In most viral social media posts, you may see the author posing with celebrities, or in photos or videos in expensive houses, cars, or exotic locations. In any case, the content creator appears to be living their best life while you, as the viewer wonder why you can’t leave your cubicle. So if these influencers are making money from their content, can they deduct any related expenses for tax purposes? The U.S. Tax Court recently decided Sami v. Commissioner where the answer is not as simple as it seems.
Suleiman Sami was working full-time as an IT employee. But he also had three side hustles: A transportation service, event ticket sales, and social media influencing.
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His social media influencer work involved videos of athletes and celebrities. Sometimes he was in the videos and other times he was behind the camera.
Sami paid large sums of money during the tax years at issue (2019-21) to get in contact with celebrities. He paid thousands of dollars to attend events like the Grammy and Emmy award ceremonies and charity events like the Tiger Jam hosted by Tiger Woods. He also paid to meet movie stars like Benedict Cumberbatch, Matt Damon, and Mark Ruffalo. He also paid for a personalized video message from Chris Evans.
He paid to catch a pass from Tom Brady, which he fumbled (he later testified that he is not a Brady fan.) He also paid to catch a pass from Drew Brees that he caught.
Whenever Sami posted pictures of himself with celebrities, it generally garnered more attention on his social media feeds and gathered more views. The increased views can lead to shared advertising revenue. But during the years at issue, Sami did not generate income from his influencer activities although in later years he did.
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Sami deducted these celebrity-related payments as marketing expenses on his tax returns. The IRS disagreed with the deductions, and his matter went before the U.S. Tax Court.
In the decision, the judge disallowed the celebrity-related deductions because she believed that the primary motive for the celebrity interaction were for personal purposes and charitable intent and not for business marketing. But she also noted that Sami did not initially claim or view the expenses as marketing ones and it is likely that he derived considerable personal status (i.e., “clout”) from being seen with famous people. Taking all of this into consideration, it was not enough to show that Sami’s expenditures were made with a business purpose.
To understand where the IRS objections and the court decision are coming from, note that both groups see a common situation where a full-time W-2 employee tries to reduce their taxable income by claiming what are seen (by the IRS and the court) as suspicious deductions. Usually this involves so-called independent distributors in multilevel-marketing operations.
Several other factors hurt Sami’s case. He did not keep good records despite having two accounting degrees. And his social media influencer business did not generate any income during the years at issue. This may make one wonder whether, but for the tax benefits, a reasonable person would spend three years investing his money this way.
Despite these shortcomings, the judge’s opinion seems to be overly restrictive. She acknowledged that there is a pay-to-play system to gain prominence in social media platforms. Influencers like Sami pay to be seen with celebrities, and they can later post their pictures and videos on social media platforms which can lead to more attention which can later turn into shared advertising revenue. Also, some of his marketing expenses include paying other people to promote his social media platforms and to sites where you pay to increase the number of followers on social media.
It appears that a number of people do this, and it seems to work. One recent infamous example involves the Tate brothers, who were arrested in Miami in July for sex offenses allegedly committed in the United Kingdom. British police are seeking to extradite the brothers, who hold citizenship in both the United States and the United Kingdom. The Tate brothers branded themselves as rich influencers who offered courses on how to become rich. They were routinely seen in luxury yachts, supercars, and expensive watches.
But the brothers’ lawyers say that their clients are not as rich as they claim to be. They said images of luxury yachts, supercars and expensive watches shared by the brothers online should not be taken as evidence of their wealth. “The outrageousness of the posts by them and about them is the point,” their lawyers said in court filings. “The more hyperbolic and outlandish the post, the more likely it will generate views and likes, which in turn generates income. In short, they are playing a role.”
While it seems deceptive, that’s how the social media monetization game works. If someone’s social media analytics shows being seen with celebrities increases their view and follower count which later turns into advertising revenue, then there is a business purpose for paying to be seen with celebrities, even if you enjoy the experience.
For those who plan to make money as an influencer, do not rely solely on social media posts for tax advice, even those from tax professionals. In most cases, the advice is not tailored specifically for you but for a large audience. Some of the outlandish “advice” given could get you into trouble. Instead, meet with a tax professional in person and discuss your plans, especially if you plan to claim an unusually large deduction on your tax return.
Second, keep good records. Use your phone to take photos of receipts or have them emailed to you. In addition to payment receipts, keep a copy of promotional and any other related materials that can show business purpose. This case is going to be the first of many where influencers or aspiring influencers will deduct costs of attending celebrity-related events and photo opportunities.
This is likely the first of many cases where federal and state tax agencies will challenge unusual deductions claimed by social media influencers. It would be prudent for the IRS to post guidance on social media sites although they won’t get many likes or constructive comments.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.