New Self-employment expenses deductions

Ski

Hello,

I am a W-2 employee, married filing jointly ($150k combined gross). We have a rental property, and I am starting to do engineering consulting on the side. I have $13k in software expenses for this and will have $0 of income from this business for 2024. I do not have a business license yet but could get one if necessary. I would like to know the best way for deducting this on my taxes to maximize return? Perhaps 5-year depreciation? We filed standardized deductions last year as we did not meet the minimum to file itemized. Thank you!

CoryF

Thank you for joining our community, Ski.

Making sure you are behaving as a business is key. This means keeping accurate records of the business expenses. This is the advice from the IRS:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business.

If the Software expenses meet these definitions, you are able to deduct them even though it will show as a loss for the business. The IRS accepts losses for three years before researching further if this business can be considered a Hobby. Hobby losses are not deductible. Behaving like a business, with business records and profit motivation is how to show the IRS that you are a business. Further information can be read in the Publication 334 for small businesses.

As for reporting these expenses, you would fill out a Business Income Schedule C when inputting your 2024 tax return. The Schedule C has nothing to do with Standard or Itemized deductions (Schedule A). Losses on Schedule C directly lower gross income from wages.