Taxes and your Small Business (What you should know about your Side Hustle)

45% of Americans have a side hustle. As tax time approaches, it is imperative that you understand the tax implications of having a second job and how to report it to the IRS. More importantly, you want to be sure that you don’t pay more taxes than you should.

Having more than one stream of income is gaining popularity.  In fact, 45% of Americans have a side hustle.  As tax time approaches, it is imperative that you understand the tax implications of having a second job and how to report it to the IRS. More importantly, you want to be sure that you don’t pay more taxes than you should.


Who Has To File?

If you earned more than $400 from self-employment, you must file a tax return. Self-employment includes sole proprietors and independent contractors. It also extends to individual taxpayers who have full-time jobs but make additional income on the side. 

The good news is that you can make deductions from your side business, but it requires documentation and proper record keeping. Click here to download our 2022 Individual Taxpayer Organizer.

What Can I Deduct?

To ensure an expense for a small business is eligible to be tax-deductible, it must fulfill at least one of the following requirements.

  1. In practice: This expense should be both necessary and reasonable, with the purpose being to produce a benefit to the individual engaged in the activity. For example, an ‘In Practice’ expense for a business consultant could include the cost of materials used to aid in the execution of their consulting services. This might include items such as printed documents, software programs, or travel expenses.
  2. Accepted in your industry: This can be interpreted as demonstrating that the expense is deemed reasonable and necessary for the operation of the business, within the context of prevailing industry standards.
  3. Appropriate and helpful for your business: This implies that the expense must be related to the day-to-day activities of the company in some way and provide a benefit that outweighs its cost. The expense should also contribute to the overall objectives and goals of the enterprise, ensuring that any funds spent can be seen as investments in achieving those goals.

 

Depending on the nature of your business, you may be able to deduct a wide array of business expenses. However, it is important to note that not all expenses associated with your side job qualify as deductible business expenses. Here are some examples of deductible expenses.

Businessman working on laptop looking at CAPEX

Capital Expenses

A capital expense is an expense that is incurred to generate income. The IRS defines a capital expense as “an expense that is part of the cost of property or equipment used in a trade or business.” Therefore, if you have a side hustle and you incur an expense in order to generate income from that business, then it is considered a capital expense.

 

Some examples of capital expenses include:

  • The cost of buying or leasing equipment.
  • The cost of improvements made to property.
  • The cost of vehicles used in the business.
  • The cost of advertising.
  • The cost of office supplies.

 

Startup Costs: the money you spend to acquire business assets

 

Amortized Expenses

You can choose to take the full deduction in the year you bear the cost or to amortize the cost over a set period. Depending on which method is more advantageous to you, you can use the AFR (Applicable Federal Rate) or linear models to amortize your expenses. Once you choose a method you must continue with it.

 

Personal versus Business Expenses

 

Generally speaking, personal, living, and family expenses are not tax deductible. However, if you have a side hustle, such as a freelance business or rental property, you may be able to deduct some of your costs. For example, if you are self-employed and use part of your home as an office, you may be able to deduct a portion of your rent or mortgage payments, utilities, internet, and office supplies.

 

You may also be able to deduct travel expenses related to your side job, such as transportation, lodging, and meals. Additionally, you may be able to deduct operating costs associated with your side hustle, such as the cost of advertising, insurance, and other costs of doing business. Remember to keep all your receipts and records for tax purposes.

 

Business use of your home.

Dad working from home on his business with his child.

If you use part of your home for business, you may be able to deduct expenses related to that use. If you rent out a room in your home, you may be able to deduct some, or all of the expenses related to the rental. We are here to help determine your eligible deductions and how to record and report your business income and expenses accurately.

To qualify to claim the business expenses of your home, you must meet both of
the following conditions.

  1. The business part of your home must be used exclusively and regularly for your business.
  2. The business part of your home must be:
    a. Your principal place of business.
    b. A place where you meet with customers or clients
    c. A separate building not attached to your home that is used to conduct business.

The IRS has outlined pertinent information for small businesses filing their taxes.  Click here to access that information. If you are not sure if your expenditure was a tax deductible expense, you should speak with a member of our team.

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Positive Rate Tax Advisors is your trusted partner in navigating the complex world of taxation. Our team of experts is dedicated to providing the highest quality service to our clients. Let us ease your tax burdens and assist you with all your tax planning and compliance needs. Contact us today to schedule a consultation.

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