn’t unique when it comes to influencers whose ecosystems are built on profiting off their lifestyles, often creating confusion over what is an acceptable business deduction and what is taxable income.
Tax deductible — or not?
One common mistake social media creators make on their taxes surrounds the expense deduction. It is not always obvious what can be considered business-related expenses in the social media world, where what you eat, use, and wear in videos could also be for personal purposes.
For instance, someone who creates gym-related content could argue that their gym membership should be deductible as part of the business. But this person could also use the facilities during personal time when no content is being created.
“If we think about business expenses, they have to be what are known as ordinary and necessary, which is just a very blanket description,” Gregory Kling, a CPA and associate professor at University of Southern California Leventhal School of Accounting, told Yahoo Finance. “But then we have to look further and say if any expenses have a specific allowance or disallowance that overrides.”
In the gym membership example, there is a tax law — under Section 274 (a)(2) — that specifically prohibits business deductions for athletic or sporting clubs fees. But the tax laws have not kept up with the recent influencer business culture where gym facilities could be used to film content that directly produces profits.
“One hundred percent agree the tax law has not yet caught up,” Kling said. “The tax law just doesn't address the influencer, who's out-of-pocket for what we would normally think of as personal expenses.”
And in the history of business tax expenses, the Internal Revenue Service has allowed what may be considered surprising tax deductions.
Most notably, one exotic dancer was able to deduct her breast implants as a business expense. The dancer argued that her implants were necessary in her job and that they directly contributed to an increase of income — from $750 a week to $3,500 a week. The US Tax Court ruled in her favor and allowed the benefit.
But for something like this, Dougherty said he suggests taxpayers to be more conservative, rather than liberal, in their interpretation of what is a business expense.
"At the most, maybe if you're at a really expensive gym [with annual costs around] $500, you are saving maybe $100 or $150 in taxes," Dougherty said. "So you are taking on an incredible amount of risk for little to no reward at all."
‘Free products’ with strings attached
Another area that catches many content creators off guard is paying income taxes on sponsored gifts. In the eyes of the IRS, the exchange of gifts for social media posts is viewed as a business transaction.
“If I get paid for services and property, then that's also taxable income based on the fair market value of whatever it is that I received,” Kling said. “The idea in our tax law is everything is taxable income, unless there's a code section that says it's not.”
Dougherty offered up an example.
"If I were to give you a car because you are this influencer and I believe that giving you this car will help build my business, me giving you that car is very similar to me giving you a paycheck," he said. "Your average influencer for sure does not know.”
Even smaller, less expensive, promotional products — such as clothes or makeup — from companies to post on social media aren’t tax-free.
“If somebody passes away, that would be called an inheritance. If somebody gives you something just because they like you, you're their friend, that's a gift,” Kling explained. “If it's not an inheritance or a gift, pretty much everything else is going to wind up being taxable income, especially if you get something in exchange for that.”
Take award ceremonies, for example, Kling said. While actors and actresses don’t usually get paid money to present awards at ceremonies, they often receive swag bags in exchange for their service. And the fair market value of the swag bags should be recorded on their tax returns as income.
This issue has mostly flown under the radar because companies are not required to issue a Form 1099 NEC for nonemployee compensation payment for products with a market value under $600. So many media creators likely would have received sponsored products without knowing the tax implications.
Although sponsored products need to be included on tax returns regardless of whether a Form 1099 NEC is issued or not, Dougherty recognized this is an abstract idea many missed unintentionally,
"I would say almost no one knows that," he said.
Rebecca is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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