Don't Treat Your Side Hustle as a Hobby

Whether you sell handmade products online, freelance on weekends, or earn extra income from a passion project, your side hustle could have important tax implications. While all income must be reported, your ability to deduct expenses depends on whether the IRS considers your activity a business or a hobby.

Why It Matters

A business can generally deduct ordinary and necessary expenses, and if your expenses exceed your income, you may even be able to use the loss to offset other taxable income.

A hobby, however, is treated much differently. Although you must report all income earned, hobby-related expenses generally aren't deductible for federal tax purposes. That means you could end up paying tax on income without being able to offset it with your costs.

How the IRS Determines the Difference

The IRS looks at whether you're operating with a genuine intent to make a profit. One way to establish this is by showing a profit in at least three of the last five years.

If your business isn't profitable yet, don't panic. The IRS also considers several other factors, including whether you:

• Operate in a business-like manner with accurate books and records

• Invest time and effort into growing the activity

• Advertise or market your products or services

• Make changes to improve profitability

• Have the knowledge or expertise to operate successfully

• Expect future profits, even if you're currently in the startup phase

No single factor determines the outcome, so documenting your efforts is essential.

Protect Your Tax Deductions

The IRS evaluates your activity each tax year, meaning a side hustle can be considered a business one year and a hobby the next. Maintaining organized records, tracking income and expenses, and demonstrating a clear profit motive can strengthen your position if your deductions are ever questioned.

If you have a side business or you're thinking about starting one, VAAS Professionals can help you determine the proper tax treatment, maximize eligible deductions, and develop strategies to support long-term profitability. Contact us today to ensure your side hustle is working for you, not against you.