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Do you want to be a social media influencer?  Do you want to post pictures of your life on TikTok, Instagram, or one of the other platforms, and earn revenue based on the number of views or clicks you get? To do so, you will need to generate followers that view and interact with your posts. Attracting followers may require you to post pictures of fancy trips, celebrity events, and luxury items.  The question has been – what can an influencer deduct on his/her tax return?  In a case of first impression, the Courts have finally ruled on a case with this direct issue.

The taxpayer, Suleiman Sami, was a full-time IT professional with a national airline.  In his spare-time, he was an entrepreneur.  He had a single-member LLC that had three components: (i) transportation services, (ii) event ticket sales, and (iii) social media influencing.  During 2019, 2020, and 2021, the LLC had gross receipts of $169,532, $93,229, and $133,252, respectively.  Notably for this article, however, is that none of those gross receipts came from the social media influencer work.

Some of the deductions claimed as part of his influencer business were for:

• Celebrity meet-and-greets with Benedict Cumberbatch, Matt Damon, and Mark Ruffalo.
• A personalized video from Chris Evans.
• Tickets for the Grammy’s, the Emmy’s, and “Tiger Jam 2019”, a charity event hosted by Tiger Woods.
• Payments to catch passes from Tom Brady (which he fumbled) and Drew Brees (which he caught), to return a serve from John McEnroe, and train with Chuck Liddell.
• Memorabilia from celebrities, including game shoes from Kobe Bryant.
• Video and streaming expenses.

At these events, the taxpayer would take pictures and videos and then later post them to his social media accounts.  Some of these postings had “positive consequences for his business further down the road”, but, again, there was no direct influencer revenue in those years.

During an examination by the IRS for the taxpayer’s tax returns for those years, the IRS disallowed all of the deductions claimed above for the influencer side of the LLC.  The taxpayer filed a petition with the United States Tax Court to dispute the IRS decision on these influencer deductions.  In its analysis, the Court noted the importance of its opinion by starting its analysis of the influencer deductions with the phrase: “We come now to the main event.”

The Court stated that expenses are deductible under Internal Revenue Code section 162(a) only if the expenses are “primarily undertaken for business, instead of personal, purposes.”  The Court continued: “The Court has not had the opportunity to apply these general principals in the context of expenses incurred by social media influencers; however, such an enterprise would be no different from other for-profit entries, and the same general rules would apply.”

The taxpayer argued, in his testimony, that these celebrity interactions had positive consequences for his business.  The pictures with celebrities increased his views and followers, which eventually purportedly increased his advertising revenue.  As of the time of the case years later, he had 520,000 TikTok followers and 140,000 Instagram followers, and he earned around $25,000 in revenues from his influencer work.  The Court noted that the number of followers in the audit years was unclear, but it was clear that there were no influencer revenues.  It also stated that the question is not whether the expenses had “any effect on his revenues”.  The Court specifically noted that if that were the standard, “it would be met by countless clearly personal expenses, such as a comedian getting good material for her standup while on a European vacation”.  The question is whether the expenses met the necessary condition of “being primarily undertaken for business, instead of personal reasons”.   The Court held that they were not.

There are a few interesting side points to this case.  First, the Court noted that, even if these deductions were permissible, the likelihood is that they should have been capitalized as startup expenditures under Code section 195.  Second, the taxpayer actually claimed these deductions as charitable deductions on Schedule A because the payments were made to charities that the celebrities were donating their time to.  However, at trial, he asserted that they instead were “marketing events and marketing charity” expenses on Schedule C for the LLC.  The original reporting of these expenses in that way certainly did not help the taxpayer in showing that they were not personal expenses.