those of you with side hustles making decent money - reasonable tax deductions?

[Valhalla]

I made some nice money with some side hustles doing internet related work I recently started this year, to the tune of about $20k or so without even trying too hard.

I'm trying to control my taxable income, so I'm looking for ways to reduce the net income.

I've got some purchases planned:  new cellphone (mine is 3 years old) - thinking Note 8 for $1k, new laptop (mine is 2 years old) - thinking Surface Pro for $2k, new tablet (my tablet is 5 years old) - thinking current gen tablet for around $300 or so.

So total tech expenses will be around $4k - $5k, to help offset the revenue.  What else would you all suggest to help reduce taxable income?

[dandarc]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

[Valhalla]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

Hmmm... I already have a full time job and max out my full time job 401k.  I'm assuming I'm precluded from a solo 401k because I already max out my regular 401k?

Please correct me if wrong.   

I'm using the excuse "I will save 30 - 40% on my taxes" as justification, because I already am in a very high tax bracket due to my regular job, so the excess side income will incur very high self employment and income taxes, which is why I'm looking to reduce it as much as I can.

So essentially getting 40% off a Note 8, Surface Pro PC, tablet, (things I'd eventually buy anyway) etc... sounds like a worthwhile expenditure for me.  However, if I can stuff it into a tax deferred vehicle like the solo 401k, I'd definitely prefer that...and add to my stash.

[Retire-Canada]

So total tech expenses will be around $4k - $5k, to help offset the revenue.  What else would you all suggest to help reduce taxable income?

I deduct:

- home office [incl mortgage interest, utilities, insurance]
- vehicle costs [incl a bicycle]
- internet costs
- office equipment and computers
- cell phone
- travel
- entertainment costs
- training
- reference materials
- any tools/supplies I buy

Costs need to be justified, but I would cast a wide net around anything you spend money on that allows you to do your work.

[dandarc]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

Hmmm... I already have a full time job and max out my full time job 401k.  I'm assuming I'm precluded from a solo 401k because I already max out my regular 401k?

Please correct me if wrong.   

I'm using the excuse "I will save 30 - 40% on my taxes" as justification, because I already am in a very high tax bracket due to my regular job, so the excess side income will incur very high self employment and income taxes, which is why I'm looking to reduce it as much as I can.

So essentially getting 40% off a Note 8, Surface Pro PC, tablet, etc... sounds like a worthwhile expenditure for me.

How high is high?  There is an income ceiling on Social Security Income Tax which is the bulk of the self-employment tax rate.  You only pay 2.9% in self employment tax on income (combined day-job and SE income) over 118.5K (2016).  See worksheet here for details: https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

So you could still do a SEP-IRA - limit is 20% of (net income less 1/2 self employment tax).  Up to $54K (2016) total if this side-business goes big-time.  Doesn't save SE, but does save regular income taxes.

[Valhalla]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

Hmmm... I already have a full time job and max out my full time job 401k.  I'm assuming I'm precluded from a solo 401k because I already max out my regular 401k?

Please correct me if wrong.   

I'm using the excuse "I will save 30 - 40% on my taxes" as justification, because I already am in a very high tax bracket due to my regular job, so the excess side income will incur very high self employment and income taxes, which is why I'm looking to reduce it as much as I can.

So essentially getting 40% off a Note 8, Surface Pro PC, tablet, etc... sounds like a worthwhile expenditure for me.

How high is high?  There is an income ceiling on Social Security Income Tax which is the bulk of the self-employment tax rate.  You only pay 2.9% in self employment tax on income (combined day-job and SE income) over 118.5K (2016).  See worksheet here for details: https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

So you could still do a SEP-IRA - limit is 20% of (net income less 1/2 self employment tax).  Up to $54K (2016) total if this side-business goes big-time.  Doesn't save SE, but does save regular income taxes.

I'm maxed out social security, but still pay medicare.    I'll have to look at the SEP-IRA... and see if it's worthwhile doing... thanks!

[Valhalla]

So total tech expenses will be around $4k - $5k, to help offset the revenue.  What else would you all suggest to help reduce taxable income?

I deduct:

- home office [incl mortgage interest, utilities, insurance]
- vehicle costs [incl a bicycle]
- internet costs
- office equipment and computers
- cell phone
- travel
- entertainment costs
- training
- reference materials
- any tools/supplies I buy

Costs need to be justified, but I would cast a wide net around anything you spend money on that allows you to do your work.

Thanks!  I'll stay away from home office deductions to avoid audit risks, but the other stuff sounds reasonable.

[mcneally]

Stuff like a cell phone and computer are deductible as a % of business use. If you maintain a 2nd cell phone strictly for business calls, it's 100% deductible. If you only have one and 30% of your calls are business, it's 30% deductible. Obviously this is an estimate and not something you can practically get exact.

[Valhalla]

Stuff like a cell phone and computer are deductible as a % of business use. If you maintain a 2nd cell phone strictly for business calls, it's 100% deductible. If you only have one and 30% of your calls are business, it's 30% deductible. Obviously this is an estimate and not something you can practically get exact.

Good point.   I already carry several cellphone lines with multiple carriers due to my extensive travel, since I need to have reliable internet / communications any where I go, so justifying a 2nd line for my side gig as 100% write-off won't be too bad.  Same thing with PC.  I already have a work PC, so the Surface Pro would be my second PC and for 100% side work as well, so far as that goes.

[Bruinguy]

Good idea to try to minimize taxes!  I'd suggest also to focus on only buying things that you need and not increasing your spending to "create" deductions.  If you spend a dollar (on stuff you wouldn't otherwise buy) to save $0.45 (in taxes), you are still out the $0.55 that you could have put in savings.

[tralfamadorian]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

Hmmm... I already have a full time job and max out my full time job 401k.  I'm assuming I'm precluded from a solo 401k because I already max out my regular 401k?

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

[Undecided]

Between saying you'd buy this stuff eventually anyway (seemingly for personal use) and sounding like you don't really need it, I'd suggest you skip it. Even if it is legitimately a business expense (and, without saying it's not, I will say it's not coming across as if it is), you're still spending a good chunk of what you've made in stuff you didn't seem to need in order to make the money. Better to look harder at the tax deferral options first, in my opinion.

[Syonyk]

$20k worth of internet related work is more than enough to start taking tax deductions for (presumably) your work from home.

I'm not a tax agent, tax preparer, or anything of the sort, but:

- Home office.  Totally worth the deduction.  You can deduct a portion of your rent/mortgage and utilities (electric, mostly) for business use.  It's an "audit risk," as you note, but if you can justify it, there's no real problem.  Not taking deductions because they might trigger an audit is silly, if you can actually justify and defend the deduction.
- Your connectivity is absolutely related.  You can deduct a lot of that, especially if you have extra connections solely for business purposes.  I intend to deduct 100% of one of my internet connections this year (I have 2 for reliability reasons since I'm rural and work on the internet) - the only reason I have that second one is for business purposes.  I can deal with a slightly flaky connection for personal use, but "Sorry, can't jump on the conference bridge, internet is acting up" isn't really acceptable except in emergencies.
- Technology and office environment upgrades.  A good chair, good keyboards, etc.  I don't think twice about buying that sort of stuff and deducting it, if I don't already have it.

Now, all that said, "buy it for the tax deduction" is silly if you don't actually need it.  As is pointed out below, "Spending a dollar to save $0.45" isn't an efficient way to save money.

Addressing other points brought up:

I've got some purchases planned:  new cellphone (mine is 3 years old) - thinking Note 8 for $1k, new laptop (mine is 2 years old) - thinking Surface Pro for $2k, new tablet (my tablet is 5 years old) - thinking current gen tablet for around $300 or so.

$1k for a phone is a bit excessive (especially for Android), IMO.  A new Project Fi device will get you Sprint & T-Mobile connectivity for a good bit less than a Samsung Bloaty McBloatware (yes, I'm biased against Samsung).

For the laptop, what are you doing that would justify the upgrade?  I've got some hardware that's newer, some that's older, and the older stuff still works for most of what I'm doing.  I don't generally upgrade hardware until I'm either out of OS support (security updates/feature updates) or it no longer does what I need (my old Macbook Pro can't run a few VMs at once, which is a business need for me that my iMac serves).  Tablet is probably fine to upgrade if you actually use it for business.

I agree with the "cast a wide net, but make sure you can reasonably defend it."  A huge TV in your living room "for video conferencing" that you never use?  Probably not legit.  However, if you do a lot of video conferencing, a wall mounted monitor and good camera in your office area is totally reasonable.  It just depends on what you do.

For me, I don't mind buying new tools related to my work (battery rebuilds, small electronics design) - and I'm usually going to buy more than I strictly need at the moment, simply so I don't have to buy it again.  I've got a 50k count bench voltmeter/ammeter and a good 100MHz 4 channel scope with 16 logic analyzer channels because that's going to hold me for a long, long while as I increase my skills and design work (the scope needs to be fast for doing transient analysis, as undamped transients ringing will fry power transistors in a hurry).

[Valhalla]

Solo 401K or SEP depending on your situation.  You don't even have to spend the money to deduct that.

If those electronics will actually help in your business, OK, but if you're just using "I can save 25% on my taxes" as an excuse to buy new toys, you might want to revisit that decision.  If this side business is your only income, you can defer taxes on virtually all of it in a Solo 401K, so you don't necessarily have to buy stuff to control the taxable income.

Hmmm... I already have a full time job and max out my full time job 401k.  I'm assuming I'm precluded from a solo 401k because I already max out my regular 401k?

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

I'm not sure I'll sustain my business enough to make it worth my while to incorporate an S-corp or set up a LLC, and have to do the associated tax returns for the entity as well.  I'm keeping it simple for now as schedule C income.  But if my business grows, I may just do that.  Right now I'm turning down side gigs because I love my free time.  I'm at a place where my free time is more important than more money, unless that money is really good.

[Valhalla]

Good idea to try to minimize taxes!  I'd suggest also to focus on only buying things that you need and not increasing your spending to "create" deductions.  If you spend a dollar (on stuff you wouldn't otherwise buy) to save $0.45 (in taxes), you are still out the $0.55 that you could have put in savings.

Between saying you'd buy this stuff eventually anyway (seemingly for personal use) and sounding like you don't really need it, I'd suggest you skip it. Even if it is legitimately a business expense (and, without saying it's not, I will say it's not coming across as if it is), you're still spending a good chunk of what you've made in stuff you didn't seem to need in order to make the money. Better to look harder at the tax deferral options first, in my opinion.

Yes, you both have helped me reconsider my spending.  I will probably reduce some of the expenditures.

[Valhalla]

$20k worth of internet related work is more than enough to start taking tax deductions for (presumably) your work from home.

I'm not a tax agent, tax preparer, or anything of the sort, but:

- Home office.  Totally worth the deduction.  You can deduct a portion of your rent/mortgage and utilities (electric, mostly) for business use.  It's an "audit risk," as you note, but if you can justify it, there's no real problem.  Not taking deductions because they might trigger an audit is silly, if you can actually justify and defend the deduction.
- Your connectivity is absolutely related.  You can deduct a lot of that, especially if you have extra connections solely for business purposes.  I intend to deduct 100% of one of my internet connections this year (I have 2 for reliability reasons since I'm rural and work on the internet) - the only reason I have that second one is for business purposes.  I can deal with a slightly flaky connection for personal use, but "Sorry, can't jump on the conference bridge, internet is acting up" isn't really acceptable except in emergencies.
- Technology and office environment upgrades.  A good chair, good keyboards, etc.  I don't think twice about buying that sort of stuff and deducting it, if I don't already have it.

Now, all that said, "buy it for the tax deduction" is silly if you don't actually need it.  As is pointed out below, "Spending a dollar to save $0.45" isn't an efficient way to save money.

Addressing other points brought up:

I've got some purchases planned:  new cellphone (mine is 3 years old) - thinking Note 8 for $1k, new laptop (mine is 2 years old) - thinking Surface Pro for $2k, new tablet (my tablet is 5 years old) - thinking current gen tablet for around $300 or so.

$1k for a phone is a bit excessive (especially for Android), IMO.  A new Project Fi device will get you Sprint & T-Mobile connectivity for a good bit less than a Samsung Bloaty McBloatware (yes, I'm biased against Samsung).

For the laptop, what are you doing that would justify the upgrade?  I've got some hardware that's newer, some that's older, and the older stuff still works for most of what I'm doing.  I don't generally upgrade hardware until I'm either out of OS support (security updates/feature updates) or it no longer does what I need (my old Macbook Pro can't run a few VMs at once, which is a business need for me that my iMac serves).  Tablet is probably fine to upgrade if you actually use it for business.

I agree with the "cast a wide net, but make sure you can reasonably defend it."  A huge TV in your living room "for video conferencing" that you never use?  Probably not legit.  However, if you do a lot of video conferencing, a wall mounted monitor and good camera in your office area is totally reasonable.  It just depends on what you do.

For me, I don't mind buying new tools related to my work (battery rebuilds, small electronics design) - and I'm usually going to buy more than I strictly need at the moment, simply so I don't have to buy it again.  I've got a 50k count bench voltmeter/ammeter and a good 100MHz 4 channel scope with 16 logic analyzer channels because that's going to hold me for a long, long while as I increase my skills and design work (the scope needs to be fast for doing transient analysis, as undamped transients ringing will fry power transistors in a hurry).

thanks for the reply.  After reconsideration, you're right $1k for any smartphone is absurd.  I'm going to just buy a new Surface Pro.  I have not bought a personal PC in several years, and work provides me with a very good PC every year.  However, I do want to keep my side gig separate from work, so I do need a good personal PC.  I've lusted over the Surface Pro for several years, so I think this is the year I'm going to buy one finally. Appreciate the advice!

[tralfamadorian]

I'm not sure I'll sustain my business enough to make it worth my while to incorporate an S-corp or set up a LLC, and have to do the associated tax returns for the entity as well.  I'm keeping it simple for now as schedule C income.  But if my business grows, I may just do that.  Right now I'm turning down side gigs because I love my free time.  I'm at a place where my free time is more important than more money, unless that money is really good.

An LLC can either be taxed as a S Corp with a separate tax filing or as pass through Sch C, the tax filer's choice.  A separate tax return is not required to make employer side contributions to a solo 401k. LLCs take about ten minutes to set up online but if you're opposed to it, not all solo 401k providers require an EIN; some will set up with your SSN.

[inline five]

Home Office now has a simple $5/sq ft deduction without having to keep any records. That is what we do.

[dandarc]

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

Going to make a minor correction here.  The 54K limit is per each employer.  Unless OP is a major shareholder or in a partnership of some kind at the day job, the side income gets its own 54K limit.

Since OP is already using the 18K employee deferral, of which you only get one combined, at day job 401K, I'd recommend a SEP-IRA - contribution limit is the same a solo 401K when you have no employee deferral, and it is a bit less hassle.  One reason to go soloK in this scenario would be if the OP is also wanting to do a backdoor Roth IRA, but I haven't yet seen anything indicating that's on the radar, or necessary.

[Valhalla]

I'm not sure I'll sustain my business enough to make it worth my while to incorporate an S-corp or set up a LLC, and have to do the associated tax returns for the entity as well.  I'm keeping it simple for now as schedule C income.  But if my business grows, I may just do that.  Right now I'm turning down side gigs because I love my free time.  I'm at a place where my free time is more important than more money, unless that money is really good.

An LLC can either be taxed as a S Corp with a separate tax filing or as pass through Sch C, the tax filer's choice.  A separate tax return is not required to make employer side contributions to a solo 401k. LLCs take about ten minutes to set up online but if you're opposed to it, not all solo 401k providers require an EIN; some will set up with your SSN.

Interesting, I thought the LLC required a 1065 filing, glad to know that's not the case! Thanks for the information, more stuff to learn and research and know about!

[Valhalla]

Home Office now has a simple $5/sq ft deduction without having to keep any records. That is what we do.

Good to know... I haven't kept up on the tax codes in a few years on this stuff.  You still need to track it for depreciation recapture if selling later, right?

[Valhalla]

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

Going to make a minor correction here.  The 54K limit is per each employer.  Unless OP is a major shareholder or in a partnership of some kind at the day job, the side income gets its own 54K limit.

Since OP is already using the 18K employee deferral, of which you only get one combined, at day job 401K, I'd recommend a SEP-IRA - contribution limit is the same a solo 401K when you have no employee deferral, and it is a bit less hassle.  One reason to go soloK in this scenario would be if the OP is also wanting to do a backdoor Roth IRA, but I haven't yet seen anything indicating that's on the radar, or necessary.

Thanks again.  A backdoor Roth IRA is a no go for me because I have a significant regular IRA that I rolled previous 401k's into, and that I contributed to before Roth IRAs were a thing.  So for me to convert to Roth IRA I'd have to recognize significant portion of my current IRA gains as taxable income, I believe.

[dandarc]

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

Going to make a minor correction here.  The 54K limit is per each employer.  Unless OP is a major shareholder or in a partnership of some kind at the day job, the side income gets its own 54K limit.

Since OP is already using the 18K employee deferral, of which you only get one combined, at day job 401K, I'd recommend a SEP-IRA - contribution limit is the same a solo 401K when you have no employee deferral, and it is a bit less hassle.  One reason to go soloK in this scenario would be if the OP is also wanting to do a backdoor Roth IRA, but I haven't yet seen anything indicating that's on the radar, or necessary.

Thanks again.  A backdoor Roth IRA is a no go for me because I have a significant regular IRA that I rolled previous 401k's into, and that I contributed to before Roth IRAs were a thing.  So for me to convert to Roth IRA I'd have to recognize significant portion of my current IRA gains as taxable income, I believe.

Or you could roll the tIRA money into a 401K first - either your employer's plan, or your new solo401K.

ETA - assuming your MAGI is above the regular Roth IRA income limits.

[Valhalla]

Depends on what you mean by max out the 401k.  If that means that you max out your 18k employee side contribution but that your employer does not contribute up to 20% of your wages as well, then you can contribute roughly 20% (S-corp) or 25% (pass through LLC) of your side hustle income as employer side contribution.  This is up to a total of 54k of all employee and employer contributions combined, presuming you are under 50.

Going to make a minor correction here.  The 54K limit is per each employer.  Unless OP is a major shareholder or in a partnership of some kind at the day job, the side income gets its own 54K limit.

Since OP is already using the 18K employee deferral, of which you only get one combined, at day job 401K, I'd recommend a SEP-IRA - contribution limit is the same a solo 401K when you have no employee deferral, and it is a bit less hassle.  One reason to go soloK in this scenario would be if the OP is also wanting to do a backdoor Roth IRA, but I haven't yet seen anything indicating that's on the radar, or necessary.

Thanks again.  A backdoor Roth IRA is a no go for me because I have a significant regular IRA that I rolled previous 401k's into, and that I contributed to before Roth IRAs were a thing.  So for me to convert to Roth IRA I'd have to recognize significant portion of my current IRA gains as taxable income, I believe.

Or you could roll the tIRA money into a 401K first - either your employer's plan, or your new solo401K.

ETA - assuming your MAGI is above the regular Roth IRA income limits.

Hmmm interesting options.  I am no longer able to contribute to the Roth IRA, correct.  My employer's 401k firm is not the best, so I'd avoid that.  Maybe a Vanguard solo 401k might be worth looking into.  You've got my wheels spinning. Thanks again!

[dandarc]

Vanguard's soloK isn't great - investor shares only.  If I were setting it up today, I'd probably go with TDAmeritrade, but inertia has kept me at E-Trade.

Make sure your plan allows incoming-rollovers when you set it up, or it will be of no help for backdoor Roth purposes.

[Valhalla]

Vanguard's soloK isn't great - investor shares only.  If I were setting it up today, I'd probably go with TDAmeritrade, but inertia has kept me at E-Trade.

Make sure your plan allows incoming-rollovers when you set it up, or it will be of no help for backdoor Roth purposes.

Thanks, this is a treasure trove of useful information!!

[dandarc]

Vanguard's soloK isn't great - investor shares only.  If I were setting it up today, I'd probably go with TDAmeritrade, but inertia has kept me at E-Trade.

Make sure your plan allows incoming-rollovers when you set it up, or it will be of no help for backdoor Roth purposes.

Thanks, this is a treasure trove of useful information!!

I should mention Vanguard's SoloK, on expense ratios, is slightly better than E-Trades - I wound up at E-Trade because at the time, they were one of the few low-cost options that even offered a Roth account.  Which was pretty dumb, in hind-sight - wasn't too long after that I found MMM and realized I should be going traditional wherever possible.  Like I said - still at E-Trade because of inertia.  I should fix that.

Any way - make sure the plan you're looking at allows the features you need - if "incoming rollovers allowed" is a requirement, read the plan documents and be sure it allows for that.

[tralfamadorian]

I used fidelity for my solo 401k and have had a good experience thus far- no setup or annual fees and good customer service.