The Internal Revenue Service typically allows you to take a tax deduction for losses incurred in the operation of your business. However, if your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business or even claiming any expenses for the hobby due to the suspension of miscellaneous itemized deductions for tax years 2018 through 2025. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.
Claiming business or Hobby
If you are receiving a 1099-NEC and cash for these jobs, the question is are you in it to make a profit. If yes you can take expenses.
The IRS safe harbor rule is typically that if you have turned a profit in at least three of five consecutive years, the IRS will presume that you are engaged in it for profit.
- If your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby.
- If the IRS classifies your business as a hobby, it won't allow you to deduct any expenses or take any loss for it on your tax return.
- Beginning in 2018 and lasting through 2025, miscellaneous itemized deductions are no longer deductible and therefore no hobby expense is able to reduce hobby income.
- If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.
