When Is A Business Not A Business?
Business By RheaCakeQueen Updated 25 Apr 2010 , 1:58am by Rose_N_Crantz
Okay, so I live in a state that does not license home kitchens, and right now I am not really interested in starting a cake business, but I love making and decorating cakes. Right now I am getting lots of requests from friends and family and friends of friends to make cakes for them... which I am gladly doing and am pretty much charging just for the materials. I would like to charge more than that because it is time consuming and time away from my family, but I love doing it...
... so my question is when does it become a business and a no-no. I am not advertising, I have no set prices, I am not soliciting business from anyone directly other than mentioning that I love decorating cakes in conversation =o)
Cheers!
Rhea
what we think is irrelevant
the tax man would see it as you making money he should have a cut of, therefor to them you are a business.
the health dept would see it as you needing to follow laws and regulations, therefor, you are a business.
the insurance companies and lawyers would see you as needing cover for selling a product, therefor, business.
it does suck!
xx
Unless you are giving away all of those cakes for free, then you are already a business. If you have accepted any form of payment (cash, check, ingredients, gift card to your favorite store, etc) then you have completed a business transaction. If you are doing this on a regular basis (which it sounds like you are) then you are, in fact, a business regardless of whether you advertise or not.
If you want to continue, then you really need to see what it would take to become legal in your state. All it takes is for one "friend of a friend" to tell someone who happens to work in the health department "Hey, I got this great cake from so and so." Not someone you want to be referred to.
no matter what you call it.... even if they are just giving u the $ for igredients... it's a usiness transaction....
but if your cakes are causing all these people to want u to do their cakes... maybe u should go ahead and make a career out of it...
Good Luck!
You are definitely a business! Money is exchanging hands for a product you are dishing out!
Thank you for all your answers, but one thing that no one seems to be taking into consideration is that under a long-standing IRS rule, you're considered a "business" if you made a profit in three of the past five years, including the current year. So as long as I am not making a profit (which in itself is the total cost of making a cake minus the amount I am paid) then the IRS would not consider me a business.
I actually am a small business in a completely different industry and this will be the last year I am filing as a business because after subtracting all the things I can write off, I am no longer making a profit in the eyes of the IRS and therefore am no longer considered a business... yet I am still working and earning, according to the IRS, a pittance =o)
The difference I was wondering about is because cakes are food and what I do is not... just because money changed hands does not mean it was a business... a profit has to be made and it needs to be over a certain amount for the year at that (which I believe is $400).
The difference between a business profit and a hobby profit is definitely a fine and fuzzy line, but people have sued the government regarding the difference and won, so there is a distinction that I think is being lost here.
when it comes to food, it's not just about the IRS. The Health Department (or Dept or Ag depending on what state your in) doesn't care if you're making money or not, you are providing food in an unlicensed location and receiving compensation for it (whether it be monetary, ingredients, gifts like mentioned above)
Thank you for all your answers, but one thing that no one seems to be taking into consideration is that under a long-standing IRS rule, you're considered a "business" if you made a profit in three of the past five years, including the current year. So as long as I am not making a profit (which in itself is the total cost of making a cake minus the amount I am paid) then the IRS would not consider me a business.
I actually am a small business in a completely different industry and this will be the last year I am filing as a business because after subtracting all the things I can write off, I am no longer making a profit in the eyes of the IRS and therefore am no longer considered a business... yet I am still working and earning, according to the IRS, a pittance =o)
The difference I was wondering about is because cakes are food and what I do is not... just because money changed hands does not mean it was a business... a profit has to be made and it needs to be over a certain amount for the year at that (which I believe is $400).
The difference between a business profit and a hobby profit is definitely a fine and fuzzy line, but people have sued the government regarding the difference and won, so there is a distinction that I think is being lost here.
You are correct in the "non food" aspect of it. Example, my husband and son raced RC cars... they would sell old cars to buy new ones. Even though money is being exchanged, there is no profit being made.
When you are talking about food, there is a whole different set of rules there. In order for any money to exchange hands for food, most states require you to be licenesed by the health dept. So really, the main issue isn't the IRS, it's the health dept. Not to say the IRS wouldn't get their cut too LOL.
Can you find a commercial kitchen you can use part time? Or your local Church's kitchen? Would be a great way to sell cakes without it costing you an arm and a leg to get started.
Yes, we're not talking about IRS rules here. We're talking about food licensing . And yes, if you're providing food for people that will be eaten off your premises, technically you're a caterer. And a business. And you have to be licensed as a business by whatever agency licenses food businesses.
Your post started "When is a business not a business?" and then asked for advice. Some very knowledgable and experienced people took the time to answer your question. It seems, however, that you already feel that you have the answer.
I do appreciate the time everyone took to answer, but most of the answers consisted of "if money exchanged hands then you are a business" but technically that is not true in all cases, that is what I was pointing out. I don't have as much knowledge when it comes to food businesses so that is why I was asking, but I wanted more food specific replies. Maybe I was not entirely clear, for that I apologize.
Really, when it comes down to it, whether it is a business or not is really irrelevant. Food is a different beast =o) I understand that now.
Thank you for all your answers, but one thing that no one seems to be taking into consideration is that under a long-standing IRS rule, you're considered a "business" if you made a profit in three of the past five years, including the current year. So as long as I am not making a profit (which in itself is the total cost of making a cake minus the amount I am paid) then the IRS would not consider me a business.
I don't know what state you're in, but in TX whether you make a profit or not, you're a business if you accept money for services and/or goods. We had a salsa business for a couple years that never got to the actual "profit" stage and we still had to file business tax forms, report our income and loss from the business, etc.
The way I understand the 3 out of 5 years profit rule- it is to separate hobbies from businesses. It is to keep people from deducting there hobby expenses as a tax deduction. If you accept $ or anything of value, then you have a business. When you fill out your business tax returns that is when the government decides if you have a profit or a loss. You can't just decide you don't make a profit and so not fill out a tax return. Well, I guess you can as long as you are prepared to accept any consequences that may or may not come along.
Most people are trying to prove they made a profit at least a few years so they can claim their business deductions without additonal hassle with the IRS.
I think the health dept. is the biggest worry.
when is a business not a business...
when it's a charity
but then again even some charities are businesses
goods, services, or money in exchange for something is business
which really doesn't make sense for those who have others purchase the ingredients for the product...one buys the ingredients and then hands them to another who then returns all of the goods ....just reaaranged...kinda like, spilling your shopping bag at someone's house and they pick it all back up for you and hand you back the bag except with the bread on the bottom and the fruit on the top...
Your post started "When is a business not a business?" and then asked for advice. Some very knowledgable and experienced people took the time to answer your question. It seems, however, that you already feel that you have the answer.
I do appreciate the time everyone took to answer, but most of the answers consisted of "if money exchanged hands then you are a business" but technically that is not true in all cases, that is what I was pointing out. I don't have as much knowledge when it comes to food businesses so that is why I was asking, but I wanted more food specific replies. Maybe I was not entirely clear, for that I apologize.
Really, when it comes down to it, whether it is a business or not is really irrelevant. Food is a different beast =o) I understand that now.
You were asking what makes a business a business. People answered with when money exchanges hands. You mentioned that you "pretty much just charged for ingredients". That's money exchanging hands. And a lot of people here have emphasized that you need to get licensed through your state to be able to sell food to the public. When it comes to food, that comes before profit/loss/IRS dealings.
The only way you'll be able to make cakes for people in a state that does not allow home bakeries, then you'll have to give them away. No money for ingredients, no favors for something for you in the future, no donations, nothing. Trust me, I understand what you're thinking. I live in such a state and I've thought long and hard about how to get around this and there is no way.
Please don't be offended by my brashness, but from what I've read it seemed people had answered your question but you still seemed a little confused.
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