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Taxes stress almost everyone out. Today's caller started a new side hustle that lost money this year, and he's wondering if there's a silver lining. I'm no tax expert, so check with a professional, but the answer here is mostly good news.
Hi Chris, this is David from Denver. 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 far I've spent about $2,000, and the business won't make a profit this year. Can I deduct those expenses on my federal income tax return?
Yes, often you can. Normally you start with gross income, list your expenses as deductions, and arrive at a net income that gets taxed. In your case, the expenses outweigh the income, so you show a loss instead of a profit. That's common. I looked it up, and roughly 2 million Americans file a small business loss every year, so it isn't unusual and it doesn't necessarily raise red flags. If you aren't sure which expenses qualify, ask a tax advisor.
One caution. You can't claim losses forever. If they continue too long, the IRS may decide your business is a hobby, and hobby expenses generally aren't deductible. The fix is to turn a profit. Under the IRS safe harbor rule, a profit in at least three of five consecutive years means the IRS assumes you're in it for profit. Fun fact: horse training, breeding, and racing only need a profit in two of every seven years.
Have a question? Visit SideHustleSchool.com/questions.
