The other big difference is how you report your income and losses for a business and a hobby. Business income and deductions are reported on Schedule C.
Deductions for a HOBBY are claimed as itemized deductions on Schedule A, and the deductions have to be taken in THIS order to the extent allowed (we’re getting down into the weeds just a tiny bit because some of this affects how you structure your business):
- Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.
- Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
- Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
- You can only deduct expenses up to the amount of money you make on the hobby. Even then, hobby expenses, along with other miscellaneous expenses you itemize on Schedule A, must come to more than 2% of your adjusted gross income before you can deduct them.
So, now you know what you have to do to make sure you’re running a business and not indulging in a hobby, at least from the IRS’ point of view.
Now let’s take a look at a few specific types of side gigs that can be very useful for the Making It part of the wealth equation.