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We LOVE our members that are crushing it as social media influencers. One common area of discussion is "What qualifies as a business expense?" since so much of your job crosses over into your personal life.
Our goal at Collective is to make sure we are staying on top of current IRS tax laws and court rulings that could affect our members. Besides saving you money in taxes, you've also hired us to make sure you don't have to bear the expense and hassle of being audited!
tldr: If the clothing or other similar expense (makeup, hair, etc). is adaptable for general and personal use, the IRS does not allow it as a deduction, and we will not record it as a deduction on your books.
Clothing, Beauty & Self-Care
While we understand that you know other entrepreneurs who are writing off their clothing, makeup or nails as a business expense, that's a pretty major risk that both they and their accountants are willing to take.
Many times the IRS will apply an exclusivity test to determine whether an expense qualify as a business deduction. You might see this when accounting for your home office space, and it also applies here. Simply stated, the expense must be exclusively for business use and not cross into your personal life.
Historically, the IRS has continuously denied expenses in tax court for clothing and other personal items that are suitable for wear outside of work. It doesn't matter if you purchased it for work for you to wear in a video or on TV, etc. If that purchase could be used outside of your place of work as a personal item (whether or not you actually wear it personally does not matter), it's not allowed as a deductible expense.
It's not worth taking the small deduction now. If the IRS is going to disallow those expenses in the future, they'll then charge you taxes, penalties, and interest on those invalid deductions.
Whether other businesses and accountants are willing to take these risks is not up to us. What is up to us is taking care of you in the best way we can, and providing advice that will result in accurate tax returns.
Examples of clothing and beauty expenses that are exclusive for professional use:
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Business uniform with company logo
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Hazmat suit or safety gear needed to complete a job
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Costume makeup for a photo shoot that would be removed after
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Hair styling (not haircut) used for photo shoot only
Example of clothing and beauty expenses that are NOT exclusive for professional use:
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Haircuts or regular manicure/pedicures
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Clothing purchased to wear to client meetings or events
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Makeup and Skincare products
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Clothing rental for business casual clothing
Expenses for hair, makeup, nails, etc. will be categorized as personal expenses unless you can verify with your Accounting Advisor that they meet the exclusivity test.
If you're interested in reading IRS court records about this, there's a couple you can look up:
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One where the IRS didn't allow an actress/model to take these type of expenses: Rick Richards et ux. v. Commissioner (1999).
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Another one, where the IRS didn't allow any clothing, makeup, hair, etc. for a TV anchor: Anietra Y Hamper v. Commissioner (2011).
Purchasing products where you earn a commission
The exclusivity test also applies here.
Example:
You purchase a water bottle and promote the water bottle on social media. Each sell of the water bottle earns you a commission from the parent company.
While the commissions would be counted as earned income. The original purchase of the water bottle would not be considered a business expense if it can be used in the normal course of your personal life.
If it is an item that you do not keep, but is discarded after the content is created, then it could be a deductible expense. However, you must be sure that you aren't promoting the item in your content as something you use every day.
Fitness/Nutrition Supplements
Whether you are promoting yourself as a fitness influencer, nutrition expert, or personal trainer, the IRS does not allow deductions solely for staying healthy.
Professional athletes can deduct the cost of training, coaching or uniforms for for events or competitions; however, they cannot deduct the expense for nutrition supplements because they IRS would argue the benefits are also personal.
Similarly, if you are a personal trainer you could deduct the cost to rent out a specific space to hold a class. However, deducting your gym memberships would not be a business expense pursuant to tax law Section 274 (a)(2).
This also applies to clothing used to work out in or film content. You cannot deduct clothing as a business expense because the IRS could argue it can also be for personal as well as professional use.
Network Marketing
There are many successful multi-level marketing, direct sales or network marketing programs our members are a part of. Either as their sole business, or as a supplement to their business.
While your membership in this group could be deducted, as well as other normal expenses for running your business. If you are purchasing product with the purpose to promote sales of that product, the product purchased cannot be classified as a business expense.
Example:
You are distributor for doTERRA essential oils. You pay a monthly fee to remain a distributor. On top of that, you purchase the product for personal use and to promote to friends and family to purchase. The monthly membership fee would qualify as a business expense but, the purchase of product would not since it also is for personal use.
Other network marketing companies include: Beach Body, Young Living, Monat, Arbonne, herbaLife - among many others.
I hope this clears up some of your questions! I know this can be a grey area. Please ask your onboarding accountant, Member Relationship Manager or Accounting Advisor if you are unsure whether your expenses qualify :)
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.