Tax on Social Media Influencers
This installment of the Tax and Vice Blog series will focus on social media influencers and the potential tax issues they may face at audit. Social Media influencers have businesses just like everybody else, there is a tax on social medial influencers just like everybody else, and they get audited just like everybody else. This blog will use the recent tax court case of Tucker v. Comm’r (TC Memo 2023-87) as an example of some of the tax pitfalls an influencer may face at audit and in litigation.
As with all posts in this series, we always issue a disclaimer. We first acknowledge the loose connection between influencers and vice. We are not going to pass judgment on those that decide posting selfies and pictures of their meals is their vocation in life. In all seriousness, getting people to buy products has always been a big and a serious business. Social media influencers are just a high-tech continuation of the age-old practice of having models, athletes, entertainers, and others endorse products.
The Taxpayer in Tucker created a “fashion lifestyle” brand. To her credit, the taxpayer did more than post pictures of her lunch on her Instagram feed. (She would be well within her right to object to the “influencer” label.) She appears to be a serious businessperson selling shoes, make up, and accessories. She has a college degree, knows how to sew, and has a background in fashion. Like the typical petitioner in a tax court case, the IRS audited her returns and found some problems.
The first potential issue is the hobby loss limitation on the Taxpayer’s return which the Tax Court did not address. The Taxpayer in Tucker reported her business running at a loss for all the years under audit. The hobby loss rules disallow business loss deductions if it appears the taxpayer’s purported “business” was not a bona fide business carried on with the goal of making a profit, but rather a “hobby.”
The Taxpayer in Tucker appears to be a serious businessperson, so the Tax Court did not touch on that issue. Other influencers (or people claiming to be influencers) may run into hobby loss issues if they attempt to claim a tax loss for their influencer business. For example, you probably will not be able to write off your trip to Hawaii as a business expense just because you posted a couple of selfies from your trip on your social media. On the other hand, if you had bona fide contracts with Hawaii businesses to promote their brands on your social media feed, you may be in a better position to legally claim travel expenses to Hawaii.
The second issue the Taxpayer in the Tucker matter encountered is poor record keeping, a problem that business of all types face at audit. The Taxpayer was unable to substantiate many of her business expenses and thus had many of her business expenses disallowed. Influencers, just like any other business, need to keep receipts and other records of expenses claimed on their tax return.
A third issue the Taxpayer in Tucker faced was she claimed a deduction for utilities expenses for her personal address. Like many other business owners, influencers may use a portion of their home for business purposes. They may claim deductions for a portion of their home utilities, but these deductions are limited. The Taxpayer is Tucker got a little aggressive with her utility deductions. Influencers need to be careful when utility expenses or other deductions related to the use of their home are incorrectly claimed.
Finally, the Taxpayer in Tucker attempted to claim a Cost of Goods Sold (COGS) deduction for materials she bought for “lifestyle flooring” and “lifestyle closets.” The court disallowed these deductions because the court did not have good evidence of any link between the materials and the Taxpayer’s fashion business. Influencers need to be careful when claiming business deductions as the items they deduct may not necessarily be related to the influencer’s business. For example, an influencer that focuses on fitness may be able to justify purchasing exercise equipment for his or her influencer business, but the influencer may not be able to justify purchasing a kitchen gadget as a business expense.
At the end of the day, being an influencer is just like any other business. While influencers’ work often appears fun and frivolous in front of the camera, being an influencer should be treated as a serious business. Influencers not only have to file tax returns and pay taxes like everybody else, they can get audited like everybody else. Any influencer who wishes to take his or her craft seriously should conduct their business in a businesslike manner.
At RJS LAW, we help all types of businesses with tax issues including audits, collection matters, and tax matters. Please feel free to contact us on the web or at 619-595-1655 for a free consultation.
Written by Joseph Cole, Esq., LL.M.