How to Build a Cottage Food Business, Not a Hobby

May 12, 2021
June 24, 2022

What’s the difference between a business and a hobby?

A hobby is something you do for fun, enjoyment, or satisfaction.

A business is something you do to earn money. Your goal is to make a profit.

At the Cottage Food Conference in April, John Ivanko of Renewing the Countryside discussed the difference between hobbies and businesses as it relates to cottage food operators. His presentation focused on helping cottage bakers, canners, and business owners think about their businesses as that — a business.

Understanding Cottage Food Business Expenses

The first key difference between a business and a hobby? Businesses are able to deduct their losses, which allows independent food artisans to offset some of their expenses. This can also lessen the income taxes that a cottage business owner has to pay. 

The IRS determines whether your activity is a hobby or a business. To make a case that you’re a business, you should do a few things: 

According to the IRS, a business makes a profit three out of every five years. If you meet that criteria, you’re probably running a business.

The IRS makes it very clear that expenses must be “ordinary and necessary” in order to be deductible, so don’t get too excited about being able to deduct everything. For bakers, an ordinary expense would be flour and butter; a necessary expense would be a canopy tent for your farmers’ market stand. A product display could also be deductible. 

What’s not deductible? A fridge that your family also uses (not just your business), or a leisure trip. Consider using a business credit card for all of your business expenses to keep things clean. 

Tracking Cottage Food Business Expenses

To properly keep track of financial transactions and expenses, many cottage food producers use software like Quickbooks — or simple spreadsheets. 

The first step in tracking your business expenses is keeping your receipts. Some business owners organize their receipts in envelopes, divided up by quarter. Others take photos of receipts and track them digitally. The best expense tracking system is the one that you use. 

In addition to tracking receipts for expenses, you should create a profit and loss statement to keep track of the revenue coming in and your expenses going out (like advertising, supplies, travel, or mileage for deliveries). At the end of the year, if your net profit is over $400, you must pay taxes to the IRS, John says. Many cottage cooks also have to pay self-employment taxes. 

What Counts as an Expense?

Expense management can be confusing — and artisans can enter dangerous territory with the IRS if they attempt to claim non-business expenses as deductible. So what counts as a business expense? If you use these items for your business, they could be considered valid business expenses: 

It’s the perfect time to start a business — and starting your homemade food business can be a fun way to make some money. Your experience and a great product are all that matter. Good luck on your business ventures.

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