Dog related tax deductions

As it seems apparent that taxes will increase to pay for Iraq, Afghanistan, Obamacare, stimulus packages, automotive bailouts, etc, I have been looking for every available legal tax deduction in my business and personal life. Maybe there are CPA's on this site that can supply some helpful advise. If you sell a litter of pups and claim the income, then you should be able to claim the training, supplies, food, birds, kennels, etc as expenses if this is a "business". How do others handle this situation? Has anyone been audited in this area?

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Originally Posted by labdoc

As it seems apparent that taxes will increase to pay for Iraq, Afghanistan, Obamacare, stimulus packages, automotive bailouts, etc, I have been looking for every available legal tax deduction in my business and personal life. Maybe there are CPA's on this site that can supply some helpful advise. If you sell a litter of pups and claim the income, then you should be able to claim the training, supplies, food, birds, kennels, etc as expenses if this is a "business". How do others handle this situation? Has anyone been audited in this area?

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try searching the forum. I know this has been discussed before. I've asked my tax guy about using the kennels and training as deductions after hearing of Todd Palin using his snowmobile racing hobby as a huge deduction...and was told that the IRS assumes all such set ups are scams until proven otherwise. Often by YOU in the form of an audit!:-x:-x So I didn't go there.

A lot of the IRS reaction is likely to be determined by whether you show a profit or a loss. If a loss, then there will be a question as to whether or not your operation is clearly organized as a business. For example, do you breed repeatedly. Do you breed all the dogs that you are training or at least all dogs that meet a specific standard of performance. Are your training activities clearly related to the manner in which you promote sales. The presumption is that the activity is a hobby and not deductible unless the expenses are clearly related to a business process geared to make money. Do you advertise and have promotional materials (website, business cards, letterheads) that clearly indicate the nature of your business and illustrate the value of the activities that you are trying to deduct? Trainrs routinely deduct training expenses and are not questioned because people pay them for the training.

You can write off hobby expenses only up to the amount that they offset hobby income. You can NOT claim a hobby loss.

I seem to recall a rule about the need to be profitable once in seven years if you expect to be regarded more than a hobby farmer. BTW, Farmers don't ever get to expense (or depreciate) the value of their land. I believe it helps to demonstrate a profit motive if you can show advertisements that you have run. If you think about it. Why shouldn't your expenses be deductible if you ever dream of getting that one in a 10,000 dog that everyone would want to pay you stud fees for. I can guarantee that if you were so lucky the IRS would get THEN consider themselves in business with you. Working to improve a breed is laudable work. Let's not sell ourselves short. Also remember if your hobby does become a business you can always sell your used hobby gear to the business and deduct it that way. I suppose the same would apply to your dogs.

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Originally Posted by labdoc

As it seems apparent that taxes will increase to pay for Iraq, Afghanistan, Obamacare, stimulus packages, automotive bailouts, etc, I have been looking for every available legal tax deduction in my business and personal life. Maybe there are CPA's on this site that can supply some helpful advise. If you sell a litter of pups and claim the income, then you should be able to claim the training, supplies, food, birds, kennels, etc as expenses if this is a "business". How do others handle this situation? Has anyone been audited in this area?

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If you are deriving and reporting income from dog breeding you can deduct related expenses. If you include training and selling started or finished dogs you can include those related expenses. If your going to go that route it pays to formalize the particular business, LLC, Corp, sole proprietor, get the business license and a UBI number. Keep good records. Audits are not as common as some might have you believe.

Luv has it right. You should report a litter and can deduct your expenses as a hobby but you can't declare aloss because it is a hobby. If you have a real job and try sliding the dogs in as a business it will not be worth it. I survived a 5 hour audit and actually came away with some good advice. People have tried proving they are a business and end up with interest penalties and it definatly isn't worth it.I fear the IRS return address because its no fun and you better keep your records for 7 years. My audit came after a loss which was allowed.

What about the owners of the really good stud dogs that are bred hundreds of times? Do the owners have to declare the income if it is as you say a hobby or do they have to declare the income because it is making a profit?

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I seem to recall a rule about the need to be profitable once in seven years if you expect to be regarded more than a hobby farmer.

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For businesses other than farming, I believe you have to make a profit 2 out of 5 years.

If you only breed more occasionally than that, then it's probably just as easy to let it be a "hobby". That means you can deduct expenses equal to the income, but not take the loss. If you have a dog with a pro, that could easily wipe out any "profit" from the litter income :-) At least you wouldn't be paying taxes on that income. Within the hobby category, you'll also be deducting expenses directly related to the stud fee, vet expenses for mom & pups, advertising, food, etc.

Still hobby: next you would want to deduct all vet expenses for the year for mom & food. After all, without that she couldn't have produced the pups.

While the "business" rules say you have to make a profit 2 out of 5 years, they do not say how much you have to make in profit. It could be a very small amount.

I truly doubt that for most of us, unless we do some boarding and training, if you looked at the total figures over 5 years you would see black ink :-)

Planning could help. One year I bred a bitch in Sept. Pups were leaving here in late Dec./early Jan. I made sure that the income didn't come till Jan. Then I had a litter around June of that year (another bitch). The income from both years got entered in the latter year. You can take smaller deposits and delay releasing pups to homes by a week or so in situations like that. That inflated the second year's income (usually I would not have more than one litter a year at most). If your bitch(es) cooperate like that just twice in 5 years, you could possibly fulfill your "profit in 2 of 5 years" requirement as a business.

The IRS is happy to answer your questions on stuff like this. If you have an accountant, they can help as well. NO! I'm not an accountant, but this topic has come up on other lists I belong to which did have accountants commenting.

Another thing is that if you donate to a service group (Seeing Eye, for example), you can take a charitable donation deduction. The deduction, I'm told, is limited to the amount it costs to raise the pup to the age when it's donated based on your direct litter expenses (I believe). And you have to get a letter from the charity verifying that you made the donation, which is no big deal. Just make sure that the organization is one that is tax deductible.

It's probably better to talk to a tax lawyer about these issues rather than a tax preparer, accountant, or even a CPA. A lawyer is more likely to be willing to look up the law. An accountant will likely give you an answer based on what he knows. If you do ask an accountant you need to find one that has had experience with small sideline businesses.

I am also guessing there are all kinds of special depreciation rules for businesses involved in breeding so expect things to be complicated. It's just impossible for things not to be complicated at the IRS - just take that as a given.