Can I deduct business expenses for my side hustle? Can I expense my cell phone bill for business calls and write off my gas to drive to business meetings? The short answer is maybe. The longer answer is, it depends. According to CNN, more than 44 million Americans have side hustles. This means that there are 44 millions side hustlers out their who are deducting side hustle expenses from their side hustle income. But the IRS is cracking down on many taxpayers and disallowing many of their expenses.
Hobby Loss Rules
The hobby loss rule is primarily where the IRS catches taxpayers who try to write off several business expenses. If the IRS classifies your business as a hobby then you can only deduct expenses up to your gross receipts; no losses are allowed on a hobby.
To make sure your side hustle doesn’t fall into the hobby category you’ll have to meet certain general criteria.
- Is the business venture for profit?
- Do you expect to make profits in the future?
- Do you consistently make profits?
- Are you knowledgeable enough to make a profit in your business?
- Does the time and effort put into the business meet the expectation of a legitimate business?
If this doesn’t sound like your side hustle then odds are your side hustle is more of a hobby.
What Can I Deduct?
If your side hustle is more of a side hustle then odds are your deductions will be limited. Expenses for a hobby will be taken on Schedule A as a 2% miscellaneous itemized deduction. This means that your expenses must exceed 2% of your adjusted gross income before you can even deduct them from your gross income.
But it gets worse! You can only deduct expenses up to your gross receipts meaning that you’ll most likely end up paying taxes on most of your side hustle income.
If your side hustle was a business then you could deduct your business expenses from your business income dollar for dollar on schedule C. This is better than taking a deduction on Schedule A because if you don’t itemize deductions then odds are the IRS will make you pay tax on 100% of your side hustle profits without allowing any business expenses.
How to Turn a Side Hustle into a Business?
The IRS looks at several factors in determining if a business is a hobby or a legitimate business. Keep in mind there are separate rules for real estate so for those who rent property this doesn’t apply.
For those who sell products online, sell crafts at trade shows, or do other random side hustle activities it’s pretty easy to turn your craft into a full-fledged business. Follow these easy steps to prove that your side hustle is a side business eligible for full deductibility of expenses.
- Turn a profit for 3 years in a 5 year period.
- Keep detailed records of your business activity and keep a log reporting the hours you work on your side hustle.
- Show that you depend on the income you’re generating from your side hustle.
- Put some real effort into your business and make it legit (logos, LLC filing, books and records, webpage, employees, etc.)
The Big Picture
There are several factors that the IRS weighs when deciding if your side hustle is a legitimate business. There are no one size fit all criteria and the IRS will look at everything in determining if you can deduct your business expenses dollar for dollar against business income.
The safest way to show that your side hustle is a business is by turning a profit year after year. It’s hard to explain to the IRS your side hustle is a business when you lose money year after year.
So for all those side hustlers out there, this is just some extra motivation to turn that side hustle into a full-fledged business. Keep hustling!