You bought a new laptop for freelance work. You took a client to lunch. You paid for a design software subscription. That’s all tax deductible, right?
Maybe. But if you haven’t formally set up your business, those deductions could raise eyebrows – or worse, get denied.
It’s a common mistake: thinking that any side hustle expense can be written off, no questions asked. The IRS sees it differently. Let’s walk through why business structure matters, how deductions really work, and what you risk by staying informal.
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What Counts as a Deductible Business Expense?
According to the IRS, a deductible expense must be:
- Ordinary: Common and accepted in your trade
- Necessary: Helpful and appropriate for your business
So yes – if you’re a graphic designer, design software probably qualifies. If you’re a consultant, taking a client to lunch might. But there’s a catch:
If the IRS doesn’t see you as a business, they might not see those expenses as legitimate.
Why Structure Affects Deductibility
If you haven’t registered an LLC or other business entity, you’re considered a sole proprietor by default. That’s legal – but it comes with baggage:
- You file business income and expenses on your personal tax return (Schedule C)
- The burden of proof is on you to show you’re running a real business
- The IRS may view you as having a “hobby,” not a business
And here’s the big kicker: the IRS disallows deductions for hobbies.
The Hobby Loss Rule: A Trap for the Unstructured
The IRS uses what’s called the “hobby loss rule” to prevent taxpayers from claiming deductions for activities that aren’t legitimate businesses.
If your activity doesn’t turn a profit in three out of five years, or if you can’t prove you’re operating professionally, your deductions can be denied – even if they were valid expenses.
Red flags include:
- No business bank account
- Minimal effort to promote or grow your business
- Incomplete records or vague receipts
- Little or no income from the activity
Forming an LLC doesn’t guarantee you’ll avoid scrutiny, but it’s one of the clearest ways to show you’re running a real business with intent to profit.
How an LLC Helps You Deduct Smarter
When you form an LLC, you immediately gain credibility. It helps you:
- Open a business bank account to cleanly separate income and expenses
- Track deductions accurately with accounting tools or apps
- Establish a business presence (website, EIN, invoices, etc.)
- Prove intent to make a profit – a key IRS criterion
This doesn’t just help at tax time – it changes how you operate. You’re more likely to keep good records, issue contracts, and think strategically when you’ve formalized your setup.
Common Deductions You Might Miss (or Misuse)
Freelancers and side hustlers often miss or misclassify these expenses:
- Software subscriptions (Adobe, QuickBooks, Zoom)
- Phone and internet (partial business use)
- Marketing and ads (including promoted social posts)
- Home office (but only if it’s exclusive and regular use)
- Meals and travel (strict rules apply)
The IRS won’t always tell you you’ve made a mistake – they’ll just send you a bill or disallow your deductions during an audit. Having a legal entity and separate accounts makes these deductions easier to justify and document.
Real Example: The Laptop You Thought Was Deductible
Imagine you’re a part-time video editor. You buy a new $1,200 laptop and use it 60% for business. You deduct $720 on your taxes.
But if you:
- Have no LLC
- Use a personal account for both business and personal purchases
- Didn’t earn significant income from editing
- Filed no contracts or invoices
…the IRS might say, “Looks like a hobby.” They can disallow the deduction – and potentially charge back taxes, interest, and penalties.
Had you formed an LLC, used a business card, tracked the purchase, and invoiced clients? Different story.
The Bottom Line
Just because you spend money for your side gig doesn’t mean the IRS sees it as deductible. Without structure, separation, and proof of intent to profit, you risk more than just a missed write-off – you risk a costly tax problem.
Forming an LLC helps legitimize your business in the eyes of the IRS. It doesn’t just unlock deductions – it protects them. It’s a signal that you’re serious, organized, and operating above board.
So yes, that laptop might be deductible. But only if you run your business like it’s real. The IRS expects nothing less.
