Apologies for the long post. I have contacted multiple accountants and tax experts with diverging views on my business developments. Around 5 people were contacted, 4 considered my case ordinary and legit in the eyes of IRS. One has raised concern. So I decided to post here and get some final thoughts. I have a computer science background and therefore StackExchange is a great friend :)


I started two self employment businesses in 2020. One was on crypto mining, and the other on carpentry. I was hired as a postdoc in a university, receiving around 70k in W2. I have a Ph.D. in Artificial Intelligence and Robotics from a reputable university in the USA.

Here is a summary of my business experience. Year 2020: Crypto mining had income. Carpentry had income. Both were negative in profit. Year 2021: Crypto had income. Carpentry turned into software engineering gig with higher income than 2020. Crypto mining was profitable, software engineering was not. Both the years 2020 and 2021 were checked with TurboTax officers and got the go ahead.

My 2022 Case

Now in the year 2022, I have started receiving around 500k in W2 since May from a major tech company and 70k before May (postdoc at university). I started thinking about using the money I earn on building real businesses as pass-through sole proprietor LLC (Wyoming LLCs). One was continuation of my crypto mining business, which I invested around $100K money in buying some mining equipment as well as tools and other necessary business expenses (e.g. subletting the first floor of my house, out of 3, to my business). I have also created a robotics business which needed a lot of expensive equipment (around $150K). All in all, I have spent pretty much every penny I made on pushing these two businesses in 2022.

The crypto is making money in 2022, though not as much as one would hope due to bad economy. Still a formidable mining setup with tens of thousands of dollars in mined assets in 2022 that might balloon in the future. The business is holding on to the assets to sell at the right time. In short, no one can look at the company and say this company is not serious about the crypto mining business – especially since it has income. The reason for growing the business was to offset the electricity costs by turning solar. So a large investment was needed.

The robotics company currently has a prototype system of a set of intelligent pet toys that engage pets when the owners are away using AI to produce maximum playfulness in cats and dogs. However, the prototypes will probably be sellable in Q1 or Q2 of 2023. Now for those who know robotics, $150k is nothing in first-year expenses, even if you are talking about pet toys. There are equipment needed for training AI systems, including super computers each costing around $20k (the low end of such equipment, they can go up to $500k for a single machine). Think about it this way, if I were to open a contracting company to build houses, that expense would be proportionally similar to having bought a few nailers and maybe a few saws. So pretty much a frugal start for a robotics company. I plan on developing other novelty household items such as state-of-the-art pool cleaners, vacuums and more, though only pet toy prototypes are planned for the end of 2022.

Prior to the end of the year, I am also planning on starting a manufacturing company to cover the needs of the crypto and robotics business as a separate entity (3d printing components, machining equipments for crypto solar panels, etc.). I have been planning to postpone this to the next year, but due to the needs of the other two businesses, I had to invest around $10K in 3d printers and a few CNC machines. It was supposed to start as a side job, but then I decided to turn this one into an LLC. The business has made income from the other two businesses and if you consider the services rendered in fair market price, it has made profit as well.

Final Thoughts

As far as I am concerned, these are legitimate businesses and business cases that I plan to develop and grow. I have even handed in my notice for quitting the job that makes me $500k per year to focus on these companies. I am concerned that IRS might object to me having spent every penny I earned in 2022 on development of my businesses. I intend to write off all my expenses on the form 1040 and reinvest my tax return in my businesses. Your opinion is appreciated. Also, if you know any accountants/tax lawyers who are experienced in starting tech companies, it is greatly appreciated.


1 Answer 1


You wrote a lot, it's hard to see what it is that you're asking, so I'll first try to summarize my understanding of your question and then I'll answer it.

You're starting a new business. The business requires significant up-front expense in durable equipment that would be used during the research and development stage. This is a significant one-time expense long before any revenue is even on the horizon.

You're planning to write all that expense off on your 1040 and use the tax refund to fund your business.

You're asking if the IRS would object.

I think it might.

Problem 1: Capital investments are generally depreciated over time, not written off in the year expended.

You can potentially circumvent the depreciation requirement through IRC Sec. 179, if you have a legitimate business use.

Problem 2: Business vs. Hobby. You have the crypto business that you said was profitable. But all the rest (carpentry, software consulting) were not. While it is not necessary for a business to be always profitable, your pattern shows potential hobbies. Carpentry is a good example, but even software consulting that was not profitable is probably a hobby. The fact that you started a W2 employment is further evidence that these are hobbies.

Now, you can show that you quit your job to develop the robotics startup, but if you can't show any traction or profits within the audit period (3 years), it is likely that the IRS will take the position that it is just another hobby.

Bottom Line: doing this on your 1040 is probably going to trigger an audit. Your return will stand out: your income jumped significantly due to W2 employment, and your expenses jumped in a manner not consistent with the income (business expenses). If you're a salaried employee - how come you're spending hundreds of thousands of dollars in business expenses? It will likely get you flagged, and probably audited. That doesn't mean you're doing anything wrong, but it does mean you'll need to show that you don't.

My suggestion: Do not try to crowdsource this. Hire a proper tax adviser. You may want to also hire an attorney to help you set up a business entity for your start up.

  • Thank you for your answer, it is very kind of you. I think the main problem here is the W2 job. I am mostly using it to be able to fund my other business efforts, the business expenses do require an initial sum to invest. It is true that with the new job that pays a lot more, I decided to invest proportionally higher. I will take your advice and hire a professional. Dec 5, 2022 at 7:23
  • Do you have any suggestions for which legal/accounting firm to connect to? I contacted a few online and local services (e.g. 1800 accountant, and a few local folks), but I had suboptimal experiences. Dec 5, 2022 at 7:24
  • One last thing, I was told by turbotax folks that if I made an LLC, I have made my intentions clear that I am not doing hobbies. I did a quick search and couldn't find any prior literature on IRS having tagged an LLC as a hobby. Could you kindly point me in the right direction if there is precedence for this? Dec 5, 2022 at 7:26
  • 2
    @AnthonyZaid this is not the place to solicit product recommendations. I suggest you join some startup-related forums or groups and go to some meet ups and conferences, and ask there. "Turbo Tax folks", with all due respect, are probably not the specialists you need. "LLC" is a legal entity, it is disregarded for tax purposes, and means nothing vis-a-vis hobby vs business evaluation.
    – littleadv
    Dec 5, 2022 at 7:32
  • Thank you very much! I will try to get the right help. Dec 5, 2022 at 7:34

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