To Deduct or Not to Deduct: Tax Time for Dog People

Karen Bodeving, CPA joins host Laura Reeves for an important discussion about dogs, the IRS and your taxes. for hobby breeders, professional handlers, dog clubs and many of us involved in purebred dogs.

Dogs and Taxes... Who is affected

Karen Bodeving CPA, CGMA, Rogue Valley Financial

Hobby Breeders HAVE to show the income, but they cannot take the expenses.

If it is a Hobby: You MUST claim the Income on your tax return. – This MUST be reported in your gross income.  Sell one puppy for $100 (or more)?  Must be shown on your tax return!

Hobby: Can you take deductions?

The TCJA (tax cuts and jobs act) suspended miscellaneous itemized deductions until 2026, removing the ability to deduct hobby activity expenses, other than cost of goods sold.

Before 2018 -If a taxpayer's activity is considered a hobby, he or she may deduct its expenses only up to the amount of the hobby income; therefore, a loss from a hobby cannot be deducted against other income. In addition, hobby expenses must be taken as miscellaneous itemized deductions; as such, they will be subject to the "two percent of adjusted gross income" floor, which will limit the amount of the deduction further.

This means even though you might have had $15,000 in expenses of showing etc it was not is NOT a direct offset.

The first test is an “OBJECTIVE” Test.

First, if a taxpayer can show that he or she realized a profit from the activity in three out of the most recent five consecutive years including the current year, the service's objective test will be met and the activity will be considered as engaged in for profit. If the activities consist primarily of breeding, training, showing or racing horses, the presumption applies only if the activity produced a profit in 2 of the last 7 tax years, including the current year. You have a profit when the gross income from an activity is more than the deductions for it.

If your dog breeding activity passes this 3 year years-of-profit test, then it is presumed that it is carried on for profit. This means it will not come under the scrutiny and limits imposed on hobby losses. You can deduct all of your business deductions from the activity, even for the years that you have a loss. You can rely on this presumption; unless and until the IRS shows it is not valid.

The second test is the “SUBJECTIVE” test.

Do you operate your business in a business-like manner?  Do you have a budget? Do you have applicable permits?  Do you have a business plan? Do you have separate books and checking accounts? Can your business appreciate in value? Does it look like you gain personal pleasure from the activity (a business usually requires Work, a Hobby usually entails “Fun”).

The Tax Court has held that a couple was not entitled to deduct their net losses from a dog-breeding activity, finding that the activity was not engaged...