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I just made an app and put it on the app store in January. It was just a project I built on my own for fun.

It has made $1 so far from advertisements, and probably won't make much money this year. However, I'm wondering if I should formally open a business and put that app under that business so that I can deduct any "related" purchases from my taxes for next year.

Will it look fishy that my app makes almost no money while I try to claim like -$1000 in internet fees, -$1000 for a new laptop, etc? Or is this a smart move to leverage my app as a way to receive business tax benefits?

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  • updated with my city
    – bigpotato
    Commented Mar 21, 2016 at 3:45

1 Answer 1

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I'm assuming you are in the US here.

From a tax perspective you don't need to take any action to start a business and deduct expenses. If you have earned income coming from a source other than a W2 paying job, then you have a business. On your taxes, this means you file a schedule C (which is where you will deduct business expenses) and schedule SE (which computes how much FICA tax you will owe on your business income). When we talk about starting a business, we usually are talking about creating a corporation or LLC. No particular tax advantage to that in your case, but there could be liability advantages, if you are concerned about that.

If you file losses consistently year after year, the IRS might try and classify your business as a hobby. That's what you should worry about. I suppose incorporating might reduce the probability of that, but it might not. Keep good records in case you need to argue with the IRS. If you do have to argue with them, they will want to ensure that you only used the laptop and internet for your business. That's a big if, but it's a potentially scary one.

IRS Guidelines on hobby vs. business income

Note: besides deducting expenses, another advantage of self-employment is opening a solo-401(k) or SEP or SIMPLE IRA. These potentially allow you to set aside a lot more money than the typical IRA and 401(k) arrangement. Thing is, you have to have a lot more earned income to really take advantage of them, but let's hope your app gets you there.

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  • Awesome thanks for the info. I guess i won't need to make a business entity for it after all then
    – bigpotato
    Commented Mar 21, 2016 at 3:50
  • Just added a link to the IRS. Based on what I read there, they may be more inclined to treat you as a business if you do make a business entity. Check the link out and then make up your mind. Either way will work.
    – farnsy
    Commented Mar 21, 2016 at 3:53

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