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I used to joke that if you go to the movies or restaurants etc. you could open pass-through tax LLCs (which are “disregarded entities” at the IRS) and write tho

by EGreg 2y ago

I used to joke that if you go to the movies or restaurants etc. you could open pass-through tax LLCs (which are “disregarded entities” at the IRS) and write those off as a business expense, as long as you had a website as a food or movie critic / reviewer, and even had a way to subscribe for some paid memberships (eg Patreon) and also advertising with affiliate sales (eg Amazon) for recipes, movie rentals etc. You know, running a business kind of like that guy who writes about inside Apple news very rarely but effectively (what’s his name, Gruber? Daring Fireball?) The business doesn’t actually have to make money in the first few years, as long as you are making bona-fide attempts to grow it. No one requires you to watch every movie or eat every burrito. But who is the government to say you’re not trying to run a business as a food or movie critic? Much of your personal lifestyle could then be deducted as a business expense on your schedule C, being “necessary and ordinary” for your various LLCs. Perhaps even your travel expenses if you are a travel blogger staying at hotels etc. But maybe it’s not a joke. Any lawyers or accountants on HN see any problems with this? Again, I’m talking about doing the minimum to make this an actual business — it may become profitable through the monetization but even if it isn’t, that’s 30% additional you’re saving on what would otherwise be your personal entertainment expenses! The main issue I see is that if your LLC has debts that it defaults on, a court might see you as “commingling” personal funds with the business, even if you keep the accounts separate, and pierce the corporate veil. But, this is a separate issue of limiting liability for debts, which your LLC doesn’t have to even take on. Even if that were the case, from a tax point of view the question is only whether the expenses are necessary for the business, and ordinary, both of which they are.

paxys 2y ago
> Much of your personal lifestyle could then be deducted as a business expense on your schedule C, being “necessary and ordinary” for your various LLCs That's not how it works. You can maybe deduct the price of your movie ticket and mileage to drive to the theater. Anything beyond that and the IRS will be up your ass in an instant.
- EGreg 2y ago
  Well that’s what I’m talking about. The price of all your movie tickets and mileage to drive to the theater, perhaps even your netflix subscription etc. Or if you’re a travel blogger, the plane rides and hotel stays become a business expense if you’re doing it for profit as part of an LLC. You have to have an actual business plan with memberships, advertisements, etc. You could be making money with it. But even if you aren’t yet, as long as you’re trying, the business expenses made by an LLC that you are investing into, are deductible on your personal Schedule C! Are they not?
ebiester 2y ago
You’d have to get revenue against it.
- EGreg 2y ago
  Well, as many on HN know, lots of startups fail. Investors write that off as a capital loss. Maybe one day, long term capital gains tax will be on the same level as income tax, and then people will stop trying to use things like 83b elections. But regardless of that, if you invest into your own startup by buying equity or lending it money, that is NOT currently a taxable event. And then that LLC’s losses are passed through to your Schedule C. It may be strange to have you buying shares in your company if you already have 100% of shares. But if you do a Limited Partnership with a few people, then all of you could be competing to buy shares in it and dilute the others. Those are non-taxable events. And the members of the LLC are also its staff, who go watch movies and review them. Then the tax deductions are claimed on Schedule K instead, by each partner. I am only talking about a bona fide business. You don’t have to go all-out for each business you start, working 40 hours a week for each one. You could even go to the movies and restaurants once a week and save 30% by turning it into an actual business. Can’t you? Do travel bloggers deduct their travel expenses as necessary and ordinary?
slv77 2y ago
Others have tried and the IRS has even provided a helpful guide on if your endeavor is a hobby or a business (https://www.irs.gov/pub/irs-news/fs-08-23.pdf https://www.irs.gov/pub/irs-news/fs-08-23.pdf).
- EGreg 2y ago
  Thanks for this! I didn’t know the guidelines were published. This is like FINCEN’s 2013 and 2019 guidances for cryptocurrencies. “The limit on not-for-profit losses… does not apply to corporations except S Corporations”. It doesn’t seem to mention LLCs. These are “disregarded entities” at the IRS level, so what does that mean? For tax purposes they are treated as sole proprietorships? It seems to me there is some “minimum” level of bona-fide for-profit business that might be helpful to reach if you are a prolific traveler or movie goer or eat out in restaurants a lot. That’s my main point. A little bit of effort and you can write off thousands of dollars a year in business expenses while you also stand a chance of making money on top of it.
  - ghaff 2y ago
    I had a small "hobbyist" software business once upon a time. I made a point of only deducting expenses that seemed reasonable and not red flags for a software business, and only deducted up to just below my revenue (about $7K/year in the 90s). That seemed safe if maybe somewhat conservative. Doesn't work for a lot of things (including reputable restaurant reviews) but bloggers also have the opportunity to get free stuff if they get noteworthy enough. Yes, it's a source of bias but so long as everything isn't how this thing they were given for free is fantastic, I don't have a problem with it. I've reviewed books (and a few other things) sent to me and I've given some pretty negative reviews as well as positive ones.
  - slv77 2y ago
    Business expenses must be ordinary and necessary to be deductible. A roofer would have a hard time justifying deducting a boat under the rule but a commercial fisherman wouldn’t have trouble. Entertainment expenses are no longer deductible with recent tax law changes with few exceptions. It would be difficult today to get a CPA to sign-off off on a lot of what may have passed previously. A decent write-up can be found here - https://www.thetaxadviser.com/issues/2023/nov/navigating-around-limits-on-meals-and-entertainment.html https://www.thetaxadviser.com/issues/2023/nov/navigating-aro...
harmon 2y ago
As I understand it, you can only write off a business's expenses against that business's income, not income from other sources. For example, if you have a W2 income source and you have this business generating losses, you can't take your business losses or write offs and apply them to your W2 income, so you wouldn't really be saving any money as there would be no revenue to write off expenses against. You would need to get the business to generate revenue for this to be a viable idea. The only case that I am aware of where you can take business losses / write offs and apply them to other income sources is in real estate, and only under very specific circumstances. This is one reason why high income individuals love things like short term rentals which is one circumstance in which this is possible.
- jerkstate 2y ago
  I am not a lawyer or accountant, but you can fund your business with a loan from your person, and then if the business fails, you can write off the loan against your personal capital gains, and up to $3000 of regular income per year. This is not financial or legal advice.
- shkkmo 2y ago
  I do not believe this is correct. If your business is a "pass through" style of entity, you can indeed deduct losses from other income (up to a point and with various limitations.) Doing too much of this can definitely trigger an audit.

by EGreg 2y ago

paxys 2y ago

> Much of your personal lifestyle could then be deducted as a business expense on your schedule C, being “necessary and ordinary” for your various LLCs That's not how it works. You can maybe deduct the price of your movie ticket and mileage to drive to the theater. Anything beyond that and the IRS will be up your ass in an instant.

EGreg 2y ago
Well that’s what I’m talking about. The price of all your movie tickets and mileage to drive to the theater, perhaps even your netflix subscription etc. Or if you’re a travel blogger, the plane rides and hotel stays become a business expense if you’re doing it for profit as part of an LLC. You have to have an actual business plan with memberships, advertisements, etc. You could be making money with it. But even if you aren’t yet, as long as you’re trying, the business expenses made by an LLC that you are investing into, are deductible on your personal Schedule C! Are they not?

ebiester 2y ago

You’d have to get revenue against it.

EGreg 2y ago
Well, as many on HN know, lots of startups fail. Investors write that off as a capital loss. Maybe one day, long term capital gains tax will be on the same level as income tax, and then people will stop trying to use things like 83b elections. But regardless of that, if you invest into your own startup by buying equity or lending it money, that is NOT currently a taxable event. And then that LLC’s losses are passed through to your Schedule C. It may be strange to have you buying shares in your company if you already have 100% of shares. But if you do a Limited Partnership with a few people, then all of you could be competing to buy shares in it and dilute the others. Those are non-taxable events. And the members of the LLC are also its staff, who go watch movies and review them. Then the tax deductions are claimed on Schedule K instead, by each partner. I am only talking about a bona fide business. You don’t have to go all-out for each business you start, working 40 hours a week for each one. You could even go to the movies and restaurants once a week and save 30% by turning it into an actual business. Can’t you? Do travel bloggers deduct their travel expenses as necessary and ordinary?

slv77 2y ago

Others have tried and the IRS has even provided a helpful guide on if your endeavor is a hobby or a business (https://www.irs.gov/pub/irs-news/fs-08-23.pdf https://www.irs.gov/pub/irs-news/fs-08-23.pdf).

EGreg 2y ago
Thanks for this! I didn’t know the guidelines were published. This is like FINCEN’s 2013 and 2019 guidances for cryptocurrencies. “The limit on not-for-profit losses… does not apply to corporations except S Corporations”. It doesn’t seem to mention LLCs. These are “disregarded entities” at the IRS level, so what does that mean? For tax purposes they are treated as sole proprietorships? It seems to me there is some “minimum” level of bona-fide for-profit business that might be helpful to reach if you are a prolific traveler or movie goer or eat out in restaurants a lot. That’s my main point. A little bit of effort and you can write off thousands of dollars a year in business expenses while you also stand a chance of making money on top of it.
- ghaff 2y ago
  I had a small "hobbyist" software business once upon a time. I made a point of only deducting expenses that seemed reasonable and not red flags for a software business, and only deducted up to just below my revenue (about $7K/year in the 90s). That seemed safe if maybe somewhat conservative. Doesn't work for a lot of things (including reputable restaurant reviews) but bloggers also have the opportunity to get free stuff if they get noteworthy enough. Yes, it's a source of bias but so long as everything isn't how this thing they were given for free is fantastic, I don't have a problem with it. I've reviewed books (and a few other things) sent to me and I've given some pretty negative reviews as well as positive ones.
- slv77 2y ago
  Business expenses must be ordinary and necessary to be deductible. A roofer would have a hard time justifying deducting a boat under the rule but a commercial fisherman wouldn’t have trouble. Entertainment expenses are no longer deductible with recent tax law changes with few exceptions. It would be difficult today to get a CPA to sign-off off on a lot of what may have passed previously. A decent write-up can be found here - https://www.thetaxadviser.com/issues/2023/nov/navigating-around-limits-on-meals-and-entertainment.html https://www.thetaxadviser.com/issues/2023/nov/navigating-aro...

harmon 2y ago

As I understand it, you can only write off a business's expenses against that business's income, not income from other sources. For example, if you have a W2 income source and you have this business generating losses, you can't take your business losses or write offs and apply them to your W2 income, so you wouldn't really be saving any money as there would be no revenue to write off expenses against. You would need to get the business to generate revenue for this to be a viable idea. The only case that I am aware of where you can take business losses / write offs and apply them to other income sources is in real estate, and only under very specific circumstances. This is one reason why high income individuals love things like short term rentals which is one circumstance in which this is possible.

jerkstate 2y ago
I am not a lawyer or accountant, but you can fund your business with a loan from your person, and then if the business fails, you can write off the loan against your personal capital gains, and up to $3000 of regular income per year. This is not financial or legal advice.
shkkmo 2y ago
I do not believe this is correct. If your business is a "pass through" style of entity, you can indeed deduct losses from other income (up to a point and with various limitations.) Doing too much of this can definitely trigger an audit.