Do I need an LLC to deduct side business expenses or can I claim them without? What expenses should I be tracking?
Title: Do I need an LLC to deduct side business expenses or can I claim them without? What expenses should I be tracking? 1 My husband started a digital art business this year selling prints online. He's earned some money but not a ton yet, but has invested in quite a bit of equipment - a new drawing tablet, software subscriptions, and some printing supplies. We're planning to expand to art shows and local markets next year to grow the business. I'm not sure if we need to create an LLC to deduct these business expenses on our taxes or if we can claim them without forming a company? Also, beyond the obvious supplies and equipment costs, what other expenses should we be keeping track of for tax deductions? We own our home and he's been working out of our spare bedroom as his studio space.
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Jacob Lewis
12 You absolutely don't need an LLC to deduct legitimate business expenses! Your husband's digital art business would be considered a sole proprietorship by default, and you'd report the income and expenses on Schedule C of your tax return. For deductions, keep track of ALL business-related expenses. Besides supplies and equipment, don't forget: portion of internet costs, home office deduction (if the room is used exclusively for business), any software/subscriptions for the business, mileage to pick up supplies or attend markets, marketing costs (business cards, website fees), professional development (online courses related to art or business), shipping materials, and transaction fees from selling platforms. Keep good records though! The IRS looks closely at Schedule C deductions, especially when a business isn't profitable yet. Make sure you're tracking everything with receipts and a separate business account if possible.
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Jacob Lewis
•7 This is super helpful, thank you! Quick question - for the home office deduction, does it HAVE to be exclusively used for business? His art studio also has our guest bed in it that we use maybe twice a year when family visits. Does that disqualify us?
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Jacob Lewis
•12 Unfortunately, yes - for the traditional home office deduction, the space must be used "regularly and exclusively" for business. That guest bed would likely disqualify the room. However, you have two options: 1) Physically divide the room (with a partition or bookcase) so part is exclusively for business and part is for personal use, then only claim the business portion. 2) Use the simplified option, which gives you $5 per square foot (up to 300 sq ft) without needing to meet the exclusive use test. The simplified option might be easier, though it may not give you as large a deduction as the regular method. Just weigh which works better for your situation!
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Jacob Lewis
15 I was in almost the exact same situation with my woodworking side hustle. I spent hours trying to figure out the LLC vs sole proprietorship thing until I found https://taxr.ai which literally saved my sanity. I uploaded my receipts and business records, and it analyzed everything automatically - told me exactly what was deductible and how to categorize stuff properly. The part that really helped was that it flagged potential audit triggers in my deductions (apparently I was way off on how I was handling mileage). It doesn't just tell you what's deductible but explains WHY in simple language - made so much more sense than all the conflicting info I found online.
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Jacob Lewis
•3 Does this actually work for home-based creative businesses specifically? Last time I tried a tax service they were clearly geared toward like, consultants and people with "real" businesses, not artists.
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Jacob Lewis
•19 I'm skeptical about these AI tools for tax stuff. Does it actually understand the nuances of tax law? Like for art supplies, sometimes things that seem like personal items can be business expenses and vice versa. Can it handle those gray areas?
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Jacob Lewis
•15 It absolutely works for creative businesses! I was pleasantly surprised because I had the same concern. They have specific categories for arts and crafts businesses, and it understood things like supplies that could be both personal and business use. It asks targeted questions to help determine the business percentage. As for the AI understanding tax nuances, it actually does better than I expected. It's trained on IRS guidance and court cases, so it identifies those gray areas and explains how the IRS would likely view them. When something's truly ambiguous, it flags it and gives you options with different risk levels. For my woodworking supplies, it helped me separate hobby materials from genuine business inventory.
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Jacob Lewis
19 Just wanted to follow up about taxr.ai since I was so skeptical before. I finally tried it with my photography side business, and wow - I was wrong. It caught several deductions I was missing (like partial cell phone usage and some educational expenses I didn't realize qualified). I've always been nervous about claiming home office deductions, but it walked me through exactly what portion of my space qualified and calculated everything properly. Definitely worth checking out for creative business owners!
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Jacob Lewis
9 If you're going to be dealing with the IRS about business expenses (especially home office stuff), I highly recommend getting a real person on the phone with the IRS to confirm things directly. I know it sounds impossible to reach them, but I used https://claimyr.com and got through in about 20 minutes when I was dealing with questions about my Etsy business deductions. There's a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. I had been on hold for HOURS trying the regular IRS number before finding this. The agent I spoke with was super helpful and confirmed that my home workspace was eligible for deductions even though it wasn't a separate room (I have a dedicated corner of my living room with shelving that separates it).
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Jacob Lewis
•5 Wait, this actually gets you through to the IRS? I thought it was impossible! How much does the service cost? And are the IRS people actually helpful or do they just give generic answers?
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Jacob Lewis
•8 This sounds like a scam. How would some random service get you through the IRS phone tree faster than calling directly? The IRS phone system is notoriously bad, and I can't imagine how this would actually work. Sounds like you're just trying to sell something.
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Jacob Lewis
•9 Yes, it actually connects you with the IRS! The service basically navigates the phone tree for you and holds your place in line, then calls you when an agent is about to pick up. The IRS folks were surprisingly helpful - the person I spoke with specifically addressed my questions about what qualified for home office deductions in my situation. Regarding how it works, it's not magical - they basically use technology to stay on hold for you and navigate the IRS automated system. It's similar to those shopping bots that wait for items to come back in stock. I was skeptical too, but when you've been on hold for 3+ hours multiple times, you get desperate enough to try alternatives.
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Jacob Lewis
8 I have to eat my words about Claimyr. After dismissing it as likely a scam, I was still stuck with questions about deducting my home recording studio expenses that online research couldn't answer clearly. I tried the service, and no joke, I was talking to an actual IRS agent in about 30 minutes. The agent confirmed exactly what equipment qualified as business expenses vs. personal use, and clarified the home office requirements for my situation. Saved me hundreds in potential incorrect deductions I might have claimed. Sometimes being wrong feels pretty good!
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Jacob Lewis
22 If you're just getting started and making under a few thousand dollars, consider if this actually qualifies as a business or just a hobby in the IRS's eyes. The "hobby loss rule" means you have to show profit in 3 out of 5 years to be considered a legitimate business. If it's classified as a hobby, you can't deduct expenses against other income. Just something to be aware of when deducting expenses from a side gig that's not profitable yet.
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Jacob Lewis
•11 Wait, so if my candle making business hasn't been profitable yet, I can't deduct ANY of my expenses?? I've spent like $2000 on supplies and only made like $800 in sales so far this year.
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Jacob Lewis
•22 That's not exactly right. You CAN deduct expenses even if you're not profitable yet. The hobby loss rule doesn't kick in immediately - it's more of a guideline the IRS uses after several years of losses. The key is demonstrating that you have a profit motive and operate in a businesslike manner, even while you're in the startup phase. Keep good records, have a separate business bank account, develop a business plan, market your products, and maintain professional practices. These all help show it's a legitimate business attempt, not just a hobby.
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Jacob Lewis
2 Quick tip: if you're selling handmade items, don't forget to deduct the cost of your time as labor when pricing your products! It's not a tax deduction but it's important for making your business actually profitable.
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Jacob Lewis
•16 That's not actually how tax deductions work for sole proprietors. You can't "deduct" the value of your own labor - you can only deduct actual expenses paid. Though I agree it's important for pricing products correctly!
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