There’s a new occupation that’s been floating out in the news for a bit now and it has to do with social media – content creators.
Content creators (considered to be social media influencers by some) are those who create content for social media platforms or websites (think TikTok, Instagram, blogs, Patreon, etc.) with the intent to generate revenue – be it in the form of physical income or in exchange for other goods or services.
You may be asking yourself, why do I need to be concerned with content creators? Based on the number of content creators (in the millions!), there is a good chance practitioners have clients who are receiving revenue from content creation and distribution platforms. More venues to create and post content will likely be popping up as time progresses.
Many of these clients may not realize the revenue (social media money) generated from these platforms is taxable. The Form 1040 instructions explain gross income means income received in the form of money, goods, property and services that aren’t exempt from tax. Gross income would also include revenue received from sources that could be considered illegal. On the flip side, the expenses clients incur to generate the revenue may also be deductible.
Typically, salaries and other ordinary and necessary expenses incurred in carrying on an illegal business are generally deductible unless they go against public policy. No expenses incurred in connection with trafficking of controlled substances or illegal drugs may be deducted. There are a number of court cases, which we won’t go into in this blog, that discuss when deductions were allowed or disallowed for ordinary and necessary business expenses for activities that are considered illegal.
For example, the Supreme Court allowed a bookmaker to deduct rent and salaries of a bookmaking activity in a state where bookmaking was illegal, and the acts performed by the employees and the payment of rent for use of the premises in bookmaking operations were also illegal (Com. vs. Sullivan, Neil). Facts and circumstances will dictate what, if any, expenses an illegal business is allowed to deduct.
As a practitioner the first step is to make sure you are aware of any social media money generating opportunities your client may be engaged in. This information may come from client interviews or from a question being asked on the year-end tax organizer many clients are asked to complete.
Once it is determined the client is generating revenue from social media, the difficult task of determining if the activity rises to a level of a trade or business or is a hobby must be undertaken. Facts and circumstances of every situation will determine if an activity is engaged in for profit, and thus rises to the level of a trade or business.
Remember, hobby income is still taxable, however the miscellaneous itemized deduction for the related expenses is suspended through 2025. The IRS offers tips to help decide if the activity is a hobby or business.
To be engaged in a business, there must be a profit motive. There are generally nine factors to consider when determining if an activity is engaged in for profit:
- Manner is which activity is conducted
- Is there a profit motive
- Are there complete books and records? Are they maintained? Are they accurate?
- Is there advertising, marketing, a website or other support to show activity is treated as a business?
- Is there a budget? Business plan?
- Taxpayer’s or adviser’s expertise
- Is competent advice sought?
- Is advice followed?
- What is taxpayer’s prior experience in the business?
- Time and effort
- How much time is devoted to the activity?
- Are others employed or consulted to assist?
- In lieu of operating profits, is there a reasonable expectation of asset appreciation?
- Has the taxpayer previously turned a similar unsuccessful business into a profitable one?
- Has the activity previously generated significant profits?
- What steps are being taken to generate profits?
- Are profits substantial in relation to any losses and the taxpayer’s investment?
- If there is a loss from the activity, is it outside of the taxpayer’s control?
- Is the activity a meaningful part of the taxpayer’s overall sources of income?
- Is money from the activity relied on to live and pay bills?
- Do profit motives outweigh any elements of personal pleasure or recreation associated with the activity?
These are the same factors a practitioner would look at with a client when the client is engaged in an activity outside of social media. If it is determined the client is not engaged in a trade or business, remember, hobby income is reported on Schedule 1 (Form 1040), Line 8. It is not subject to SE tax because a hobby is not considered a trade or business. If it is determined the activity rises to a level of a trade or business, then it needs to be determined what the appropriate entity type is for the activity – Schedule C or corporation – and the correct reporting would follow.
As is the case in the tax profession, change is always happening. For some practitioners, this could be an exciting area to learn more about and develop a niche serving clients as a consultant, as there is a crossover with the expertise many have developed in helping businesses and their owners.