Hobby Loss Rules
If you just started a side hustle or your business has not turned a profit in the last 3 years, this is for you...
Beware of the hobby loss rule!
If the IRS concludes that your motive in business is not to make a profit, the IRS can classify your business as a hobby and disallow you from being able to write off expenses.
That doesn't mean your business can't have a loss. Lots of you take depreciation deductions which can sometimes create paper losses. This is okay because your business motive is still to make a profit.
So what can you do to be classified as a business instead of as a hobby?
Make it clear that your motive in business is to make a profit. You have to be able to show the IRS under an audit that you're regularly working at your business to make it profitable. You're running this business to pay for groceries so you can eat. You're in business to make money so you can pay your bills. If you can show that your motive is to make a profit and that you're treating this as a business and making changes to the operations of the business to make a profit, then the IRS will allow the deductions. And, better yet, you might be making more money from this because of all of the increased attention you're giving your side hustle or business.
Hope this helps. Let me know if you have questions.