Can you expand on how it can be such a big tax benefit? I understand business, and a limited amount of taxation and write offs. Just curious, as I would try this myself.
I thought real estate was the most realistic way as you could depreciate the house.
It’s not really a tax benefit, as a business owner you’re responsible for keeping track of expenses so that you can correctly report your income to the IRS.
If you make enough money, you can set up your own retirement plan, a solo 401k for your side gig. It will be a separate contribution limit from your airline’s 401k contribution limit.
You would be able to make contributions to your solo 401k as the employee (yourself) and as the employer (yourself). The employee limit is the same as your airline pilot contribution $23000 + 7500 catch up if over 50 or net earning from all your side gigs whichever is less. The employer contribution limit is 20% not to exceed $69000 limit if your schedule C business is a sole proprietorship or partnership. If the schedule C business is chartered as a corporation then the employer contribution limit is 25% not to exceed the $69000 limit.
In order to deduct expenses your side gig needs to have a profit motive otherwise the IRS will deem it as a “hobby” and your expenses will be disallowed. However the IRS will still come after your profits for your “hobby.”.
One of the criteria is generating a profit 3 of the previous 5 years. If you’re continually generating losses, then that’s when it triggers a red flag, and the IRS takes notice and decide to take action.
My side gig is an IRS enrolled agent. Anyone can take 3 tests and get a designation as an Enrolled Agent from the IRS. Then it’s a matter of applying for a PTIN, EFIN and now you have the privilege of representing clients in tax court, preparing individual and business tax returns, etc…. Although the tests are multiple guess, I made the mistake of thinking they were like pilot tests, i.e. memorize the answers from the question bank and regurgitate them back on the multiple guess computerized test…. These are no sh*t real tests that you have to understand and know the material in order to answer it correctly and you can’t deduce the correct answer by comparing all of the answer choices. After I failed my first test, I realized the tests were a real thing and passed it on the second try a few months later and passed the remaining two tests after several more months of study. You have 2 years to pass all 3 tests.
Everything BobDuck has posted are valid business expenses that can be used to offset income generated from his business. That’s all reported on Schedule C. The only thing that would raise questions from me is the bringing friends over for dinner and calling it “business dinner.” But me as an Enrolled Agent, I am not the judge and jury. It’s all about having all your paperwork in order in the event the IRS Revenue Agent comes knocking and being able to defend your expenses, claims, and your position.
Pilots I have flown with have come up with some harebrained schemes, setting up LLCs, hiring their kids, creating IRAs for their kids, all in the name of trying to pay less taxes from their airline pilot income. I point out issues with their schemes, but I am not the IRS, I am not going to report them. if they came to me as a client, my job is to point out what they can claim and not claim. And the penalties for claiming an indefensible position with the IRS. if they decide to persist with their indefensible position, then I decline to work with them and they can find themselves another tax professional.
being able to set up your own retirement plan is the one of the tax benefits of having a side gig in my opinion. If you have a large traditional IRA balance that prevents you from doing the backdoor Roth tax free, then moving that traditional balance into your airline’s 401k or your side gig solo 401k allows you do the tax free backdoor Roth conversion.
A rental property is separate from a side gig, and it’s considered passive income, you can deduct the expenses from income you generate from the rental property, but you can’t offset w-2 income with Schedule E losses.
