Watch out for these terrible tax tips circulating on TikTok, experts say

495 0 0

(NEXSTAR) – Between the entertaining videos, the chance of a life hack-style discovery, and the confident delivery from self-described experts, finding advice on TikTok is both enjoyable and fraught with risk, experts say.

“TikTok is filled with tax advice that has just enough truth to be dangerous and a lot of it seems to have to do with business tax deductions and credits,” tax attorney Adam Brewer with AB Tax Law told Nexstar.

From new boats to luxury vehicles, you can find numerous TikTok videos describing how to write off high-dollar purchases under Section 179 of the IRS tax code.

“Section 179 of the tax code allows business taxpayers to deduct the cost of certain property as an expense when the property is first placed in service,” according to the IRS.

Unfortunately, it’s not quite as simple as some of the videos make it seem.

“The part that they all forget is that it has to be ordinary and necessary for your business,” Joshua Youngblood, a senior tax advisor with The Youngblood Group, told Nexstar. “Simply being an influencer, buying a G-Wagon to you know, drive around in, is not ordinary and necessary for a business.”

Despite not qualifying for IRS rules on expenses for trade or business (Code 162), Youngblood says he sees people set up LLCs and run their expenses through it “all the time.”

Hiring your children as employees?

Parents may be the boss at home, but they could run into trouble if they treat their children like actual employees come tax time.

“Another good example of just-enough-truth-to-be-dangerous videos is the idea of hiring your children as employees of your business and then paying them just enough so that they won’t be taxed while you get the tax deduction,” Brewer said. “It’s true you can hire your children to work for your business and there can even be tax savings and an opportunity to save money for your children. What the videos rarely, if ever, mention is that all business expenses must be ordinary and necessary.”

Plainly put, if someone’s 6-year-old and 8-year-old are making an amount that far exceeds what is “ordinary and necessary,” mom or dad risk an audit that could come with back taxes and penalties, plus interest.

Employee Retention Credit fallout

The pandemic-era Employee Retention Credit, which was crafted to help employers keep paying workers if COVID-19 had partially or fully shut down the business was quickly targeted by scammers.

“We are seeing the consequences in real time with Employee Retention Credit (ERC),” Brewer told Nexstar. “During the pandemic many businesses claimed the ERC based on videos they saw on social media. Now the IRS is auditing businesses and clawing back the funds for those businesses that weren’t eligible, but received funds.”

In many cases, crooks took advantage of the complex rules charging business owners money to file for a credit that they didn’t actually qualify for.

“The problem is so widespread the IRS even implemented a Voluntary Disclosure Program (ERC-VDP) to allow businesses to return 80% of the funds in exchange for not being audited or charged penalties and interest,” Brewer said.

The Augusta Rule

Not unlike trying to pad a tax refund with one’s children, the self-described tax experts on social media have another popular piece of advice – rent your home to your business to write it off.

“It’s true you can earn rental income from your home under the Augusta Rule – named after Augusta, Georgia, home of the Masters golf tournament,” Brewer said. “Yes, you can earn income tax free from renting your home up to 14 days per year.”

Following the theme, TikTok videos often mention a real rule, but suggest using it in a way that wouldn’t pass an audit.

“These videos take it a step further and have your own business paying you rent and then deducting it as a business expense,” Brewer said. “Again, if it is not ‘ordinary and necessary’ for your business to rent your home for up to 14 days, then you are at risk of an audit and paying back the tax, plus penalties and interest.”

To file a tax return that way, there would be some record of payment that could be used in an audit, Youngblood points out.

“It’s like this big thing of trying to look smart shifting numbers from here to there, but somewhere, some entity, even if he owns the entity, is going to have to declare it,” Youngblood said.

Youngblood added that he hopes the IRS eventually starts cracking down on unscrupulous tax advisors and social media misinformation.

“You shouldn’t be putting out some of this erroneous information on social media because the average person out there comes across this and they think they found something that they can rely on, because it comes from what they perceived to be a professional and then they do it,” Youngblood said. “And then you know, somewhere down the line, they get in trouble.