Are you a yoga teacher on the weekends? A wood-worker with an Esty shop? Do you moonlight as a paid blogger? Everyone loves a good side hustle, but due to a (disadvantageous) change within the 2018 Tax Cuts Jobs Act, now is the time to ask your accountant – should my side hustle be classified as a business?
Until now, a hobby status has enabled you to offset extra income with write-offs and deductions to minimize your tax implications. In many cases, hobbyists have been able to balance the extra income with allowable deductions to maintain a net tax loss, or a break-even status.
But under the new 2018 TCJA law, you must report 100% of your hobby income on your 1040 (not good) and all hobby-related deductions are disallowed (also not good!) This means you’ll pay tax on every penny of income you earn in your hobby, without the benefit of tax deductions. Business status is good for tax purposes; hobby status is bad, especially after the TCJA.
So now what?
If you incorporate your ‘hobby’ into business status (LLC, sole-proprietorship) all of your write-offs and deductions are back in play. This means that your side hustle income will benefit from all of the standard business write-offs and deductions and your tax implication will be minimized. If you have a hobby or a side business, it’s more important now than ever to connect with your accountant. Every situation is different and we will help chart the best path.