Can expenses from a side business (for profit) lower W2 taxable income?

[jyeh74]

Can you have expenses from a side business that is for profit, but hasn't generated income the first year, to lower W2 taxable income?  

[Mike9241]

maybe. it depends on whether the activity is a business or a hobby. read the info from the iRS. 

if the activity is classified as a hobby then you are in the worse situation possible the income is taxable but none of the expenses are deductible

https://www.irs.gov/site-index-search?search=HOBBY+LOSSES&field_pup_historical_1=1&field_pup_histori... 

and you should read this thread that more directly discusses a hobby under iRC 183

 https://taxcure.com/business/irc-183-hobby-loss-rule 

[jyeh74]

@Mike9241 The business is for profit but may not generate profit the first year.  Can expenses then offset W2 income?  Some people said no, expenses for side business can only offset side business income.  If there are no profits generated from side business, then the expenses get carried over to next year.  This effectively does nothing on W2 taxable income.  But you’re suggesting side business expenses can lower W2 taxable income?

[Mike9241]

if the activity is a business (not an investing activity) engaged in for profit, losses can offset other income. whether you actually have a business depends on the answer to those questions.   there is also the issue of start-up costs which if small enough are the deductible in the year the business becomes active. 

generally, I would advise you to consult with a tax pro who can assist you in your endeavors. opening a business is one thing but keeping good records but finding out what taxes (other than filing with your personal tax return) you would need to collect and to file returns for is essential.  one of the most common is sales and excise taxes. the laws vary greatly from state to state

[Hal_Al]

Q. Can you have expenses from a side business that is for profit, but hasn't generated income the first year, to lower W2 taxable income?  

A.  No. At least not directly.  But, for most people, the answer is effectively yes. 

If you are actively in business, your report your income (even if 0) and expenses on Schedule C. If you have a net loss, that goes to line 3 of Schedule 1, then to line 10 of form 1040 where it lowers your total income, which effectively lowers your taxable income.

Q. Can expenses then offset W2 income?  Some people said no, expenses for side business can only offset side business income.  If there are no profits generated from side business, then the expenses get carried over to next year?  

A. It depends.  If you are actively in busimess, your business losses are deducted from your other income (on line 10 of form 1040). If your expenses are only "start up" expenses, they cannot be deducted, in the current year, but most be carried over;  and then amortized (deducted as depreciation) over the next 15 years.

https://www.irs.gov/newsroom/heres-how-businesses-can-deduct-startup-costs-from-their-federal-taxes

[jyeh74]

On schedule C, it asks for the name of the business and the industry that it is in.  You don't have to register a fictitious business name or LLC to be qualified as a business from day one?

[TomD8]

@jyeh74 --

No.  If you are self-employed and filing Schedule C, you can use your own name as the name of the "business".

[jyeh74]

@Mike9241 @Hal_Al @TomD8 

Start up costs have a limit of $5000.

A lot of businesses are done over meals and drinks.  Is there a limit of how much you can expense annually for food and drinks?