Tax deductions

Entrepreneurs think they have a “brilliant” idea that they can write off expenses for their hobbies and use them as tax deductions. In fact, many entrepreneurs decide they have multiple businesses running out of their house which were formerly their hobbies. This isn’t really legal.

The tax code is fairly clearly written that only real businesses (not hobbies) that really try to generate revenue can have financial write offs and tax deductions. This means that the company needs to be a real going concern with revenue to actually have these offsetting operating costs. It also states that only expenses that are directly related to the business can be written off in an effort to produce income. The U.S. Internal Revenue Service (IRS) states:

“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

Remember, for any expense for a tax deduction, detailed records need to be kept for 7 years that explain what it is, who it was with and the correct amount.

Expenses should be written off only as a result of starting and running a real business. Don’t pretend to start a business just to write off personal expenses as tax deductions. It is not within the tax code. For example, you can’t have a wood shop in the basement and write off all those expenses for equipment unless you have a business of selling the products that you produce.

(Remember that I am not a financial adviser. lawyer or an accountant, please consult with them before proceeding on any financial opinions given here.)