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If I have a side business that has more expenses than income, can I deduct the expenses from the taxes paid on my primary income?

Example:

  • Let's say that in a year I have $1,000 in income with $5,000 in expenses.
  • My Primary income makes me $200,000 a year, so roughly $80,000 paid in taxes.

Can I write that $5,000 of from my $80,000 taxes paid on my primary job or can I only write it off on the income that my side business has generated?

This is California, USA if that will affect the answer.

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If i have a side business that has more expenses then income, can i deduct the expenses from the taxes paid on my primary income?

Business losses offset ordinary income, which affects your taxable income and therefore income tax burden. In this case you'd have $1,000 in business income and $5,000 in expenses, so business losses of $4,000. Your tax burden wouldn't be reduced by $4,000, but your taxable income would be reduced by $4,000. So $4,000 in actual loss to you would net you tax savings of $960 - $1,280 depending.

However, if you aren't actually trying to make money with your business the IRS may consider it to be a hobby, in which case losses aren't allowed, so expenses can only be used to offset income. Additionally, the latest tax bill introduced limits on losses from pass-through entities (500k married, 250k other).

You'll read various rules of thumb about how many years you must show profit to avoid the scrutiny of the IRS, but if you are trying to make money and happen to lose money for many years, then losses are allowed, it's more about intent than success.

  • My intent is to set up a nutrition selling website, and actually drive to gyms (in a leased car) and give out business cards and set up a banner. I expect to get some income but i don't think it will ever be enough to cover the expenses. – Androme Sep 17 '18 at 16:55
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    @Androme What's the motivation for starting the business given your skepticism about its success? – Hart CO Sep 17 '18 at 16:57
  • Oh i think i will make profit, but not for a few years until i have build up reviews and loyal customers. – Androme Sep 17 '18 at 17:01
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    Note that you can only count the lease as a business expense if you use the car only for business. You can alternatively deduct a certain rate per mile (53.5 cents as of 2018) from a personal vehicle as a business expense, which might be more beneficial that the cost of a lease. – D Stanley Sep 17 '18 at 17:02
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    Yeah, there are other good resources on valid/invalid business expenses, make sure to track them carefully, a mileage log is essential. – Hart CO Sep 17 '18 at 17:05

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