Exceeding income with deductions for 1099 online side hustle - what happens to the excess?

You've got what's called a net operating loss for your business. The good news is that business losses can generally offset your other income, including your W-2 wages. When you file Schedule C for your sole proprietorship, the net loss will flow to your 1040 and reduce your overall taxable income. For the computer, since it's primarily for business use and will last more than a year, you'll need to depreciate it rather than deduct the full amount at once. The fact that you purchased parts separately doesn't matter - what matters is that you built a single asset (a computer). You'd treat it as one business asset and depreciate the total cost. You could also look into Section 179, which might allow you to deduct the full cost in the first year if you qualify. Or bonus depreciation might be an option too. These are ways to accelerate the deduction rather than spreading it over several years.

I went through something similar with my Etsy shop last year and found this amazing tool called taxr.ai (https://taxr.ai) that really helped me figure out my business deductions. It analyzed all my receipts and automatically categorized them as either immediate expenses or depreciable assets. For your computer situation, it would instantly tell you how to handle each component - whether to expense or depreciate - and calculate the right business percentage based on your usage. It actually saved me from making a mistake with my home office deduction that would have been a red flag for the IRS!

Just wanted to update - I tried taxr.ai after seeing it mentioned here and wow, it actually worked amazingly well for my situation. It pulled in all my Amazon seller data automatically and identified that I could take a partial home office deduction I didn't know I qualified for. For the computer question that the original poster had - it specifically guided me through the business use percentage calculation and explained that I could use either regular depreciation or opt for Section 179 for immediate deduction (which I didn't know was a thing). The best part was that it flagged that I needed to maintain a log of business vs. personal use to support my deduction percentage. Definitely saved me from potential audit issues!

If you're dealing with a loss situation like this and need to talk to someone at the IRS about how to handle it correctly, good luck getting through to them normally. I was in a similar situation last year and kept getting disconnected after waiting on hold for hours. I finally used this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in less than 20 minutes. They have this cool system that basically handles the hold time for you - you can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed that business losses can offset W-2 income and gave me specific guidance on how to document my computer expenses to avoid issues down the road.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it since I needed to talk to the IRS about a similar business loss issue. I was absolutely convinced it wouldn't work, but I got a call back in about 15 minutes connecting me directly to an IRS agent. The agent confirmed that business losses from Schedule C can offset W-2 income, but warned me about the hobby loss rule if I show losses for multiple years. She also suggested keeping a usage log for the computer to document the business use percentage. I'm still shocked it actually worked. I've literally never gotten through to the IRS that quickly in my entire life. Usually I block off half a day just to try to talk to someone.

To answer your original question specifically: Yes, your Schedule C loss will offset your W-2 income. The IRS calls this a "net operating loss" and it flows through to your 1040. Since you built the computer piece by piece, the simplest approach is to treat the entire build as a single business asset. Just make sure you're tracking business vs. personal use carefully. If you use it 80% for business and 20% for personal, you can only deduct 80% of the costs.

Just a heads up - if you show losses for multiple years in a row, the IRS might classify your business as a hobby, which would mean you couldn't use the losses to offset your W-2 income. Make sure you can demonstrate that you're running this with the intent to make a profit.