even if you charge $$ it's a hobby - Page 2

The IRS doesn't set criminal laws, health codes or state licensing laws, it sets tax laws.

Can we agree that there is waaaaaay too much government?!? Seriously. We own 2 restaurants. We need a license to sell milk for crying out loud. The fine line between business and hobby is

grey. If someone asks me to make a cake, I'll do it...in my unlicensed kitchen. I ask them to pay for supplies/ingredients. No biggie. Do you all make sure your babysitters are licensed and declare their income?! Didn't think so.

I would guess if there is no profit to be made and no charge for labor, it sounds like a hobby to me. Taking money for ingredients is not a profit.

 

Just sayin, Jimmy Boombats

Agreed, but the IRS still taxes hobby income as if it was pure profit until you exceed the 2% AGI misc deductions threshold.

Has anyone actually ever sought a qualified legal opinion on whether taking money only for ingredients constitutes operating as a business or not (aside from what the IRS says about taxing any profits). Does it still depend on the county/state law for your area? Because all I can find is hearsay online. Some say its OK, some say not. 

The definition of a business from the perspective of licensing and food safety typically centers around whether or not your business interacts with the general public.

So if you have a storefront, advertise, hand out business cards to the public, and/or have a business web site that is publicly available, you are generally considered a business. If you only make cakes on request from friends and family and do not advertise this to the general public (and you reject orders from outside your circle of friends and family) you would probably not be considered a business.

Of course this will vary depending on your city/county/state, both on the basis of different regulations and how those regulations are enforced.

And that's the kicker right there. The IRS is not the end all of what constitutes a business.

I think the reason there is no real concrete answer is because no CPA (that I know of) is going to give blanket tax advice.  Everyone's situation is unique, not to mention every county and state has different laws about this.  All I can say is my sister is a very successful CPA in CA specializing in business taxation.  The first time someone offered me money to make a cake I picked up the phone and called her.  She told me...

 

"If you walk like a duck the IRS and the State of California are going to treat you like a duck, and so am I.  If you want to do this, here's what you need to do..."

 

Again, advice specific to me, my intentions and circumstances and YAY having a CPA in the family.  So if you want a real answer specific to you, you should call a CPA in your area.  And maybe your local business license office because my county considers any dollar changing hands as a business transaction.

I just contacted my state health department to ask about receiving reimbursement for expenses from friends and family so I'll report back if I get a response. 

A lot of the time here on CC the question of business vrs hobby comes up during one of 2 posts

1. Help! I made a cake for xxxx and she hated it and wants her money back, what should I do?

or 

2. Help! I just got my first order and have no idea what to charge!

 

Tax and law aside, someone who is paying for a cake certainly considers themselves a customer and usually acts as such, no matter how much you feel you are a hobbyist and do not want to deal with business-y type things like complaints, policies, and pricing structures. If you are doing the cake for free (no money at all), then the recipient usually does not behave like a customer and you don't have to deal with business-y things. 

 

I have NO problem with people doing cakes for a hobby, even accepting some money for supplies- I get it. But don't be surprised when the person asking for the cake and writing the check acts like a customer- because when they pay you, they are.  

jenmat - you forgot number three: Help! I've taken the first Wilton class and I have now started my business and taken my first order. Can someone tell me what to charge and give me recipes?

 

Has anyone claimed this?   Certainly not the original post which specifically addresses a common response given to people here when they mention they accept money for ingredients as a hobbyist only to be told they are operating a business BECAUSE they accepted that money.  There is a thread in this forum about two weeks old where this activity is precisely what the person describes only to be told in the first post they are not a hobbyist they are a business.  There is no mention of food or safety issues in the reply characterizing this activity as a business activity--it only mentions the payment for ingredients.

 

In addition, a search of this site reveals posts where individuals say I know as a hobbyist I cannot accept any money, even for ingredients, because I would be running a business.  Again these statements have nothing to do with issues other than the accepting of money too cover costs of their hobby.  There have also been a variety of threads discussing whether or not accepting funds can be counted as a donation.  Again the discussion centered on the question of the receiving of money for an item, not other concerns raised here in terms of what counts as a business.  

 

The page cited is more than a simple a "tax page," it is the criteria used by the IRS to ascertain whether an activity counts as a hobby or a business.  The original post uses this because it specifically addresses a belief that is (despite Jason's claim that most center on questions of advertising to the general public) routinely expressed on these boards often to curtail the actions of hobbyists.  It specifically addresses the claim: you take money, you are a business and not a hobby.  An activity can in fact generate income and not be consider a business activity.  Whether other laws or agencies would consider selling a cake a business from a safety or health standpoint is irrelevant to the question raised by a hobbyist who wants to know whether taking money from a friend for ingredients makes them an illegal business from the stand point of receiving money to cover some of the costs of their hobby.  So yeah it makes clear that hobbyists in fact are not walking like ducks from the perspective of the IRS if they generate income (income does not equal profit) by asking others to cover the costs of the cake they make.  

I actually found that definition (interaction with public = business) very recently while researching this topic, IMO it eloquently make a distinction that can be used as a rule of a thumb.

I was never a huge fan of the "accepting money = business" definition, since it means that you are running a business if a family member reimburses you for a cake, and even if that is technically true (I'm not sure that it is) realistically there would be no way of anyone else knowing unless you advertise it publicly.