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services the influencer will provide to
The issue arises of whether and when the customer and the benefits the influ-
encer will receive in return. Under those
‘freebies’ or discounts result in taxable income circumstances, the influencer should be
to the influencer and possible limitations on thought of as like any other independent
deductions for the related expenses. contractor providing services to a cus-
tomer. As a result, a best practice to avoid
any surprises is to ensure that the federal
disallowance of entertainment expenses If the contract provides that the service tax consequences of the arrangement are
in Sec. 274(a), with certain exceptions recipient is taking the expense deduction, understood by all the parties and explic-
provided in Sec. 274(e). In contrast, the the contract should also require that the itly addressed in the contract.
Sec. 132 exclusions for no-additional- independent contractor provide sufficient From Stephen Tackney, J.D.,
cost services and employee discounts do receipts or other documentation neces- Washington, D.C.
not apply with respect to benefits pro- sary for the service recipient to substanti-
vided to an independent contractor. ate the expenses (and that otherwise the
If there is no applicable exclusion, the amounts will be reported as compensa- Procedure & Administration
compensation income should be reported tion to the independent contractor).
on Form 1099-NEC and the entire pro- In contrast, if the service recipient Early signs from Treasury on
cess of obtaining a Form W-8, Request treats the cost of the food and beverages the scope of digital asset cost
for Taxpayer Identification Number and as compensation income to the influenc- basis reporting
Certification, and any other reporting er, then the service recipient’s deduction Information reporting is an important
process used by the service recipient for will not be limited by Sec. 274, although part of the U.S. tax system, given that
independent contractors will need to be in that situation, the influencer’s available the system relies in large part on self-
applied. In addition, if some or all of the deduction for the expenses may be. If reporting. Information reporting greatly
compensation takes the form of fringe the tax treatment of the costs is expressly increases tax compliance by making it
benefits, consideration should be given identified in the contract to provide easier for taxpayers to comply with their
to which party will be subject to any ap- services between a service recipient and tax reporting obligations and by ensuring
plicable deduction limitation. an independent contractor, that will that they are aware a reportable transac-
For example, with respect to food and determine the party that generally would tion has occurred.
beverage expenses incurred by the service be subject to the deduction limitations. There is a perception in some corners
recipient, or incurred by the influencer In the case of an arrangement between that cryptoasset transactions are not
and reimbursed by the service recipient, a service recipient and an independent being reported accurately by all taxpayers.
the service recipient’s deduction for the contractor providing for reimbursements Although there is likely some intentional
related expenses may be limited by Sec. that does not expressly address the tax underreporting, noncompliance is often
274 if the amounts are not treated as issue, if the influencer provides adequate a result of the novelty of the technol-
compensation income to the influencer. documentation to the service recipient, ogy and the fact that many cryptoasset
Under Sec. 274(n)(2), the deduction of the deduction limitation applies to the market participants are not aware of their
a food and beverage expense is limited service recipient. If the influencer does tax obligations. To address this, Congress
to 50% of the deduction that would not provide adequate documentation, recently expanded the cost basis report-
otherwise be allowable. (Section 210(a) the deduction limitation applies to ing rules of Sec. 6045 as part of the
of the Taxpayer Certainty and Disaster the influencer. Infrastructure Investment and Jobs Act,
Tax Relief Act of 2020, Division EE of The growth of celebrity influencers’ P.L. 117-58 (the Infrastructure Act), to
the Consolidated Appropriations Act, services in marketing strategies and the require “brokers” to provide cost basis
2021, P.L. 116-260, added Sec. 274(n)(2) formalization of these arrangements reporting for “digital assets.” For this
(D), which provides a temporary excep- require these relationships to be reas- purpose, a broker is defined as including
tion to the 50% limitation for expenses sessed from a federal tax perspective. “any person who (for consideration) is
for food or beverages provided by a Celebrities used to be invited to events responsible for regularly providing any
restaurant. Sec. 274(n)(2)(D) applies to with the hope only that they would at- service effectuating transfers of digital
amounts paid or incurred after Dec. 31, tend and be photographed. The more assets on behalf of another person” (Sec.
2020, and before Jan. 1, 2023. For more modern arrangements with influencers 6045(c)(1)(D)). Digital assets include
information, see IRS Notice 2021-25.) often state explicitly what marketing most instruments commonly referred

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