How to go above board with my side hustle?

[nexus]

A combination of events has led me to decide to go above board with my side hustle. If the subject matter is relevant, I string tennis rackets and give lessons outside of my regular job. A friend/client who works for the IRS suggested I do it in order to potentially lower my tax burden. Another friend, who teaches tennis full-time has managed to operate quarter after quarter, year after year at a loss as well (I'm not surprised by this; he's in debt). He shared the app he uses with me(XpenseTracker), and was nice enough to send me his 2018 expense report so I could see what he itemized and how he categorized it.

I don't know anything about taxes, so I'm just going to ask questions (below), and include some facts about my current situation. Maybe you guys can help. My IRS buddy did say he'd sit down with me towards the end of the year and fill in the blanks, but if you've read my journal you'd know I'm impatient and want to know now. Knowing sooner rather than later will definitely affect my decisions moving forward and help me decide it is even worthwhile to continue side hustlin', or if I'm going to have to raise my rates because 1/3 of my income will go to uncle sam.


Facts:
> I started my side hustle to cover my own tennis expenses such as equipment, apparel, tournament and league fees, etc.
> I'm probably close to break-even, however if I'm allowed to deduct mileage, I'll probably show a loss.
> There is no passive or risidual income generated from this. I either work and get paid, or don't and not get paid
> Tax bracket: Income ~$108k, $19k of which is placed into 401k, another $3.5k into HSA so my taxable income is about $85k in CA. So I guess that puts me at 24% federal tax rate, plus the 9.3% for Californians

Tax questions:
- Would I report annually, or quarterly? I have a regular job for which I just do taxes annually. Can I file both of these incomes together, or do I need to keep them separate?
- Does the $12k standard deduction have anything to do with me itemizing my side hustle expenses? Do I have to either choose the $12k standard deduction for a single filer, or try and incur over $12k of side hustle expenses? I have a hard time trying to phrase this question, but is it essentially an either/or situation, or are the two entirely unrelated?*
    -If it is the latter, I'll never be able to incur 12k expenses through my side hustle
- In an example, if I earned $5k from my side hustle, but incurred $6k worth of [itemized] expenses.. would I owe $0 in taxes, and reduce my tax burden by another $1k?
- Can I do this via <insert tax software here>?  Or should I at least go to a tax professional for the first year (although I think I can pay to have a turbo tax professional accessible if needed)
- What form(s) do I need?
- Do I need to establish any sort of business like an LLC, or can I just be me, Mr Sole Proprietor

Are these statements true?
- I can expense the mileage to and from any lessons(s) I give
- I can expense the mileage to and from any location where I pick up or drop off client's rackets
- If, on a 5 day trip I do 2 days of 'continuing education' related to my side hustle, I could expense 2/5 of my flight, hotel, and car rental, and 100% of the education costs
- Any clothing or equipment I purchase/use (uniform and tools) can be itemized
- Tournament & league fees can be itemized because they are a form of advertising/PR for me
- Because I run the business out of my home, and I have a 2 bedroom I can itemize the sq footage of my home office at the rate of $5 per sq foot. Room is 12x12, so 144 x 5 = $720.
- It is feasible to display a loss year over year if the loss is 'less' each time, meaning the business is growing/becoming more successful, especially in the first 12 months as things are just starting out

Many thanks for taking the time to read through this, and provide any insights. :)

*Reason i ask is because a non-tax expert friend was trying to explain this to me
I read this thread, thought it was super interesting, but feel like i need some more nitty gritty answers specific to my situation. https://forum.mrmoneymustache.com/taxes/side-gigs-in-the-usa-schedule-c-vs-hobby/

[MDM]

Tax questions:
- Would I report annually, or quarterly? I have a regular job for which I just do taxes annually. Can I file both of these incomes together, or do I need to keep them separate? File with your normal tax return.  You will add Schedule C and Schedule SE.  You may want to adjust the withholding from your W-2 job so you don't need to bother with estimated tax payments for the side income.
- Does the $12k standard deduction have anything to do with me itemizing my side hustle expenses? Do I have to either choose the $12k standard deduction for a single filer, or try and incur over $12k of side hustle expenses? I have a hard time trying to phrase this question, but is it essentially an either/or situation, or are the two entirely unrelated?* Unrelated.  The standard deduction comes off your Adjusted Gross Income (AGI).  Your AGI is the sum of your W-2 income, interest, dividends, etc., and your net self-employment (SE) income.  Your net SE income is your gross SE income minus your SE expenses.
    -If it is the latter, I'll never be able to incur 12k expenses through my side hustle
- In an example, if I earned $5k from my side hustle, but incurred $6k worth of [itemized] expenses.. would I owe $0 in [SE] taxes, Yes.
and reduce my tax burden by another $1k? No.  It would reduce your AGI by $1K.
- Can I do this via <insert tax software here>?  Yes.
- Or should I at least go to a tax professional for the first year (although I think I can pay to have a turbo tax professional accessible if needed) That's up to you.
- What form(s) do I need? At least Schedules C and SE
- Do I need to establish any sort of business like an LLC, or can I just be me, Mr Sole Proprietor Not as far as the IRS is concerned.  Don't know about your state/local laws.

Are these statements true?
- I can expense the mileage to and from any lessons(s) I give
- I can expense the mileage to and from any location where I pick up or drop off client's rackets

Depends whether you have a Home Office Deduction | Internal Revenue Service or not.

- If, on a 5 day trip I do 2 days of 'continuing education' related to my side hustle, I could expense 2/5 of my flight, hotel, and car rental, and 100% of the education costs
- Any clothing or equipment I purchase/use (uniform and tools) can be itemized
- Tournament & league fees can be itemized because they are a form of advertising/PR for me
- Because I run the business out of my home, and I have a 2 bedroom I can itemize the sq footage of my home office at the rate of $5 per sq foot. Room is 12x12, so 144 x 5 = $720.
- It is feasible to display a loss year over year if the loss is 'less' each time, meaning the business is growing/becoming more successful, especially in the first 12 months as things are just starting out

Here I defer to those more involved with the nitty-gritty of self-employment.  In any case, good luck!

[nexus]

Hey MDM, this is IMMENSELY HELPFUL in filling in some gaps in my knowledge and understanding of things. Thank you, very very much.

In addition, I've also started leveraging Youtube videos to see some tutorials and case studies on how to fill the forms out. Definitely going to use the Cash based accounting method.

And a specific thank you for clarifying, in my example, that a $1k loss in business revenue would reduce my AGI from $xk to $xk - $1k, which I'm inferring, might make a nominal decrease in my tax bill, or increase in my tax refund.

I also checked your standard home deduction link (thank you!) and using the simplified method there is a cap on the square footage. The most you can deduct is 300 sq feet, so my 144 falls beneath that limit.

[LilyFleur]

Just be careful with how many years you take a loss on your business.
https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a-hobby/L5NClTTtK

Also, you may have to include inventory every year. I remember doing that back in the day when I had a greeting card business. The change in the value of your inventory from year to year may have some sort of effect on your profit/loss, if I remember correctly.

[secondcor521]

- If, on a 5 day trip I do 2 days of 'continuing education' related to my side hustle, I could expense 2/5 of my flight, hotel, and car rental, and 100% of the education costs
- Any clothing or equipment I purchase/use (uniform and tools) can be itemized
- Tournament & league fees can be itemized because they are a form of advertising/PR for me
- Because I run the business out of my home, and I have a 2 bedroom I can itemize the sq footage of my home office at the rate of $5 per sq foot. Room is 12x12, so 144 x 5 = $720.
- It is feasible to display a loss year over year if the loss is 'less' each time, meaning the business is growing/becoming more successful, especially in the first 12 months as things are just starting out

Here I defer to those more involved with the nitty-gritty of self-employment.  In any case, good luck!

1.  No.  The majority of the trip has to be for business purposes for any of the travel to be deductible.  So the IRS would decide whether it was a personal trip which happened to involve some business, or a business trip which happened to involve some personal stuff.  If the trip is personal, then none of your travel would be deductible; if the trip is business, then all of the travel that was business-related is deductible.  See:  https://www.irs.gov/publications/p463#en_US_2018_publink100033801.

2.  Uniforms, yes if they are not suitable for personal wear.  A blue dress shirt would not be deductible; a polo shirt with your business logo on it would be deductible.  Tools, if purchased for the business, can either be expensed or capitalized/depreciated based on the useful life of the equipment.  And you shouldn't use those tools for personal use.  So a screwdriver is not deductible; a racket-stringing machine would be.  The racket-stringing machine, since it has a useful life more than one year and probably costs more than $200, should be treated as a capital expense and depreciated.

3.  Advertising is deductible, but I don't buy your argument and I don't think the IRS would buy it in an audit.  The primary purpose of tournament and league fees is for you to play and compete, not for advertising, which is an incidental benefit.

4.  You can deduct $5 per square foot up to 300 square feet each year for that home office as long as that home office is used exclusively and regularly for business.  Usually people fail to meet the exclusivity test.  So you can't use that room for out of town guests, or for doing anything personal (like watching TV, surfing the web, doing yoga, whatever).  https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction

5.  Whether something is a business or not is subject to IRS criteria.  Whether a business shows decreasing losses year over year is not one of them.  See here for the IRS criteria:  https://www.irs.gov/spanish/hobby-or-business-irs-offers-tips-to-decide

[nexus]

New question: If I string my own racket, do I expense that as well? Or how do I track using my inventory for my own equipment. For example, if string labor is $10, how do I pay myself/document it? Or is that not applicable even though it depletes my supplies/inventory? I need strings on my racket in order to facilitate drills for my clients, and they regularly break/wear out and require replacement.

LilyFleur,

Good to know about the inventory. Luckily, I run pretty lean and have clients that supply their own string. As it gets closer to EOY, if inventory looks like it'll be complicated, I'll just stop restocking -- maybe close shop towards the end of year after I run out of inventory until the beginning of the following year. The reason I say this is because I usually buy string in large reels, rather than individual sets. Not every racket takes the same amount of string, so I can't easily or accurately tell how many rackets' worth of string I have left in a given reel. Taking an existing partial reel at the end of the year, and then having to measure and cut sets or 1/2 sets off would end up creating a lot of waste/lost product. Buying individual sets would solve this problem, but not be cost effective. I'll do more research & ask my buddy for his recommendation. Sets of string are 40', whereas with a reel if a client has a racket that only needs 31', or 36', to 40'+, for example, I have the flexibility to reduce waste.

secondcor521,
Thank you for the clarification & additional insights. My intention is to turn this into a profitable venture that I can use as a safety cushion during FI. It takes time to grow my client base, and given my initial startup costs vs rate of client growth/frequency I'm projecting a loss this year, even if I remove the recent trip from my expenses.

Follow up to #2: I use the word "tool" loosely in this post with the assumption that readers probably don't know much about tennis, but essentially I just mean my racket(s), stringing machine, and teaching equipment. The machine has a tray that has a few tools including two different kinds of pliers, an awl, and clippers that are all exclusively used for my work. They were included with the machine when I purchased it. I do have a separate toolbox with other tools I use for stuff around the house. I was not planning on expensing the machine, as I purchased it 2 years ago for my own personal use... so I guess that would be considered a gift to my business?

Not arguing, just follow up question to #3: Any tournament or league match/team I play on has a public record -in fact multiple records across multiple websites - associated with it. Competing builds a 'resume' of wins/losses/accomplishments/prestige. The only way to stay relevant and present in those mediums is by paying to play in leagues or tournaments. With this additional information, does this make a difference or change your stance? Just curious, as I'm either going to have to conclude that <teaching pro friend> shouldn't have reported those expenses in 2018, or he/his tax professional know something we don't.

Follow up to #4: 2nd bedroom does not have a bed in it. It has two desks, the stringing machine, and a closet full of tennis stuff.

[secondcor521]

Regarding stringing your own racket, you could use business inventory for that.  Inventory isn't that complicated - you take your inventory value at the beginning of the year (1/1/xx) and subtract from that your inventory value at the end of the year (12/31/xx).  The difference is treated as a business expense.

You could charge yourself string labor, but that would just cause you to increase your business income by $10, which you would pay income taxes on.  Most people wouldn't.

Theoretically you would allocate the cost of the strings and string labor on your own racket between personal and business use.  In practice I don't think most people would keep track of things to that fine of detail.  It would be more proper for you to have a business tennis racket and a personal tennis racket, but again I doubt most would go that far.

The stringing machine and tools are not a gift to the business.  They would be "placed into business service" as of a given date and a given value.  Your business should pay you to buy it from you at whatever fair market value would be reasonable for a used stringing machine and various tools.  Then, if it is worth more than $200 at that point or if it has a remaining useful life over 12 months, it should be depreciated as a business asset.  Depreciation isn't hard, but the calculations can be fiddly.

As for the additional information on #3, I don't know the tennis world enough to answer.  There would at least, I would think, have to be a connection between your business and your tournament play.  So if you're entering the tournaments or league play as "Joe Nexus", I still would say not.  If you can somehow enter the tournaments or leagues as "Joe Nexus Tennis Stringing, LLC" then you might have a point.  Your tennis pro friend and/or his tax guy may not know what they're talking about, or they may be super aggressive in their tax deductions.  I'm not a tax expert but I've seen tax experts regularly make mistakes.  If you were particularly interested, you could read up on the IRS documentation on advertising, and then ask your friend nicely what his tax theory is.  Advertising is mentioned in Pub 535 (https://www.irs.gov/publications/p535#en_US_2018_publink1000209178), but that discussion doesn't seem to apply to what you and your tennis pro friend are talking about.

On #4, I think you would intuitively know what is personal use and what is business use.  If every time (or very nearly every time) you're in that room, you're doing business stuff, then you're exclusively using it for business and can take the home office deduction.  If you're using it sometimes for personal stuff, then you're not, and wouldn't be eligible to claim the home office deduction.  As an aside, several years ago it used to be the case that the IRS looked at home office deductions carefully because (a) they're a fairly big deduction for most small businesses, and (b) they're often taken by people who are ineligible.  If you do take it, I would suggest keeping good, contemporaneous documentation.

[nexus]

Regarding stringing your own racket, you could use business inventory for that.  Inventory isn't that complicated - you take your inventory value at the beginning of the year (1/1/xx) and subtract from that your inventory value at the end of the year (12/31/xx).  The difference is treated as a business expense.

You could charge yourself string labor, but that would just cause you to increase your business income by $10, which you would pay income taxes on.  Most people wouldn't.

Theoretically you would allocate the cost of the strings and string labor on your own racket between personal and business use.  In practice I don't think most people would keep track of things to that fine of detail.  It would be more proper for you to have a business tennis racket and a personal tennis racket, but again I doubt most would go that far.

The stringing machine and tools are not a gift to the business.  They would be "placed into business service" as of a given date and a given value.  Your business should pay you to buy it from you at whatever fair market value would be reasonable for a used stringing machine and various tools.  Then, if it is worth more than $200 at that point or if it has a remaining useful life over 12 months, it should be depreciated as a business asset.  Depreciation isn't hard, but the calculations can be fiddly.

As for the additional information on #3, I don't know the tennis world enough to answer.  There would at least, I would think, have to be a connection between your business and your tournament play.  So if you're entering the tournaments or league play as "Joe Nexus", I still would say not.  If you can somehow enter the tournaments or leagues as "Joe Nexus Tennis Stringing, LLC" then you might have a point.  Your tennis pro friend and/or his tax guy may not know what they're talking about, or they may be super aggressive in their tax deductions.  I'm not a tax expert but I've seen tax experts regularly make mistakes.  If you were particularly interested, you could read up on the IRS documentation on advertising, and then ask your friend nicely what his tax theory is.  Advertising is mentioned in Pub 535 (https://www.irs.gov/publications/p535#en_US_2018_publink1000209178), but that discussion doesn't seem to apply to what you and your tennis pro friend are talking about.

On #4, I think you would intuitively know what is personal use and what is business use.  If every time (or very nearly every time) you're in that room, you're doing business stuff, then you're exclusively using it for business and can take the home office deduction.  If you're using it sometimes for personal stuff, then you're not, and wouldn't be eligible to claim the home office deduction.  As an aside, several years ago it used to be the case that the IRS looked at home office deductions carefully because (a) they're a fairly big deduction for most small businesses, and (b) they're often taken by people who are ineligible.  If you do take it, I would suggest keeping good, contemporaneous documentation.

Thanks! I think the bottom line, no pun intended, is to err on the side of caution when choosing what to deduct.

[minimustache1985]

Late to the party but FYI I started a business last year and could not use the home office deduction despite it being exclusive etc because my business took a loss (as most first years do).  The IRS allowed me to reduce our taxable income by the loss.  Mileage and other actual costs were allowed but TurboTax specifically disallowed the home office solely based on there being no profit to deduct it from.

[nexus]

That’s great insight. Thanks for contributing :) there are so many rules & caveats, it sounds like.