1099-NEC "Expenses Exceed Income" issue in TurboTax

[mdrzakow]

I have received $3,500 in 1099-NEC income for a side gig which I was able to enter just fine in TurboTax.  This is in addition to my W-2 which I believe is unrelated other than my overall taxable income can go up or down based on this 1099-NEC.  However, while entering all of my legitimate expenses, TurboTax software seems to have "capped" me at $3,325 of expenses so my taxable income still reads $175.  In reality, I have slightly more than $3,700 in expenses so I technically operated at a loss.  Why is the TurboTax software "capping" my expenses at $3,325?  Is there a rule I am unaware of?  Thanks for your help...

[DianeW777]

A key component is your material or active participation in the self employment activity. If you answered this question incorrectly your loss would be limited.

1. Go to Wages & Income > Self Employment Income > Edit beside your business
2. Under Business Summary select Edit beside your business 
3. Scroll to Other Situations and be sure you selected 'Yes' to Actively participated in this work

A business allows you to deduct the costs necessary to obtain the income.  The law explains that 'you must be engaged in the activity to produce a profit'.  The test under IRS tax law is that you must show a profit three out of every five consecutive years to be considered a business.

Please update here with any details and we will help.

[mdrzakow]

Hi Diane,

I am just getting back around to look at my taxes again and saw that you had replied to my question and I thank you for that.  Per your message, I did check and under "Other Situations", it is already marked "YES".  Do you have any other ideas why TurboTax is capping my expenses?  I should be able to deduct them correct? 

Thanks!

[mdrzakow]

Diane,

I just realized that if I just randomly toss in a much higher number, say $3,000 for a vacuum instead of $300, it does then add it to/affect my overall Expenses amount.  However, if I add a smaller legitimate amount, say $15 for rubber gloves, it doesn't add to the overall Expenses amount at all, like it only adds expenses if they are a higher dollar amount.  I'm very confused...

[VolvoGirl]

If you are not showing a loss on Schedule C.

Some expenses, such as home office or section 179 depreciation can only be used to reduce your schedule C taxable income to zero, and not to create a loss. Excess deductions for these carry over to the next year.  And you have to answer yes to both questions about exclusive and regular use, not just one.  The area of your home office must be used regularly and exclusively for business to deduct it.

Or you checked the box on 32b saying Some Investment is Not at Risk.

If you have money not at risk you can not take a loss on schedule C. If you don't know what it means then probably All your Investment is at Risk (check Box 32a). It means you are using your own money for the business.  People usually check the wrong box.

[mdrzakow]

Hi VolvoGirl, 

Thank you for your response.  It is very possible I am not following what you are saying but to the best of my amateur knowledge, I don't think what you are saying applies to my situation.  It's a very basic situation...side cleaning business, got paid $3,500 in 2025.  Expenses total close to $3,750.  TurboTax is capping my expenses at $3,325.  If I add any smaller expense, say $30 for a mop, my expenses stay capped st $3,325.  If I make up a fake large expense, say $10,000 for the best vacuum in the world, suddenly my Expenses go all the way up to closer to $14,000 putting me at a loss.  That's what I don't understand.  Why are my smaller expenses not adding in?

[DianeW777]

If you would like to send us a “diagnostic” file that has your “numbers” but not your personal information it would help.  If you would like to do this, here are the instructions:  (Don't forget to give us the state)

TurboTax Online:

Open your return -Go to the menu panel on the left side of your return and select Tax Tools. 

1. Then select Tools below Tax Tools.
2. A window will pop up which says Tools Center.  
3. On this screen, select Share my file with Agent.
4. You will see a message explaining what the diagnostic copy is.  Click okay through this screen and then you will get a Token number.
5. Reply to this thread with your Token number and your state. This will allow us to open a copy of your return without seeing any personal information.

TurboTax Desktop:

If you like, you can send a copy of your return that will be scrubbed to eliminate your personal data by using these steps:

1. Click on Online in the top left menu of TurboTax Desktop for Windows
2. Select 'Send Tax File to Agent'* > Follow the prompts to reach the token number.
   • Enter your email used for TurboTax > Enter your code > Send
3. Write down or send an image of your token number and state then place in this issue.
4. We can then review your exact scenario for a solution.
5. Please also tell us any states included in the return. This is necessary for us to view the return.
   • *If using a MAC, go to the menu at the top of the screen, select Help, then, 'Send Tax File to Agent')

We will be able to see exactly what you are seeing and we can determine what exactly is going on in your return to provide you with a resolution.

@mdrzakow 

[mdrzakow]

Hi Diane,

Thank you for helping out.  My Token # is 1353984 and my state is Indiana.  Let me know if you need anything else.

Thanks!

[DianeW777]

As I review the information, there's an indication only 95% of the income from business was attributed to your home office which is used to determine the amount allowable for the home office deduction. Using the same numbers you used see the formula below.

• $3,500 x .95 = $3,325  The difference is $175. The home office is not allowed to reduce your income below zero (see note below).

You also indicated the home office was used all 12 months. Regardless, the limitation is due to the home office and has always been the tax law.

Note: your home office deduction cannot reduce your net self-employment income below zero. The deduction is limited to the gross income derived from your business, meaning it can reduce your profit down to $0 and eliminate self-employment tax, but it cannot be used to create a loss.

• Can I take the home office deduction?
• Simplified Option for Home Office  (under this method you are not required to recapture depreciation in a future sale)

@mdrzakow 

[mdrzakow]

So, just to make sure I understand, if I claim the home office expense, I can not operate my side business at a loss, correct?

[DianeW777]

The home office is an expense the tax law places limits on. The mortgage interest and real estate taxes are allowed as an itemized deduction with or without the business. Most expenses that have both personal and business activity have more specific rules than other regular business expenses necessary to create your income.

The home office deduction cannot reduce your net self-employment income below zero. If you had other expenses that created a loss then you could have expenses in excess of income. In this situation the home office expense would not be allowed as indicated previously.

For information purposes here is some guidance on Hobby vs Business income.

Note: You can decide if it is hobby or business income.  This IRS link will help you: Business or Hobby?

Key elements:

1. A hobby requires you to report the income you received and under the current tax law, Tax Cuts and Jobs Act (TCJA), no expenses are allowed to be used to reduce the money collected even if you itemize deductions.
2. A business allows you to deduct the costs necessary to obtain the income.  The law explains that 'you must be engaged in the activity to produce a profit'.  The test under IRS tax law is that you must show a profit three out of every five consecutive years to be considered a business.

@mdrzakow