even if you charge $$ it's a hobby - Page 3

So ... Reversing the question (or statement) ... When would or should a hobby baker consider him/herself a business? 

In most, of not all threads, the professional bakers have a clear view on when somebody is "doing business" vs hobby. Regardless of laws, I would like to hear from the hobby bakers when THEY think it transcends a hobby ...

genuine question, not trying to be snippy 

It seems to me that we are arguing about whether a hobby is a business and whether it is illegal or not, but only considering the viewpoint of the IRS and the fact is, they are not the only agency that get to decide whether your hobby is a business or whether it is legal or not.

There are states/counties/cities where it is legal in pretty much all aspects to make cakes out of your un-inspected home and sell them without a license, or registering yourself as a business, for the cost of ingredients, for $1 a slice, for $10 a slice and you can call it a hobby (boy I need to move to one of those!).

Then there are states/counties/cities where none of that is allowed. 

The determination by the IRS that there is to be a certain amount of tax levied on a certain portion of income gained from your hobby provided you meet certain conditions does not impact any of that.

The legality of the cake sales to your city/state/local health department is whole separate issue here. As someone else noted earlier, income from illegal activities must be reported as income like anything else. (That's what's finally got Al Capone...tax fraud on his illegal activities...but I digress...)

It's pretty simple once you wrap your mind around how the IRS does things: If you sell a cake (regardless of whether you profit on that cake or your caking activity in general), you need to either report it as a hobby or a business. Period.

If you have repeated losses for multiple tax years, you need to report as a hobby. The IRS looks at like this: If a cake baker decorates cake and loses money for, say, 5 years straight, why the heck is he/she still running this "business"? A "rationale person" would get out of that "business" and cut his/her losses. If he/she stays in the "business" while continuing to lose money, it is a hobby and reportable as such. Obviously, there is an element of personal pleasure that keeps the decorator decorating cakes that fail to result in a profit.

Side Note: I remember reading about a court case that revolved around  an "aspiring professional golfer" who wrote off his weekly rounds/golf clubs/travel expenses, but he never netted much as far as prize money. He was realistically never going to make it in the PGA, so his activity was a hobby as ruled by the court.

Again, repeated losses are the key factor here if you are looking at it in hindsight-regardless of who you are selling to...In other words, if you are selling to complete strangers but still have repeated losses, you are a hobby.

To be more specific on "repeated losses," the IRS has a guideline about number of years and losses.

Try not to think about it in the "common sense" way...unfortunately, our tax code was not written in the most logical of ways...Again, it's important to do your research and then talk to a CPA...Hold your CPA accountable because you are responsible for your tax return in the end.  

What level of government regulates business and commerce within a city or state? Are states responsible for defining commerce within their jurisdictions or does the IRS do that job for them? If the IRS definition were all that was required to define business vs hobby, then why bother with cottage food laws, licensing, health department regulations etc?

What do city and state laws say about what constitutes a business? I believe that's what matters more than how the IRS chooses to view a business vs hobby for tax purposes.

Quote:

Originally Posted by vgcea 

What level of government regulates business and commerce within a city or state? Are states responsible for defining commerce within their jurisdictions or does the IRS do that job for them? If the IRS definition were all that was required to define business vs hobby, then why bother with cottage food laws, licensing, health department regulations etc?

 

What do city and state laws say about what constitutes a business? I believe that's what matters more than how the IRS chooses to view a business vs hobby for tax purposes.

Once again no one in this thread has argued otherwise.  You will not find a single person here claiming that the IRS definition is the only one that matters.  However what you will find is people making the rather simplistic claim to hobbyists (and hobbyists making the claim themselves) you cannot take money for ingredients because it makes you a business.  For tax purposes that is indeed incorrect. It is also incorrect for other regulatory agencies.

As for cottage laws they govern commercial transactions, look them up, they all describe laws in which a private kitchen is used to engage in commercial transactions defined as sales to the public.  There are any number of instances where friends engage in private transactions involving food which are not governed by health and safety codes.  For example friends are not engaged in a commercial transaction when they decide hey James is going to cook for 20 of us, based on the cost of the meal we will divide by 20 and each pay him that amount so that we can cover most of the ingredients.  That is a private transaction among friends.  

Even if it was done each week (something I did in grad school) it would not become a commercial transaction.  Cooking was our hobby and we were not selling to the public.  Ag and Health departments would have laughed if some local restaurant had turned us in for violating health and safety codes.   Our kitchens were not used to sell food items to the general public hence the activity was not subject to the Ag Depts and HD. 

There are plenty of other examples of private individuals engaging in private transactions and hence not subject to government regulatory agencies.  The best example is gun shows (please I do not want to start a debate about guns).  What is relevant is that individual owners can go to shows and mark their transactions private and they are not subject to the federal firearms regulations like gun store owners.  Like it or not there is a distinction between private and commercial transactions, and cottage laws, HDs and Ag Depts regulate commercial transactions.  They are not there to regulate every monetary transaction between private individuals--those not engaging in public commerce.  The IRS makes distinctions between hobbies and businesses, you don't think health and safety agencies distinguish between commercial and non-commercial activities?

Now does that mean you can simply define selling to the general public as a private transaction?  No, just as gun stores cannot go to gun shows and mark their transactions as private sales.  And while things certainly are not black and white, it is pretty clear when an individual is selling to the general public--advertising (check), you do not know the individual personally (check).  However friends and family giving money for ingredients to someone to make them cakes is not something that will run you afoul of the IRS or HDs and Ag Depts. The transaction does not make them a business.

If you want to sell to the general public then by all means follow the laws governing commercial transactions, but the hobbyist who takes money for ingredients from friends and family is not doing something illegal (they are following the law).  And folks should stop making simplistic accusations such as taking money makes you a business when the reality is far more complex.

But is that a qualified legal opinion, or your personal understanding? In your example of gun shows, while sales at gun shows are not currently subject to any controls, if the laws change as is being proposed, those sales will then become subject to regulation, as will potentially any private transaction. While it may not make it a commercial transaction, that doesn't mean there isn't regulation that needs to be followed. 

Are these hobbies or charity programs?  From what I can tell, there are folks operating cake subsidy programs for people who either cannot or don't want to pay the full value of cake. Couldn't these people become classified as a charity and then become tax exempt?

Sorry, I couldn't resist.

To me, a few people on the internet saying it's perfectly fine, while a few others are saying it isn't, doesn't mean it is in fact legal. Nobody has provided me with a convincing enough argument that it is OK yet, beyond that it should just be common sense. There are a million horror stories about people doing something that seems perfectly innocent and finding out it really wasn't. What seems logical to some, seems illogical to others. Since there is no clear cut answer anywhere about what constitutes a hobby and what makes it a transaction subject to regulation (apart from the IRS), the only way to know for sure is to have an attorney who is qualified to give an opinion on the actual legality of it give their opinion. While there are two sides in court, one of them is generally trying to interpret the law in a way that was clearly not intended. 

I don't have the means to pay a hefty fine if I'm doing something wrong. And I don't want to jeopardize the business I actually hope to be able to open at some point. Going forward with accepting reimbursement and hoping I'll just get a slap on the wrist if I'm doing something wrong just isn't going to happen for me. I'm not saying those who do are doing anything wrong, just that it isn't the kind of risk I take. 

Hobbies are one thing. Industries which are regulated for the sake of public safety are another. This may be 'the land of the free' in name but there is virtually nothing that there isn't a law about these days. 

I seriously have no problem with others that think it's OK - I just have a weird thing about always making 100% sure I'm staying within the law - having a green card does that to you. I've never even had a traffic ticket. Not that I'm sure all the other drivers wish I had got a ticket for sticking to the speed limit!