Ian: "Dad's wearing his slippers outside."I'm mulling over whether I can set up Smalltyme Cardigans as a separate business entity for tax purposes. We all know that breeding and showing dogs is not what you'd call a profitable venture, but I'm wondering if I can offset some of the associated costs by deducting them as business expenses. To my (unBELIEVEably limited) knowledge, I would need to come up with something like a 5-year business plan; and I would need to set up a separate bank account, pay all show related expenses from it, and keep all of the receipts. But I'm still fuzzy on where the IRS draws the line between what is legitimately a business in its own right, and what is considered a hobby and therefore not deductible.
Does anyone out in the blogosphere have any knowledge or experience in this?
We've been a small business for nine years. No plan, no separate account, just receipts and records. We use a tax preparer, though, because it does get a little complicated sometimes. You typically have to show a profit a certain number of years (like two out of five or something; I honestly don't remember). On those years we underreport expenses and make sure we breed a litter so we have some income.
ReplyDeletehttp://www.irs.gov/newsroom/article/0,,id=172833,00.html
ReplyDelete"An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses."
I've been breeding and showing for over 20 years and haven't made a profit yet.
I used to work for the IRS. I wouldn't play around with them.
We're not messing around; the tax preparer is there every step of the way and he would never let us get away with anything.
ReplyDeleteAs I understand it, because when we sell puppies that's income, we HAVE to report it. The best way to do that, and the most legal way, is by setting it up as a small business. I know we haven't profited three out of five years; my guess is that our tax guy has it as whatever kind of business is allowed to run at a loss more often than that (i.e., Amazon or the vast majority of small businesses for their first five years). We report every puppy sale (and are taxed on them) and we deduct show expenses and vet bills. Everything is divided between the show dogs (who are allowed to be part of the business) and the rescues (not), and we're very careful to keep good records. The years we've made a profit we've made like a thousand dollars; the years we don't have litters we typically spend five to ten thousand. Overall there's no way we're making any money, but some years you come out very slightly on top.
As I understand the way things work, if you DON'T report every sale of every puppy, you get in major trouble. And since we're selling repeated numbers of puppies who were deliberately bred for sale, we were told we can't report it as incidental income like if we sold a bureau or something. It had to be taxable and transparent.