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Breeder Tax Options and Responsibilities

Breeders must be aware of all tax options and discuss them with a tax professional.

Whether you owe a substantial amount or have a refund coming, start your tax planning at the beginning of each year. For many dog breeders, just like thousands of other Americans, the scramble to file taxes has just begun. To add to the chaos, U.S. tax laws are complicated and ever-changing, so getting professional advice is always a good idea.

All revenue received through your dog activities must be reported as income on your tax returns. This would include puppy sales, stud fees, and boarding income. There are options, however, in how you declare this income, which will dictate whether you can deduct your expenses and the limits of such deductions.

To claim all your breeding expenses on your taxes, you must be able to verify to the IRS that your endeavor is, in fact, a business and not simply a hobby. For most of us in the fancy, breeding is a pursuit that can hardly be labeled a business, even though money is exchanged. Trying to represent your breeding activities as a business can often lead to much more trouble than it is worth.

Before you decide to make that claim, ask yourself the following questions: Do you make a profit, at least in some years, or if not, does your breeding “business” have the potential to be profitable? Are you prepared to pay taxes on that profit? Is there market value in your venture, as opposed to significant recreational value? Have you kept good records? Do you have breeding facilities? Are you willing to claim the number of dogs necessary to be perceived as a viable breeding business, considering your zoning or covenants? Are you willing to have your premises inspected by the AKC or other authorities? Are you prepared to be audited by the IRS, even though the audit may trigger audits of your personal and other business returns?

If you are considering establishing your breeding program as a business, you might decide to incorporate the enterprise. You will have to pay a separate tax for the corporation unless you create what's called a “subchapter S corporation,” in which the income is reported on Schedule E of your personal return. If you do choose to incorporate, you should hire a lawyer to draw up the corporate papers. Another option is the Limited Liability Corporation (LLC), in which you limit your liability. In any case, you should develop a business plan, which might benefit from the advice of a professional consultant.

Next, you must have a well-organized, efficient bookkeeping system in place. What about employees? Surely you can’t run this business by yourself. Are they properly recompensed, and is their income being properly reported to the IRS?

If you don't qualify as a business, even as a hobby breeder you can still deduct expenses on your tax returns. If you report your income on Schedule C, you can take limited deductions for your breeding expenses. Remember, however, that if you are claiming excessive deductions, you may draw attention and trigger an IRS audit of your return.

You can also offset excess “doggy” income by making charitable donations. A portion of any gift to an eligible 501(c)(3) dog-related charity is tax-deductible; the percentage depends on your tax bracket. Although most dog clubs are not 501(c)(3), many parent clubs do have eligible charitable branches. The AKC affiliates — the Canine Health Foundation, the AKC/CAR Support and Relief Fund, and the AKC Museum of the Dog — are ideal beneficiaries of your tax-deductible gifts.

Most of us are proud to be hobby breeders, and our dogs probably will have little impact on our tax returns. Still, it is important that you are aware of all your tax options, and that you discuss those possibilities with your tax professional. Perhaps by this time, your return is all ready to go. Should you need more time, however, you may delay filing until August 15 — so long as you file for the extension by April 15 and pay (in advance) any estimated taxes due.