Paying Taxes on Products Received to Review through Amazon Vine

[mynameismynameandonlymyname]

I was selected to review products through the Amazon Vine program last year. The products they send are considered compensation/income in exchange for the review. However, they do not allow us to sell or give away the items for 6 months. And some of the products are unusable and worth nothing even though they put the estimated tax value (that is inflated) on the 1099-NEC they send. The other issue is that in order to review the product, we have to use the product.

I understand we have to pay income tax on the ETV of the product. I also understand that if we claim this as self-employment income as opposed to hobby income, then we can deduct expenses. What I want to know is can we deduct the ETV of the items themselves as a business expense or loss if the product arrives damaged or unusable and had to be thrown away or disposed of? Also, if we have to use the product up in order to review it, then can we deduct the ETV as a business expense since we no longer have the product due to having to use it to perform the service of reviewing it? Also, can we claim these products as inventory if we are not using the products for personal use?

I am not in any way trying to find any loopholes. I know some Vine reviewers may be doing that. I am trying to figure out the proper way to report inventory, losses, expenses, and income related to being a Vine reviewer so that I am not paying more taxes than I should actually owe. Thanks!

[RobertB4444]

All of the products that you are receiving from Vine are being treated as though Amazon had paid you cash and with your disposable income you chose to purchase their products.

The only way to take the products into inventory is to actively set them up for sale.  Then the inventory value could be the same as the purchase value.

If you received a defective product and could not exchange it or receive a credit to your account for it then you should absolutely deduct it from your income.  Create an expense for "defective product received" or something like that.

Using the product up doesn't create a tax deduction any more than wearing your clothes does.  You use stuff you buy.

@mynameismynameandonlymyname 

[JayJay808]

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@RobertB4444 wrote:

Using the product up doesn't create a tax deduction any more than wearing your clothes does.  You use stuff you buy.

Even if the full use of said product was necessary to be able to write the review? Wouldn't that mean that someone could have a loss as a result? For example, if a $10 product (as listed on the 1099NEC) is gone/used up entirely without any benefit to the reviewer and a review needs to be written, would that not mean they lost $10 of value? Basically, what I'm trying to figure out is how this would be different from other deductions. For example, if the review were to be submitted via regular mail, we'd be able to deduct the cost of the paper, printer ink, stamp, and envelope, would we not? How is this different if the use of the product was entirely for the purpose of delivering the service (writing the review)? 

Another question, if I may: You mentioned taking products into inventory, putting them up for sale, and that the inventory value can then be set the same as the purchase value.

Since Amazon dictates that members of the Vine program cannot sell their item within the first 6 months of ownership, it feels reasonable to assume there is a loss in value, even more when the item was used in part for a review.

Am I correct to assume that by doing so, it means I could sell the items after 6 months at a loss, and therefore claim the loss on my return? For example, on a $10 item, I would pay the necessary income related taxes. After 6 months, I place it into inventory at a value of $10 and put it up for sale at a reduced price since it's no longer new. If I then sell the item for $5 (or even dispose of it, if it doesn't get sold), I could deduct the loss (and if sold, I'd have to pay tax over the sale price as well). Is that somewhat correct?

I'm sorry if my questions seem a bit snarky, I'm definitely not trying to be. I'm merely trying to get a good idea of what I can and cannot do. 

[RobertB4444]

A lot of this depends on how you're going to enter this into your tax return.  If you are entering this as hobby income as we started with then all of the income is taxable and you don't get to deduct expenses.  But on the upside you are not subject to self-employment tax.

If you decided to create a business on your tax return as a self-employed reviewer then anything that you had to purchase in order to do the job would be deductible including the business portion of your internet and your laptop and any product used up in the review process.

In the case of a business where you were writing a review in exchange for money then you would deduct the product that you bought and used up in order to write that review.  You would use your own money to purchase that product so you would have a deduction for buying it.  In this case they just took out the middle man so you could deduct the cost of the candy bar when it is sent to you.

In the case of items not used up but resold later - you would have to take them into taxable income initially.  Then they would go to inventory.

So you receive a $10 widget for review.  That is ten dollars in income to you and that income has turned into $10 in unsold inventory.

Then, when you sell it, you could indeed have a gain or loss on the inventory in your store.  

I would keep meticulous records if you're going to go this route.  I would also make sure to note that because of that six month gap you are definitely going to have a number of products that are in your inventory and can't be sold that you will be paying taxes on at the end of the year and receiving deductions on in the following year.  And whatever the income is on those products in inventory and the ones you decide to keep for personal use you will be paying self-employment tax on.

@JayJay808 

[JayJay808]

Thank you for the additional information, @RobertB4444  🙂

[SweetPease]

Remember when you tell the IRS that you have a business, you have to have a business—make a profit (3 out of 5 years, I just read somewhere as I am researching Vine taxes for myself), keep meticulous records, actually sell something or provide a service.  I am going to have extra money deducted from my work taxes to help with the tax burden at the end of the year and try to stick to mostly getting things that I would be buying anyway. 

[Spino]

I came to this discussion via an internet search because I am an Amazon Vine reviewer. To me, as a somewhat experienced and educated small business accountant and tax preparer, Amazon is setting up a scam and we should not facilitate that by paying their taxes. Here's what I mean: By declaring the suggested retail value (or some proxy they pick) and reporting that as income to Vine reviewers, Amazon is likely taking an inappropriate deduction on their taxes. They certainly do not pay that amount, if anything, as the cost of those goods. They also provide a rather detailed set of obligations to Amazon reviewers and completely control entry and exit from the program as well as which reviews they publish.
So what is actually happening? Continued participants in the Vine program must perform ongoing services at certain levels to remain in the program, not to mention advance in "status." They are not hobbyists, but rather qualified writing professionals who have been carefully screened (based on past performance) for participation in a program. All they receive in exchange are goods of some value, with restrictions. So, while Amazon is reporting an amount of income, all that income is necessarily spent on acquiring inventory or materials required to do a job in exchange. That is cost of goods or supplies. 

1) Vine reviewers should expect to file as small business owners. They are receiving income, even if it is all spent on goods required to do the job. The only reason to call it a hobby is if you're rich and don't care about the money.

2) All income from Amazon should be expensed as either supplies (which are consumed in providing the service) or cost of goods (inventory that can be resold or repurposed for personal use.)

3) Inventory has to be valued. Since by agreement with Amazon, goods must be kept for at least 6 months, there will always be some inventory unless all goods are treated as supplies. If any goods are intended to be resold, they need to be valued at the end of each tax year.

4) Even if goods are treated as supplies rather than cost of goods for resale, they still must be treated as income if they are converted to personal use. The value of these items at the time they are converted to personal use should be fairly determined. For guidelines, consider the valuation guidelines for contributions of goods. There are several alternatives presented there including such things as comparative sales and values at thrift stores.

So I would conclude the following:

1) Amazon's declared valuations on the 1099 are not likely appropriate valuations for the goods actually received (and required to be held for 6 months prior to resale or even gifting) by a small business who is not running the world's largest online retail marketplace.

2) Items converted to personal use should be valued appropriately and that is in fact taxable small business income, after expenses, that should be reported.

3) Items held as inventory for potential resale should be valued appropriately at the end of each tax year. Active participants in the Vine program who resell products received should expect to declare inventory on hand each year because of the six month obligatory holding period they agree to with Amazon. This inventory can be easily tracked though because Amazon keeps a complete record for you online (which of course would also be available to an auditor if the IRS were so inclined for any reason.) You can add the work of tracking inventory to the work of writing reviews as part of your business activity, along with your prime membership, writing tools, camera, internet connection, and so on. Of course your time itself is not an expense to the business, no matter how much of it you take to earn this paltry income from Amazon.

[Uprisinghope]

We can donate to a non profit? Do we depreciate it and by how much? So if we keep a storage as an inventory.

1. We can write off the full value. Until we sell it?

2. Can we keep same product, XOX shirt. And then when updated or upgraded model comes out compare it to our aging inventory . We give a review recap on every product. If you had same product for every year do you depreciate the value. If you had five updated products. Is the tax write off the entire amount then gets depreciated each year?

Could I create a non profit e-commerce museum? And do seminars on ecommerce and other things as an education model?

Would a Foundation work better?

Thank you so much

[user17601651056]

Just to clarify- you said all income from Amazon should be expensed. And they should either be expensed as supplies or expensed as cost of goods. So an item..such as say a Car Play system where the audio didn't work so it's unusable and unsellable (it's basically trash) would be categorized as "supplies" for expensing? Or an Airtracker that quits working a week after you receive the item would be expensed as cost of goods since it worked long enough to do the review? What about things that if you could have returned and gotten a refund/exchange if you had actually bought the item- like a pair of shoes that didn't fit- so you don't actually get any value out of and just have to store for 6 months until you can trash them/donate them?

[Spino]

@Uprisinghope Let me respond to your questions each in turn:

1) Amazon is going to declare that they paid you a certain amount. However all of that amount was actually received as merchandise samples, not cash. So you just spent that amount buying samples that you need to review. So you have income and a matching amount of expense.

Now the question is what do you do with those samples? If you sell them, you have more income. If you convert them to personal use, you have the equivalent of income. The amount of income you have if you sell them is pretty clear--and depending on your jurisdiction, you may also need to collect sales tax. If you convert them to personal use, you will need to value the items you have converted to personal use (as if you sold them) and you may also owe sales tax.

2) If you are holding the samples for resale, then they become inventory. You will need to value your inventory each year if you are reporting inventory on your Schedule C personal business return. If you do not report business income and expenses, then you are converting all the samples received into personal property. You will need to report this value, whether or not it is the same as what Amazon reported they gave you. If your valuation is different, you should have supporting documentation as to how it differs.

3) You can only donate personally to a non-profit, not from a Schedule C business. Amazon's agreement with you specifically prohibits you from accepting their products directly into a non-profit, which by definition is not owned personally. You can do business activity for reasons other than making a profit, though, and the IRS accepts that. They still want you to report business activity and pay taxes on any profit. They do not want you to report continual losses and call it a business. They consider that personal activity, sometimes referred to as a "hobby business." For instance, you could race cars, paint, or build furniture, but not do it to make money. If you do make money, though, the IRS wants it reported and then you can deduct expenses of making that money. By the same token, you can write reviews with no expectation to make money--except that when you joined the Vine program you started making "money" in the form of free samples while before that you were doing it as a "hobby."

[Spino]

@user17601651056 You receive a broken car play system from Amazon. They keep track of that and send you a 1099 at the end of the year that values that broken car play system at $100. So you have to report that $100 that they tell the IRS they paid you, but what you actually have is the broken car play system, which you value at $0. So you just suffered a loss of $100 and you want to figure out how to report that. 
Here's the thing--you could keep track of every single item and what it's value is based on comparable sales or thrift sales or whatever basis you use, and include the reporting of how you value these things in your records in case you are audited. However Amazon wants you to review at least 80 items (or whatever it is) every 6 month review period and that kind of detail is probably not worth your time. So you are looking for a work saving option that the IRS would accept if audited and would not require useless work for little or no benefit. One way of doing that, which Trump made famous/infamous, is to use that value but give it a haircut.

That means that you say, "Overall, by the time I follow Amazon's rules (or whatever you are doing) I still end up with some value, though it is certainly not the retail value of products that might not even be viable and have to be kept for six months, etc. So what is it? You might make some reasonable assumptions and come up with a value expressed as a % of the Amazon retail. IRS might challenge whether your assumptions are reasonable, but they are unlikely to challenge your business choice to do this.

One Vine reviewer I know says she only reviews items she expects to sell for the value of the income taxes. I don't know her tax rate, but if it is 22% then she is saying the items she reviews are worth (on average) 22% of the originally declared value by Amazon. 

You also raise the question of storage. If you pay for that storage, you can deduct that actual cost. If it is just mixed in with your personal property, the IRS is likely to say, "No, that is not an identifiable business expense." [He says as he sits in a home office cluttered with products to review and products already reviewed he needs to store someplace.]

[Crazycohy]

You are pretty spot on as to how I think about it.  Taxation is two things:  theft and voluntary. The Viners that pay tax on the items they receive, do so voluntarily and once you do so, setting a precedent, the IRS holds you to that.  These payers also get very mean and nasty to those who see it differently and do not offer to pay taxes.  I believe the 6 month rule and the inflated ETV are the factors that cause this theory to not hold water. 

[KatyR1066]

Yes, but we pay for clothes with money we earned and pay SALES tax not income tax. That’s why this doesn’t make sense. They should explain it better BEFORE accepting the invite. I was told tax and since it’s a purchased item that my income didn’t pay for and we were told they are free except for the tax, of course I thought SALES tax, not income tax. We can’t spend the products we get so how is that income? We are not even supposed to give them away or sell them for at least from the time each item is purchased. I still do not see how this STUFF is income if unspent and also some unusable! I completely agree sales tax should be covered but if we have to pay both income and sales tax. This program is completely not worth it except in rare instances where you get a very expensive item you need for a fraction of the cost. And it’s extremely true that they jack up the EVA and right after you get it, you’ll see it listed for MUCH less!! That is bait and switch and false business tactics!! Why are we paying more tax on items that aren’t worth what they told us they were?? This needs to be handled in a better way! And Canadians have income tax yet they are not required to pay tax on Amazon Vine items. They are completely free!! How is that?