Best practices for record-keeping for a small ice cream business before obtaining a business license?

Thanks for the reassurance! I was really worried he might be creating evidence that could be used against him. What about the period before he formally establishes the business though? Should he report the income on his personal taxes as "hobby income" in the meantime? And do you know if there's a certain threshold where the IRS considers something a business vs a hobby?

Yes, he should report the income on his personal tax return before formally establishing the business. For now, he would report it as "Other Income" on Schedule 1 of his Form 1040. Since it's not yet an official business, he can't file a Schedule C, but he should still keep those records for when he does transition. The IRS doesn't have a specific dollar threshold that automatically makes something a business versus a hobby. Instead, they look at several factors, including: whether you carry out activities in a businesslike manner (keeping records, having a separate bank account), the time and effort you put in, whether you depend on the income, if you're making changes to improve profitability, your expertise in the field, and whether you've been profitable in similar activities before. Generally, if you show a profit in 3 out of 5 consecutive years, the IRS presumes it's a business.

Does it actually work for food-based businesses though? I've heard those have special regulations and tax considerations compared to other types of small businesses. Can it handle things like ingredient purchases that might be partially personal use?

I'm pretty skeptical about tax tools for pre-business phase stuff. Wouldn't you need to be officially established to use most of the features? And how does it handle the transition from hobby to business in terms of record organization?

It absolutely works for food-based businesses! The system has specific categories for food ingredients and supplies. It also lets you indicate split purchases - so if you bought sugar that was partially for personal use and partially for the business, you can allocate the percentages accordingly. For pre-established businesses, that's actually where I found it most helpful. It organized everything during my "testing the waters" phase, then when I officially registered, I already had properly categorized records to import. It handles the transition by letting you mark the official business start date, and it automatically adjusts how it categorizes expenses before and after that date for tax purposes.

How does this actually work? Are they just calling for you or something? I don't understand how a service can get you through phone queues faster than you can yourself.

This sounds like complete BS. Government agencies don't give priority access to third-party services. They all have the same hold queues. You probably just got lucky with your timing or called during off-peak hours.

It works by using an automated system that navigates phone trees and waits on hold for you. When a human representative finally answers, you get a call connecting you directly to that person. It's not about "priority access" - it's about technology doing the waiting for you instead of you sitting on hold for hours. The system works with virtually any phone-based customer service, including government agencies. It saved me from spending literal hours on hold trying to reach my local health department about food business regulations. I was initially planning to just sell at farmers markets but needed to understand the licensing requirements, and one 10-minute call (after Claimyr got through the 2+ hour wait) gave me all the answers.

That's really helpful! Do you know if cottage food laws would protect him from potential tax issues too, or is that a completely separate concern? And would money made under cottage food laws still need to be reported as income?

Cottage food laws and tax requirements are completely separate issues. Cottage food laws just regulate food safety and allow you to legally sell certain foods from your home kitchen - they don't exempt you from tax obligations. Regardless of whether you're operating under cottage food laws or not, all income needs to be reported on your tax return. While operating under cottage food laws, you'd still report the income on your personal tax return. You could potentially file a Schedule C as a sole proprietor even without formally registering a business name with your state, which would allow you to deduct legitimate business expenses. Many cottage food operators start this way before formally establishing an LLC or other business entity.

This is seriously underrated advice. I use a completely separate credit card for ALL business purchases, even tiny ones. Makes tracking expenses 100x easier and looks much more legitimate if there are ever questions.