Are you a TikTok fan? Love someone who is? Many on the social media platform swear it’s a great way to pick up practical lifehacks, including valuable little nuggets of tax advice. But is it all it’s cracked up to be?
According to a study by Personal Capital, more than half of TikTok users turn to the platform for financial advice. But the same study concludes that only 41% of those TikTok users fact-check the advice they get through the app. Most (66%) use the number of likes the video has gotten to judge if it should be trustworthy.
“TikTok isn’t built for deep dives, and it doesn’t allow creators to link directly to their data sources. Creators must paste long, unfriendly links that users then have to copy and paste into Google to search. Linking is tedious for everyone,” The Motley Fool’s Cole Tretheway explains.
Accounting Today recently published some of the top tax myths spread on TikTok, compiled by tax software developer Keeper. They include:
- If you write off $500 in business expenses, you’ll save $500 on your taxes. (It’s not a dollar-for-dollar calculation.)
- People who rely on their appearance for work can write off appearance-related expenses. (How do you prove your makeup or plastic surgery is for “business use”?)
- Likewise, lifestyle influencers can write off “lifestyle expenses” like clothing hauls or home décor. (Again, proving those goods are necessary and aren’t used for non-business purposes isn’t easy.)
- You need an LLC to claim write-offs. (Business deductions can be applied to any business structure, even sole proprietorships.)
- You can choose an expensive vehicle to go to work because you’ll be able to deduct its full cost the first year it’s in use. (Those rules have changed, plus the business versus personal use of the vehicle is critically important.)
One example of TikTok tax advice gone awry was recently featured by Forbes’ Kelly Phillips Erb. She discusses a TikTok reel touting the tax benefits of business owners renting space in their homes for business meetings. The tactic is called the Augusta Rule because it was first noticeably utilized by homeowners living near the Masters in Augusta, Georgia, during the event’s timeframe.
“Under that section, if you rent your personal residence for fewer than 15 days, you do not report any of the rental income and do not deduct any expenses as rental expenses,” Erb explains, summarizing the appeal for modern-day business owners: “Businesses rent space in a business owner’s home for a monthly meeting. The business would pay the owner and claim the corresponding deduction. The business lowers its taxable income, and the business owner picks up the income, tax-free, thanks to the so-called Augusta Rule.”
However, a recent Tax Court case proves that it’s trickier than it appears on TikTok. It involves a group of medical professionals who owned several Planet Fitness centers through the formation of an S corporation. They held meetings at each other’s homes while “the taxpayers generally reported the rent as income on Schedule E for the years in question and excluded it from their gross income, thanks to the Augusta Rule.” The Tax Court wasn’t satisfied with the lack of documentation to prove when and how the meetings happened and determined that the “rent” collected from the S corp was severely inflated, ultimately reducing their combined $290,900 in deductions to just $16,500.
Like any other tax advice you receive, it’s essential to read between the lines to determine what the regulations state and how those rules apply to your specific situation. Cutting corners can be costly. Feel free to contact us with questions.