Even If You Charge $$ It's A Hobby
Business By -K8memphis Updated 9 Mar 2013 , 2:03am by Annabakescakes
gotcha, Suuske
it's on page 5 of the link
starts at the bottom of the first column
at the paragraph right before the bulleted list including the bulleted list
http://www.irs.gov/pub/irs-pdf/p535.pdf
if anyone is interested in tax speak
plus it says it considers other factors not listed--muy comprehensive
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.
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.
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.
kikiandkyle, may i ask a genuine question? no arguing in any way--my health can't go there srsly
why do you feel you need a qualified legal opinion--i'm just curious---
from what perspective do you not think a hobbyist can accept money for thier hobby?
if private guns sales will be regulated in the future and that might eventually affect all private sales how does that impact hobby reimbursements/transactions now?
personal understanding and legal opinion are almost the same thing--both are vastly open to interpretation--that's why there's two sides in court
all i wanna say is --this is still the home of the free
this just seems troubling to you and i wonder why--is it hard to believe (when you were convinced otherwise) that you can take payment for ingredients/materials under some circumstances?
and you are more than welcome to believe anything you want i'm not trying to change a hair on your head --i'm just very curious
and all this is said in a good way a positive way--no argument--full candor--don't shoot 
you can't see them but the smilie face's hands are raised in surrender 
and sure the regulation that needs to be followed is play fair (in the proverbial perfect world)
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.
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.
very funny!!! 
and true too
except honestly i think it would probably be easier to launch an operation like buddy valastro's (cake boss) than be a 501c3 sq942 ten jqr or whatever all the irs mumbo jumbo is
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.
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.
oh
best of the best to you
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!
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
ahhh i understand where you're coming from now.
for what it's worth as i said upthread because i have made my living previously as a pro-caker if i did a couple cakes a month or several a year i think that's over the line according to the irs
if say for example a heretofore non-pro was in a monthly club and everyone pitched in for the decadent masterpice every month or whatever--that's a hobby baker even though in this case they were actually doing more cakes than moi in the previous example
yes it is an interpretation and if you avoid it altogether there is nothing to interpret--no worries
but i believe that if one gets a chance to do a cake once or twice a year and gets reimbursed for ingredients/materials the authorities will not only not come after you for that it also is not in any way shape or form a business -- if that hobby baker doesn't turn down the potential orders ensuing from that event then yes you are a business
~~~~~~~~~~~~~
there's this one street where it abruptly goes from 55 mph to 40--my husband got a ticket for going 45 but that's another story he can think about speeding and they turn on the sirens hahaha)--but i go from 55 to 40--i can't tell you how many times i've screamed out loud because it looked like some of those idiots are going to rear end me and there's three lanes!!!--i just flip up my rear view mirror now and don't look
I called my county health department this afternoon and they're getting back to me. It seems like none of the people making the rules know the rules, at least not until you've broken them!
I have a street like that near me, I get the most evil looks as I'm slowing to 40 in time for the sign and nobody else is!
I hope it is illegal to get reimbursed for cost of ingredients when you're a hobby baker. I invoke that line ALL THE TIME! It's the best way to get out of doing a cake for someone you wouldn't otherwise gift a cake to! AND I rarely have to make a cake for something I don't already want to.
I'm not saying I won't still claim it is if it isn't!
I called my county health department this afternoon and they're getting back to me. It seems like none of the people making the rules know the rules, at least not until you've broken them!
I have a street like that near me, I get the most evil looks as I'm slowing to 40 in time for the sign and nobody else is!
typically the inspectors are out in the field except first thing in the morning
health inspectors aren't generally known for handling financial aspects
i'd take an evil look any day over screaming my mouth off my face
We're gonna claim it's illegal, even if it isn't, because it's just a convenient lie.
Think about it "Can you make me a sheet cake."
"no sorry but it's illegal"
"Can you make me a wedding cake that looks like me in my wedding dress"
"oh I'm sorry but that's definitely illegal"
"I need a cake to feed 250 people for tomorrow afternoon"
"I know but's it's illegal"
See, if we could just use it for ALL those other things. Who woulda thought regulation could be convenient?!
Can you make me a 7 tier cake for tomorrow, it should only cost around $50 for the ingredients and I'll reimburse you? Sorry - I'm not allowed.
oh i see yeah that
here's some to pull out of the hat when necessary
- i'm a hobby baker and i just work on cakes for my portfolio
- i'm a hobby baker and i don't want to get in trouble with the irs
- i'm a hobby baker and i can only do a couple cakes a year and you ain't it/i ain't wasting one on you
- i'm a hobby baker not an indentured servant
i don't know it is a lot easier to say "it's illegal"
why do we get hounded so much-- dang!
- i'm a hobby baker and i have to limit my activities-- oh i see you fixed your car you should open a garage!!!
A
Original message sent by kikiandkyle
I called my county health department this afternoon and they're getting back to me. It seems like none of the people making the rules know the rules, at least not until you've broken them!
It was the department manager that I spoke to. Didn't get back to me though yet 
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
I would think that if you were making cakes specifically to make money then you are a business. If you take orders, especially from people you don't know, you are a business. If you say you have "customers" then you are a business. If you promote yourself as a cake decorator, cupcake maker, etc. you are a business. If you make a cake because you feel you must because you need the money then you are a business. If you turn down making a cake because you don't have time, the skill to make something specific that someone may want, because you don't like someone or just because you don't feel like it you are not a business.
When I was growing up my mother made cakes for all occasions for family and friends. When she accepted money, which wasn't always, she basically charged for the ingredients and few dollars more, maybe a bit more for very labor intensive cakes. But she didn't solicit people, didn't take orders and didn't do cakes for "friends of friends". She never thought of it as running a business. It was a chance for her to do something she liked without going broke doing it.
A
Original message sent by mariel9898
If you turn down making a cake because you don't have time, the skill to make something specific that someone may want, because you don't like someone or just because you don't feel like it you are not a business.
I would think that if you were making cakes specifically to make money then you are a business. If you take orders, especially from people you don't know, you are a business. If you say you have "customers" then you are a business. If you promote yourself as a cake decorator, cupcake maker, etc. you are a business. If you make a cake because you feel you must because you need the money then you are a business. If you turn down making a cake because you don't have time, the skill to make something specific that someone may want, because you don't like someone or just because you don't feel like it you are not a business.
When I was growing up my mother made cakes for all occasions for family and friends. When she accepted money, which wasn't always, she basically charged for the ingredients and few dollars more, maybe a bit more for very labor intensive cakes. But she didn't solicit people, didn't take orders and didn't do cakes for "friends of friends". She never thought of it as running a business. It was a chance for her to do something she liked without going broke doing it.
I don't quite follow.
I turn down cakes rather frequently. I refuse to do naughty cakes or boob cakes, I don't like them and don't like working on them. Does that suddenly make my business null and void?
If someone brought me a picture of an 7 foot tall cake, sculpted to look like Shaq, I would turn it down because I don't have the skill set to handle something like that on my own, again, that does nothing to affect my business, except show that I know my parameters.
Personally, I think someone turning down cakes outside of their skill set is a sign of good business management. I get where your coming from, unfortunately there is no legal merit to it.
In any case, it has nothing to do with what people's personal feelings are towards what constitutes a business. It has to do with the regulations where you live.
I don't quite follow.
I turn down cakes rather frequently. I refuse to do naughty cakes or boob cakes, I don't like them and don't like working on them. Does that suddenly make my business null and void?
If someone brought me a picture of an 7 foot tall cake, sculpted to look like Shaq, I would turn it down because I don't have the skill set to handle something like that on my own, again, that does nothing to affect my business, except show that I know my parameters.
Personally, I think someone turning down cakes outside of their skill set is a sign of good business management. I get where your coming from, unfortunately there is no legal merit to it.
In any case, it has nothing to do with what people's personal feelings are towards what constitutes a business. It has to do with the regulations where you live.
lol! I made a boob cake once, at a place i used to work, and it was awkward because we used buttercream, and the viva method, so it was spherical, and the only way to smooth it was with your hand and the icing there is very dry so I had to heat it up with my hand, over and over to "buff" the wrinkles out...
weird! My friend took a picture and sent it to my husband, lol! I actually told them I didn't want to do them anymore. Traumatized me, hahaha!
I would think that if you were making cakes specifically to make money then you are a business. If you take orders, especially from people you don't know, you are a business. If you say you have "customers" then you are a business. If you promote yourself as a cake decorator, cupcake maker, etc. you are a business. If you make a cake because you feel you must because you need the money then you are a business. If you turn down making a cake because you don't have time, the skill to make something specific that someone may want, because you don't like someone or just because you don't feel like it you are not a business.
When I was growing up my mother made cakes for all occasions for family and friends. When she accepted money, which wasn't always, she basically charged for the ingredients and few dollars more, maybe a bit more for very labor intensive cakes. But she didn't solicit people, didn't take orders and didn't do cakes for "friends of friends". She never thought of it as running a business. It was a chance for her to do something she liked without going broke doing it.
I also turn down cakes for religious purposes. I will not do naughty, or body part, or anything I do not want to do. I will not do cakes depicting hate-groups or other things I feel strongly about. And while some of the people ordering the cakes will fall into those "protected classes" I will not do the cake depicting it, they can order any cake I have done, or any cake with flowers or stripes or whatever custom cake they would like, except the banned ones, but I will not violate my own beliefs to hold up someone else's.
Pretend my example is an old lady, (since I LOVE old ladies*, it is ludicrous, and no one should be offended ;-D) I will not make a cake depicting afghans, crochet, or denture cream or blue hair dye. I will, however make an elegant wedding cake, or their grandbaby's Elmo birthday cake. KWIM?
*seriously, I love them! I had my grandma teach me how to knit and crochet and paint ceramics when I was 8 and younger, she is 80 now, and we speak weekly. I also use to volunteer in nursing homes, passing ice, feeding people, and playing cards and fetching blankets and rubbing shoulders and arthritic hands and helping them get into their nighties when I was only 11, 12, 13 and 14 :-) I can't wait to be good and old, I am going to pretend I am senile and tell it like I see it. lol
AAnti-discrimination laws apply to the attributes of the customer, not the product. Every customer has characteristics that fall into a protected class, since we all have race, color, gender, etc.
It would be perfectly legal to refuse to make a denture cream cake for any customer. The illegal situation would be if you made the denture cream cake for an old customer but refused to make the same cake for a young customer (or vice versa).
This is another one of those areas that only applies to transactions involving the general public, so if you make cakes as a hobby and do not sell or advertise to the public then you would not be subject to anti-discrimination laws.
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