Becoming a Product Reviewer: Income Tax

I know so there are so many different theories about product reviews and taxes, so when I had the opportunity to chat with a tax adviser that has experience with our industry, I jumped on it.  Below is the relevant excerpt from our conversation.  For privacy's sake, his name has been changed to TaxMan 🙂  FMV stands for Fair Market Value and is the number the IRS wants to see.

TaxMan :
So your revenue is all the revenue you get from having your blog online. You have additional income in the form of the FMV of the products you received for free. If the product is a trial version or not used for anything other than the review, then it has a zero FMV.
Your expenses are your actual expenses you have to pay.
You cannot depreciate products you paid nothing for. Depreciation is a way to match the cost of an asset to its use over a period of time. If you paid nothing, you can depreciate nothing.

TaxMan :
If you purchase the product for review, then it would fall into a Cost of Goods category. Imagine if you are Consumers Union (the publisher's of Consumer Reports). They purchase their test products at a retail store. This expense is their Cost of Goods. It is written off in the year purchased. Any revenue they get from selling the used product is income. Otherwise, they usually destroy or use up the product so it has no useful purpose after testing.
If you used 10% of the product for testing purposes, you could deduct 10% of it as a Cost of Goods.

Me:
What about products that are consumable, such as food?

TaxMan :
Food you would use 100% for testing….MMm! Good!
Deodorant….test it, throw the rest away…..100% testing.

Me:
I thought it sounded a little unfair that I had to pay taxes on 100% of items that were used for reviews.

TaxMan :
I was thinking you were getting ipads and PCs, not consumables

Me :
So, if I don't like a product and dispose of it afterward, I can write it off afterward?

TaxMan :
Yes, if you dispose of the remainder, it is not income because you did not use it personally

Me :
A large portion of what I review is food and beauty products.

TaxMan :
Most of that would not be taxable income items

Me :
Okay. Do I need to keep a record of all the products I received and track whether it was 100% business use or not?

TaxMan :
Yes, that would be a great idea.

Me :
Okay. What about non-consumable products that do suffer wear and tear?
Or something that breaks while being reviewed, such as jewelry or toys?

TaxMan :
Non-consumables you keep are income items.
Stuff destroyed is the same as food

Me:
Sometimes I'll review an online service, such as a subscription to a website.

TaxMan :
Same as food unless they give you a year subscription type of thing and you use it for review for one month

Me :
Okay. If I don't like it and don't use it after the review, it counts like food – 100% business use. If I use it afterward, review portion is business %, remaining is income %, correct?

TaxMan :
Basically, if you use it for business and nothing else….not an income item… If you use it for personal afterward, then an income item

Me :
Oh – since I don't receive receipts for most items, how do I provide proof of the FMV?

TaxMan :
Look up the retail price online
Ask the manufacturer. They should be able to tell you FMV

Me :
Should I just print it out and keep it with all my receipts?

TaxMan :
Another good idea

Me :
Another revenue stream I have is via referrals to programs like Superpoints and Swagbucks. I can cash in points for gift cards through them. What is the best way to document this?

TaxMan :
This is income….simple as that.
X points = $50 gift card = $50 income.

Here's my understanding of how this works then.  If I receive a product to review and use it all up or dispose of the remainder when I'm done, I record it, but mark it as 100% business use – therefore cancelling out my tax liability. It shows up on my taxes, but I'm not paying any penny on it.  If I receive a bottle of shampoo to review and use it for 2 weeks before writing my review.  Since I used 1/4 of the bottle, I get to write off 25% of it as business use, but pay tax on the other 75%.  If I receive a non-consumable product (like that double stroller I'm dying to try), I have to pay tax on 100% of it.  The exception would be if I don't like it and choose not to keep it.  I can throw it away, give it away, or donate it (not as a charitable contribution).

What's your take on paying taxes for review products?

Disclaimer: The information provided should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts.
Although the information contained here is presented in good faith and believed to be correct, it is General in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals' specific circumstances or needs and may require consideration of other matters.

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