Home-based baking is a wonderful hobby for many bakers; however once you start charging for your baked goods or you allow someone to pay you money for the dessert, this may changes your baking venture from hobby to a for profit business.The key motivating factor here is whether your motive is to bake for profit? What is motive? Motive is defined as an emotion, desire, physiological need, or similar impulse that acts as an incitement to action. You are baking because your motive is to make money. Is it?
The meaning is not “Wow!, this is really cool, I can make money doing something I love, decorating cakes or baking pies”, in fact, motive is more like “I’m doing this (baking these cakes, making these pies) with the intention of making a profit and if I can’t make a profit doing this I’ll find something else to do that will make me a profit.”
Do you see how the motive is different in these to examples? In the former, the motive for the activity was the doing – the enjoyment inherent in the activity itself (I just love to decorate beautiful cakes).
Making money was an incidental benefit. In the latter, the motive for the activity was to make a profit. That’s not to say that you can’t enjoy what you choose to do to make that profit, it’s just that your primary objective must be to make a profit such that if this venture is not profitable, you would presumably choose not to pursue it. With a hobby, on the other hand, even if the activity was inherently unprofitable, it is something you would choose to do anyway.
So, how does the IRS decide whether you truly have a profit motive?
Quite simply, the IRS will look at your tax returns for the last 5 years and if you made a profit during at least 3 of those years, you will satisfy the profit-motive test.
If you don’t meet this test or if your business is new and you haven’t filed 5 tax returns, then the IRS will apply a subjective standard. Learn more by reading Is Your Hobby a For Profit Endeavor
It is also recommended that you consult a Certified Public Accountant or Tax Expert if you have additional questions.
