What’s The Relationship Between Side-Businesses And Tax Deductions?

Tom Jeffries | January 31st, 2014

Do you or someone you know enjoy knitting or jewelry-making? Or perhaps you do résumé writing or other professional consulting work? If you do any of these as a side business and make a profit, did you know that you can deduct expenses that are ordinary and necessary to your business? If your side business expenses exceed the income for your business, then the loss can be deducted against other income. However, if your loss is from a business that’s not making a profit, then you’re not allowed to deduct your loss against other income. 

Determining Tax Deduction Eligibility

So how do you know if you’re eligible for a tax deduction? Well, the IRS considers an activity a for-profit business if it shows a profit for three or more years out of five consecutive years.

Here are nine factors as stated in Internal Revenue Code §183 that the IRS uses to determine whether a business is a legitimate for-profit business:

  1. The manner in which the taxpayer carries on the activity.
  2. The expertise of the taxpayer or advisors.
  3. Time and effort spent by the taxpayer in carrying out the activity.
  4. The expectation that assets used may appreciate in value.
  5. Taxpayer’s success in other similar or dissimilar activities.
  6. Taxpayer’s history of income/loss with respect to the activity.
  7. Amount of occasional profits, if any.
  8. Financial status of taxpayer.
  9. Elements of personal pleasure or recreation.

Business Owner Best Practices


Income Tax Help

If you have a side-business and are not quite sure the tax implications, contact Rea & Associates. Our team of Ohio tax professionals can meet with you and evaluate your side-business and help you either get compliant with IRS regulations or maintain compliance.

Author: Tom Jeffries, CPA (Millersburg office)


Interested in other best practices related to your taxes? Then check out these blog posts:

How Can You Best Prepare For The Upcoming Tax Season?

Why Did The IRS Delay The Start Of The 2014 Tax Season? 

So Is It a Tax Credit Or a Tax Deduction?


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