tiffany0727 Posted 8 Nov 2013 , 10:40pm
post #1 of

AHey!! I was wondering if I could get some questions answered regarding starting up!! Do you need an inspection if you are home based and maybe doing four cakes a month? Really at a hobby state, but want to do it right. I am in NC. Second, going to my first business event at my husband's work. Should I offer samples or raffle off a cake? Thanks!

27 replies
Norasmom Posted 8 Nov 2013 , 11:23pm
post #2 of

Yes, contact your local health inspector for your kitchen and then they will tell you what you need to be certified.

 

If you are just getting started and are still at the hobby level, I suggest making cakes for friends and putting them on a Facebook page.  I get many orders from Facebook .  I am a hobbyists who charges, I am not wanting to go big or own a bakery, I just love being creative and making cakes.

 

Give out free samples when you have leftover batter and buttercream, that way you aren't spending too much to promote.

 

Good luck and have fun!!

tiffany0727 Posted 8 Nov 2013 , 11:30pm
post #3 of

AYou sound like me. I just want some extra blow money. I don't plan on making a bakery in town or anything like that. I do have a facebook and have been posting some pictures! I haven't really started promoting myself. Want to dot my i's and cross my t's . I just wasn't sure if I even need inspection if I was at hobby level, but charged for my cakes. Thanks for the advice!

Stitches Posted 9 Nov 2013 , 2:36am
post #4 of

Quote:

Originally Posted by tiffany0727 

I just want some extra blow money.

 I think that refers to extra money to buy a certain type of drug, no....

Norasmom Posted 9 Nov 2013 , 3:13am
post #5 of

Goodness I hope not.  One cannot support a drug habit by just baking cakes.

 

I think what she meant was "pin" money…just extra money for herself to spend on life's little extras.

Smckinney07 Posted 9 Nov 2013 , 4:41am
post #6 of

AThe Cottage Laws are different in each State, definitely start with your Health Department. Even if your just selling a few cakes each month you're still technically in business since your charging.

In my state, Illinois, for example you cannot make direct sales from home only at farmers markets and other designated areas unless you have a separate kitchen, food safety certification, and a bunch of other things including paying taxes (fun, fun).

I imagine at the very least you'll need a ServSafe or Food Safety Certification, tax id, and some sort of inspection. Some states have a limit on the income you bring in, certain labels you need to place on items, etc.

Just to be clear, I don't personally care if you do any of these things :) just trying to be helpful. I started with my local HD, they gave me a packet with checklists and other helpful tools. They had an inspector come over (free of charge) to explain what modifications I needed to make to my home, floor plan layout, things I didn't need to purchase, etc. they are very helpful!

Hopefully, you won't have to jump through as many hoops.

tiffany0727 Posted 9 Nov 2013 , 12:42pm
post #7 of

AHaha totally NOT what I meant! Spending money for my kiddos and go out to eat money. Oh well! Thanks for your input ladies! I will check into it on Monday foe sure and be doing some research over the weekend.

kikiandkyle Posted 9 Nov 2013 , 2:03pm
post #8 of

AA quick google search for "cottage food law nc" brought up several useful sites, including this one:

http://cottagefoods.org/laws/usa/north-carolina/

If you will be selling out of your home that usually comes under the cottage food umbrella. That is probably a good place to start your research.

MimiFix Posted 9 Nov 2013 , 6:27pm
post #9 of
Quote:
Originally Posted by Norasmom 
 

I am a hobbyists who charges

 
Very interesting. I didn't know that was legal. How does this work with the IRS - do you still fill out the Schedule C or are hobby sellers exempt? 
-K8memphis Posted 9 Nov 2013 , 6:51pm
mimi, i am not a tax expert by any means--but the language in schedule c instructions and elsewhere i think shows that the irs does recognize a distinction between hobbyists and businesses and they have distinctions for starting up and bladeeblabla--taxes make me very tired but here's the language--
 
Quote:
 

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Schedule C (Form 1040), Profit or Loss From Business

Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21, or Form 1040NR, line 21.

 

 

you still have to report it--there's instructions for that somewhere--

 

so to me, randomly doing a cake or two for someone for pay does not make it automatically a business to the irs--it's a judgement call  but they do recognize the hobbyist--not that the caker doesn't need to meet all the requirements of their locality as well--

 

but yeah sporadic activity does not qualify as a business although you still have to report it--

MimiFix Posted 9 Nov 2013 , 7:06pm

Oh, how very interesting. I appreciate all your help, Kate. So according to the IRS, income must be reported - whether it's on the Schedule C or another line on the 1040. I wonder if everyone here knows that. ;-)

 

My next question would be, how does the local health department differentiate between the "hobbyist" and the legal business. Just asking, cause I do like to understand everything. And I'm sure others want to know, too. 

jason_kraft Posted 9 Nov 2013 , 8:02pm

ANot only must hobby income be reported, but the rules for deducting expenses against hobby income are much more restrictive, since hobby expenses are considered miscellaneous expenses on Schedule A and only expenses above 2% of your adjusted gross income can be applied to reduce hobby income. So a hobby could potentially owe tax even if they have a negative net income.

http://www.nolo.com/legal-encyclopedia/can-you-deduct-your-expenses-from-hobby.html

Generally health depts will consider someone a hobbyist if they only sell to friends and family, but as soon as you sell to the general public or advertise (via FB, a web site, or word of mouth) that's a business and licensing requirements kick in. YMMV so it's best to contact your local health dept if you have questions.

-K8memphis Posted 9 Nov 2013 , 8:08pm

much more important to me is the distinction that hobbyists can receive money for their hobby and it remain a hobby according to the irs---a certain level of business activity has to be attained to be qualified as a business leaving tons of room for the average hobbyist to accept money for their products--depending on the local rules.

 

the qualification  would be different for me for example because i have been a professional cake decorator--the bar would be lower for me 'to be a business'  than for the average hobbyist--

PumpkinTart Posted 9 Nov 2013 , 11:43pm

Quote:

Originally Posted by -K8memphis 
 

much more important to me is the distinction that hobbyists can receive money for their hobby and it remain a hobby according to the irs---a certain level of business activity has to be attained to be qualified as a business leaving tons of room for the average hobbyist to accept money for their products--depending on the local rules.

 

the qualification  would be different for me for example because i have been a professional cake decorator--the bar would be lower for me 'to be a business'  than for the average hobbyist--

The IRS doesn't base the distinction of whether you are a business on the level of activity or a certain income threshold.  They look at your intent.  If you intend to make a profit, then it's a business; if you don't intend to make a profit, it's a hobby.  Regardless, you have to report all of your income.  It is actually in your best interest to file a Schedule C and claim your business income because you can write off your expenses.  A hobbyist typically cannot deduct expenses, unless they file Schedule A, and even then you lose the first 2%.

 

The presumption of a profit motive (i.e. your intent) comes into play if you file your taxes for several years and always claim losses and use these losses to offset your other taxable income.  For example, if you "lose" $10,000 a year for three years straight and use these losses to offset the wages you earn as an employee, thereby lowering your taxable income, the IRS can audit you and disallow these losses.  The theory is that a reasonable person would not continue to do something as a business that was losing money every year.  In this case, they would consider you a hobbyist and disallow ALL of your expenses or limit them to the amount you can claim on your Schedule A.  Since a majority of taxpayers don't itemize their deductions on Schedule A, the impact of being ruled a hobbyist means the IRS will tax you on 100% of your cake income--NOT your profit, your gross income.  Ouch!

jason_kraft Posted 10 Nov 2013 , 12:00am

A+1 to PumpkinTart's post. This info is also available directly from the IRS: http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

It's ironic that some of the strategies that are employed to evade health dept requirements (such as only charging for ingredients) can cause serious financial issues on the IRS side.

-K8memphis Posted 10 Nov 2013 , 12:10am
Quote:
Originally Posted by PumpkinTart 
 

The IRS doesn't base the distinction of whether you are a business on the level of activity or a certain income threshold.  They look at your intent.  If you intend to make a profit, then it's a business; if you don't intend to make a profit, it's a hobby.  Regardless, you have to report all of your income.  It is actually in your best interest to file a Schedule C and claim your business income because you can write off your expenses.  A hobbyist typically cannot deduct expenses, unless they file Schedule A, and even then you lose the first 2%.

 

The presumption of a profit motive (i.e. your intent) comes into play if you file your taxes for several years and always claim losses and use these losses to offset your other taxable income.  For example, if you "lose" $10,000 a year for three years straight and use these losses to offset the wages you earn as an employee, thereby lowering your taxable income, the IRS can audit you and disallow these losses.  The theory is that a reasonable person would not continue to do something as a business that was losing money every year.  In this case, they would consider you a hobbyist and disallow ALL of your expenses or limit them to the amount you can claim on your Schedule A.  Since a majority of taxpayers don't itemize their deductions on Schedule A, the impact of being ruled a hobbyist means the IRS will tax you on 100% of your cake income--NOT your profit, your gross income.  Ouch!

 

how the irs operates is not my point of reference--i am actually referencing the previous misbelief on this forum that if one were to accept money for doing a cake then that alone makes you a business that you are no longer a hobby caker--and the irs doesn't agree with that--

 

all the irs bladeebla is not my point at all--not my thing--

 

that the irs allows wiggle room for hobbyists to accept money and not be a business is my point--just that small, simple and pointed--a little parenthetical--whether it is best or safe or deductible --not my point---and there are local ordinances to have to comply with as well--but one can accept money for a hobby and not be a business according to the irs--

 

then beyond that there's more to the story of how to be in good standing with all the authorities of which they are legion but i'm not questioning any of that--

 

one can be a hobbyist and accept money for your products

kikiandkyle Posted 10 Nov 2013 , 12:37am

AThe IRS says you can be a hobbyist and accept money for your hobby, but the IRS does not govern local health departments, or city ordinances, or HOAs, so while your business can be a hobby in the eyes of the IRS, they do not speak for everyone.

-K8memphis Posted 10 Nov 2013 , 12:44am
Quote:
Originally Posted by kikiandkyle 

The IRS says you can be a hobbyist and accept money for your hobby, but the IRS does not govern local health departments, or city ordinances, or HOAs, so while your business can be a hobby in the eyes of the IRS, they do not speak for everyone.

that's true and i said that in each of my posts

Norasmom Posted 10 Nov 2013 , 2:36am

I'm a total hobbyist but I have still earned a decent amount of money doing cakes.  I will be doing a schedule C, I think this is important even if you only bake a few cakes each year.  It's the honest thing to do.  Thank goodness my husband is in finance, he has given me a tremendous amount of direction and will help with the appropriate deductions.

 

Even though I say it's the honest thing to do, I won't pass judgement on those who take cash here and there from friends and family because it's friends and family.:-D

jason_kraft Posted 10 Nov 2013 , 5:37am

A

Original message sent by -K8memphis

that the irs allows wiggle room for hobbyists to accept money and not be a business is my point--just that small, simple and pointed--a little parenthetical--whether it is best or safe or deductible --not my point---and there are local ordinances to have to comply with as well--but one can accept money for a hobby and not be a business according to the irs--

It's not really about the IRS "allowing" anything...all income must be reported in one form or another, whether the income comes from a business, a hobby, or selling illegal drugs (hence the "income from illegal activites" line on the 1040).

Having your income treated as coming from a hobby instead of a business from the perspective of the IRS is entirely disadvantageous to you and is certainly nothing to aspire to. The ideal situation for a hobbyist would be to limit the scope of your sales (no advertising, no FB page offering products for sale, no web site, no accepting orders from the general public) so as to be treated as a hobbyist by the health dept, but hit enough of the points in the hobby vs. business link above to be treated as a business by the IRS. The exception is if you already have 2% AGI in misc. itemized deductions from sources other than hobby expenses, in which case the negative impact of being classified as a hobby would be minimal.

sixinarow Posted 10 Nov 2013 , 5:55am

Quote:

Originally Posted by -K8memphis 
 

 

how the irs operates is not my point of reference--i am actually referencing the previous misbelief on this forum that if one were to accept money for doing a cake then that alone makes you a business that you are no longer a hobby caker--and the irs doesn't agree with that--

 

all the irs bladeebla is not my point at all--not my thing--

 

that the irs allows wiggle room for hobbyists to accept money and not be a business is my point--just that small, simple and pointed--a little parenthetical--whether it is best or safe or deductible --not my point---and there are local ordinances to have to comply with as well--but one can accept money for a hobby and not be a business according to the irs--

 

then beyond that there's more to the story of how to be in good standing with all the authorities of which they are legion but i'm not questioning any of that--

 

one can be a hobbyist and accept money for your products

Call it what you want, the point to take away from this thread is: whether you are a hobby or business, you STILL have to report sales to the IRS and you STILL need to be in compliance with all local requirements and laws to accept money for the sale of goods. I think this could be very confusing for newbies reading this thread who might be thinking they can claim they are hobbyist to get around local regulations or accountability while still being able to charge money for selling cakes. 

MimiFix Posted 10 Nov 2013 , 12:26pm
Quote:
Originally Posted by sixinarow 
 

Call it what you want, the point to take away from this thread is: whether you are a hobby or business, you STILL have to report sales to the IRS and you STILL need to be in compliance with all local requirements and laws to accept money for the sale of goods. I think this could be very confusing for newbies reading this thread who might be thinking they can claim they are hobbyist to get around local regulations or accountability while still being able to charge money for selling cakes. 

 

People like to rationalize their behavior. It's quite unfortunate that threads like this make CC appear to be complicit.

-K8memphis Posted 10 Nov 2013 , 1:29pm

there are many agencies to contact and comply with to do it right--if it is even possible in each individual area--and if all the conditions are met hobbyists can sell cakes without being classified as a business--

 

this is in regard as i stated to the previous rigorously held error when some of us would say that one sale of anything means you are a business--hoot and holler but one or two sales does not a business make--i still see it occasionally--

 

this is a very narrow distinction that i am making in regard to the previous egregiously erroneous definition of a business--maybe some of you were not here then--tack on all the 'what ifs' and 'oh nos' you can think of but but selling food sporadically is not by any means the birth or definition of a business --

 

of course there's a right way and a wrong way to do it--

-K8memphis Posted 10 Nov 2013 , 1:50pm
Quote:
Originally Posted by sixinarow 
 

... I think this could be very confusing for newbies reading this thread who might be thinking they can claim they are hobbyist to get around local regulations or accountability while still being able to charge money for selling cakes. 

 

if there are newbies who think that from reading this thread then they did not read it--even the quote i posted from the irs talks about reporting non-business income--many many posts give all the information--hobbyists have obligations too--they are just not businesses

 

the op SAYS she's a hobbyist who want to DO IT RIGHT--what are you reading into this? how could anyone arrive at this conclusion of yours from the information in this thread?

 

tiffany0727, a couple questions for you, please--

 

from the thoughtful reading of this thread do you think you can sell cakes without contacting local agencies first? (this is a really obvious question and i apologize for asking because you started the thread saying you want to do this right--but the question has come up that the thread is confusing--are you confused?)

 

is there any information in here that has now led you to believe that you can sell cakes without reporting the income to the irs?

-K8memphis Posted 10 Nov 2013 , 2:26pm

in 24 posts i counted up about 12 times that 'contacting local agencies/health department' has been advised and the proper irs reporting has been mentioned about 14 times--several in depth explanations--that 's fully sufficient to get those points across to anyone who really reads them--

Godot Posted 10 Nov 2013 , 3:08pm

A

Original message sent by -K8memphis

in 24 posts i counted up about 12 times that 'contacting local agencies/health department' has been advised and the proper irs reporting has been mentioned about 14 times--several in depth explanations--that 's fully sufficient to get those points across to anyone who really reads them--

Actually it's not fully sufficient because most people are A: too stupid to get it, or B: don't want to know so they don't even read it.

AZCouture Posted 10 Nov 2013 , 3:25pm

AGodot; killin' threads since 2012. Goes down smooth, without any bitter aftertaste.

SystemMod1 Posted 10 Nov 2013 , 4:12pm

Cake Central would like to advise the OP and anyone reading that members here are not CPAs, attorneys, nor do they work for any government agency.  They are not qualified to advise you about IRS rules or laws in your area.  They are random people on the internet.  Please seek in-person council from your local Health Department or County/Municipal/State Business office as to rules and regulations in your area and contact a licensed CPA about how you report income from any sales.

 

This thread has run it's course.  Thank you for your participation.

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