Let’s say you have a side-hustle that makes you a little money. Should you consider it a business if you claim tax losses on your 1040?

The IRS would prefer that you think of a money-losing sideline activity as a hobby rather than a business. The tax rules for hobbies have been anti-taxpayer for years, and now an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) has made things even worse for 2018-2025.

The key is to show a motive for making a profit with your sideline. Then, you can classify that activity as a business for tax purposes and deduct the losses.

Here are some tips to help you strategize and clarify your intent:

• Keep good financial records.
• Search for profit-making strategies and prove that you are making an effort to incorporate them into your business.
• Position yourself as an expert in your field, and hire advisors if you need assistance in certain areas.
• Spend enough time in your activity to justify that it is a business, not a hobby.
• Does your side job expect asset appreciation? For example, owning real estate will never be considered a hobby by the IRS. Even if losses are incurred, the property will appreciate.
• Exhibit success in other ventures to prove that you have business acumen.
• Take into consideration the amount of income and loss from your activity. An occasional significant profit will hold more weight than many smaller gains. Losses arising from unusual circumstances or bad timing are more acceptable as typical of a business than a hobby.
• Take a look at your financial status. The IRS understands that the rich can afford to absorb ongoing losses (associated with a hobby) while ordinary folks usually try to make a buck (indicating a business).
• How pleasurable is the activity? Let’s face it, breeding golden retrievers is more fun and hobby-like than draining septic tanks, so the IRS is far more likely to claim the former is a hobby if losses start showing up on your tax returns.

What’s the lesson here? Go ahead enjoy gardening for your farmstand or teaching kids to play tennis. Just remember not to have too much fun, or the IRS will make you pay for it!

Need help figuring out whether you’re having fun or not? Call C&B for advice at 201.787.6542.