This transcript was generated from the episode audio and may contain minor errors.
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What's up, my friends? Welcome to Side Hustle School. My name is Chris Guillebeau. Always excited to bring you a new question from a listener, or sometimes a case study, sometimes some tips, just all kinds of stuff, all designed to help you create freedom in the form of a money-making project. And I want you to be able to do that without quitting your job, without adding a ton of extra stress to your life, because I'm well aware that a lot of us have been feeling a perhaps disproportionate amount of stress this year with everything associated with remote work and perhaps remote education, if you're looking after your kids and all the other thousand things that have happened.
It's hard to keep up these days. But speaking of stress, one thing that is almost always stressful for just about everyone is taxes. And this listener, the one who's calling in today, their new side hustle lost money this year, which is normally bad news, right? But in the context of this question, hopefully, by the way, that will change in 2021. They will actually make money.
But for now, is there a silver lining in being able to deduct losses from his income taxes? Of course, I'm no tax expert. You should always consult a professional, but thankfully, in this case, there's a pretty simple answer to this question, and it's mostly good news. So stay tuned. Here's a quick message from our sponsor, and then we'll talk about deducting side hustle losses from your federal income taxes.
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Hi, Chris, this is David from Denver. I've been listening to the show for a couple of years now. I have a question about taxes. I know you say not to spend much money on an unproven idea, but it was hard for me to get going without investing some cash. So, so far, I spent about $2,000, and the business won't make a profit this year.
Hopefully, that'll change soon, but for now, can I deduct the expenses on my federal income tax return? Thanks, Chris, and I look forward to hearing from you. [Music]
All right, David, what's up, man? Thank you so much for calling in, and congratulations on starting the new business. Yes, I totally understand that sometimes it takes some time to get going.
I always encourage people to spend as little money as possible, but of course, depending on the business, it may be necessary to spend funds, as you mentioned. So hopefully, 2021 will be better in terms of the income, and also, you know, everything else in the world, but let's stay on topic. And as I said, this is not tax advice. I'm not qualified to do that, but this is also a pretty simple question. And the good news is, yes, very often, you can deduct what would otherwise be expenses from a small business that shows a profit.
Normally, you have a gross income, and then you list various expenses as deductions to come up with your net income, which is then taxed, of course. It's just that in this case, which is common, instead of showing a profit for this particular year, you have a loss. I just looked up the numbers. It's something like 2 million Americans, you know, file a small business loss every year. So as I said, it's not unusual.
It's not uncommon. It's not necessarily going to raise some red flags. Of course, you should consult a tax advisor if you aren't sure which expenses qualify. But generally speaking, this can be a silver lining. Now, just one note.
This is the note that is always applied when people talk about deducting various small business expenses. The note is you can't do it forever, because if your losses continue for too long, then the IRS will assume that your small business is actually a hobby. And sadly, most of us are not able to deduct, you know, our various hobby expenses on our taxes. So to fix that, all you need to do is, well, be profitable. It's called the IRS Safe Harbor Rule.
If you have turned a profit in at least three of five consecutive years, then the IRS just assumes that you are engaged in it for profit. And here's a fun fact that I did not know before going to just confirm this answer. If you are engaged in horse training, horse breeding, or horse racing, those industries only have to have a profit in two of every seven years. How about that? Maybe that information will incentivize someone to go into the field of horse training, horse breeding, or racing.
Who knows? Anything is possible. But there you have it. Thanks again, David, for the question. Thanks again, everyone, for listening, being part of this community.
If you have a question, just come to sidehustleschool.com/questions. We're going to continue to feature them along with updates from other listeners as they launch and grow their projects. You can subscribe wherever you get your podcasts and do pass it on to a friend as well. My name is Chris Guillebeau. This is "Side Hustle School." [Music]
