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Don't Gamble with Tax Deductions for Your Side Hustle
No that G-Wagon Is Not A Write Off
This past Friday, during my monthly poker game, the conversation shifted to the topic of winnings. One of the players exclaimed, “Dude, if you make that much, you can just start deducting things, and then you don’t have to pay taxes on your winnings. Gambling's my side hustle!”
While I certainly encourage folks to start a side hustle if they can, it’s crucial to be careful about what kinds of expenses you run through your business. The internet is full of ‘gurus’ who will tell you to buy that G-wagon because it’s a write-off. My suspicion is that they have some sort of sponsorship deal with Mercedes; otherwise, I can’t explain such irresponsible advice.
And yet, smart people fall for this nonsense. Take, for example, Dr. William Sherman. Dr. Sherman is an ER physician who should have been a rock star. He studied music and played guitar through the '70s and '80s, performing various gigs to pay for medical school and his training. After establishing himself in the medical field, he decided to finally try and make some money by starting a film company to ‘scale’ his passion for music into profit.
Unfortunately, Dr. Sherman, clearly adhering to some terrible advice from Instagram influencers, took above-the-line deductions for all sorts of expenses—cameras, intel chips, travel, meals, and entertainment. He even doubled down and took more deductions for his medical practice. Did he keep receipts? Nope! Did he form any kind of business entity? Also, no! Did he think he needed to? Of course not!
The opinion of the tax court can be found here, and it is almost comical to see Dr. Sherman try to explain these expenses with zero documentation. To summarize: your side hustle has to be real, and you have to genuinely try to make a profit. You may not have to try very hard, but you must document your efforts and have a ‘profit motive’ for starting the business. There is settled case law on this issue, and the IRS has clarified the rules for taking business deductions.
Starting a business or side hustle when you or your spouse has a W-2 income can be a powerful strategy to reduce your taxable income. But you have to do it right! You need to actually have a clear profit motive, document the actions you took to try and make money, and, most importantly, keep all your receipts! Dr. Sherman’s downfall was being absolutely lackadaisical in all phases of his business endeavors, and it became very clear from his testimony that he just wanted to play with fancy cameras.
So, before you go out and get that G-Wagon, do some planning and lay the groundwork for the deductions. Businesses pay taxes first; ordinary employees pay taxes last. That’s why this strategy works, but only if you actually take the time to do it right!
Key Takeaways
Have a Clear Profit Motive: Ensure your side hustle is a genuine business with the intent to make a profit.
Document Everything: Keep meticulous records of all your business activities and expenses.
Form a Business Entity: Establish a formal business entity to provide structure and legitimacy to your side hustle.
Stay Informed: Be aware of IRS guidelines and case law regarding business deductions.
Avoid the pitfalls that Dr. Sherman encountered and make the most of the tax benefits available to you by planning, documentation, and really making sure that all your actions are in services of a genuine effort to make your side hustle profitable.
Earnings Season Continues This Week
This week earnings season starts to heat up. Many big names will be reporting that will give us a peak into how the consumer is doing. In addition to the five names below, we get reports from UPS, Comcast, Tesla, Coca-Cola, and Chipotle. If these names report beats, we’ll get confirmation that the consumption remains resilient and that consumer demand is still strong. Plus, we get to hear from Alphabet, IBM, ServiceNow, a
Visa (V). With higher rates, Visa has demonstrated strong financial performance in recent years. Analysts expect Visa to report earnings of $2.42 per share. This earnings report will offer insights into consumer spending trends, given Visa's central role in global transactions. A strong performance might indicate robust economic activity, while any signs of weakness could suggest consumer spending is slowing down, impacting the overall economic outlook. Southwest (LUV). has experienced some turbulence (see what I did there? did you see?) over the last few years, with annual revenue reaching $26.1 billion in 2023, up from $23.8 billion in 2022, but not keeping pace with their peers. Recently, Southwest faced scrutiny over ongoing operational challenges and customer service issues, impacting its reputation and operational efficiency. Analysts project Southwest to report earnings per share of $0.45 for the upcoming quarter. This earnings report will provide insights into the recovery of the airline industry post-pandemic and consumer confidence in air travel. Additionally, it may reflect broader economic trends related to travel spending and discretionary income. American Airlines also reports this week, so we’ll see if Southwest continues to lag behind its peers. Tesla (TSLA). Despite demonstrating strong financial performance, with revenues and net income rising year over year, the stock has remained under pressure after Tesla warned of a continued slow down in sales. Recently, Tesla announced the expansion of its Shanghai Gigafactory, aiming to boost production capacity significantly. They are also moving their HQ to Texas to save on taxes, but it’s unclear if that is enough to solve the problems the flagship EV manufacturer is facing. Analysts expect Tesla to report earnings per share of $0.61. This earnings report will provide insights into the health of the electric vehicle market and consumer demand for sustainable transportation options, which has fallen dramatically in recent years. Ford (F). Ford has shown a solid financial performance recently, with a first-quarter 2024 revenue of $42.78 billion, marking a 3.1% year-over-year increase. Analysts project that Ford will report earnings per share of $0.58 for the second quarter of 2024. Comparing Ford's performance to Tesla this year, Tesla continues to lead in revenue growth and market dominance in the electric vehicle sector, while Ford has focused on balancing its traditional automotive business with its growing electric vehicle offerings. While prices in the car market are declining rapidly, this report will gives us insight on who is winning over consumers: the traditional car makers, or the silicon valley disruptors. Sands (LVS). Las Vegas Sands has been a drag on the S&P, but has made a notable rebound in activity. In the first quarter of 2024, the company reported earnings of $0.75 per share, surpassing analyst expectations of $0.62, and achieved revenues of $2.86 billion. The company's announcement of plans to expand its Marina Bay Sands resort in Singapore, aimed at enhancing luxury experiences and boosting tourist inflows could help with performance as well. Analysts expect earnings of $0.60 per share for the second quarter of 2024. This earnings report will provide insights into the recovery of the global travel and tourism industry, potentially indicating broader economic trends and consumer confidence in discretionary spending. Strong results from Sands could signal a positive economic outlook, particularly in regions where tourism is a significant economic driver. | Visa has been consolidating Can this chart pull back on the stick, or will this nose dive continue? EVs are falling out of vogue as TSLA tries to break out Stuck in neutral, can they get in gear? We’ll find out if the consumer is up for gambling, or running out of disposable income |