Hobby or business? Dog breeding

[ketchup]

Hey guys,

I've been thinking about this more as my girlfriend's income has grown (yay) and therefore so has her tax burden (boo).

She is a self-employed showdog photographer.  Her income is right from her clients, and she deducts expenses for that: equipment, travel costs, etc.  Simple enough.

She also whelps a litter of puppies every year or two (this year being one of them).  Even selling puppies at $1000-3500 each (usually around $2000), that often comes out at a loss when factoring in all expenses for it.  I'm trying to figure out if she can use that to help shield some of her income and save on taxes.

The first question from the IRS seems to be whether it's considered a business or hobby.  I'm not quite sure what to think.

https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:

    Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.  We do keep records, because I'm an insane spreadsheet guy, no matter the context.
    Whether the time and effort you put into the activity indicate you intend to make it profitable.  We put tremendous time and effort into it.  Lots of time and stress leading up to the breeding with blood tests, the actual whelping over the course of multiple hours with a vet on speed-dial, eight weeks of at least 100 man-hours per week spent raising the litter, etc.
    Whether you depend on income from the activity for your livelihood.  Sort of?  It sure doesn't hurt when it makes a little money.
    Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).  This one's tricky.  I'm not quite sure how to think about it.  We've certainly had giant unexpected vet bills as part of the process.
    Whether you change your methods of operation in an attempt to improve profitability.  Well yeah, we spend as little as we can on expenses, like we do in every aspect of our lives.  We don't cut corners to make extra cash, though.
    Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.  We probably do.
    Whether you were successful in making a profit in similar activities in the past.  Not in an official capacity.
    Whether the activity makes a profit in some years and how much profit it makes.  Yes, profitable in some years, maybe 10K/year tops, usually near zero or a loss.
    Whether you can expect to make a future profit from the appreciation of the assets used in the activity.  No, only "assets used" are our bitches, and they're not for sale, despite their definite high value if they are being bred.

Next question would be what's considered "ordinary and necessary" deductions.  Direct costs such as vet bills, generic and blood tests, AKC registration, stud fee, food for mom and pups, transportation, etc. all make sense. 

But would this also include things like feeding the bitch for the rest of the year? She's still primarily a pet/showdog.  Obviously though it's "necessary" in the sense that she can't have a litter if she dies of starvation.

What about showing?  We're planning on a litter next year out of one of our bitches that's a multiple best-in-show winner from doing a lot of showing this year.  That's not a cost directly associated with the litter, but her puppies will be a lot more valuable as a result of it.  Every time we breed a bitch, she'll already have shown and is usually a champion.  Breeding doesn't happen without showing first.  Also, in this case it's split among multiple tax years (this year and next), does that matter?

In addition, her photography career's continuing success is also related to her profile being more known due to the showing/breeding.  Not sure if that would be too much of a stretch to connect the two or not.  We know that if she stopped breeding, her career would slowly fade.

Anyway, thoughts? Am I completely overthinking this (probably)?  Any important details I'm omitting?

Note: After proofreading, I realize I'm casually using the word "bitch" a lot more than normal people - this is common crazy-showdog-people lingo and if anyone is confused or offended I apologize.

[Xlar]

I would think that rather than claiming the dog breading as a second business you could wrap it in with the showdog photography business that you already have. That way you are not creating a business that always loses money.

[MDM]

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider...whether an activity is a business engaged in making a profit.

A few years of losses, especially the first few, can be consistent with "a business."

The occasional year of making a profit vs. normally having more expenses than income is consistent with "a hobby."

E.g., if she has been doing this for 8 years, what is the overall profit or loss for those 8 years?  The more overall profit, the firmer grounds for calling this a business even if some years have a loss.  OTOH, if it's a net loss for those 8 years, she'd need a very good story about how the next years will be profitable.

[Metalcat]

My family breeds dogs.

Not willing to post about it publicly, but feel free to PM me.

[Cassie]

The show breeders I know have not made money. The only breeders I know making money are puppymills. I suppose if you have a valuable winning dog at a high level then the puppies would be valuable.

[ketchup]

In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. A hobby activity is done mainly for recreation or pleasure. No one factor alone is decisive. You must generally consider...whether an activity is a business engaged in making a profit.

A few years of losses, especially the first few, can be consistent with "a business."

The occasional year of making a profit vs. normally having more expenses than income is consistent with "a hobby."

E.g., if she has been doing this for 8 years, what is the overall profit or loss for those 8 years?  The more overall profit, the firmer grounds for calling this a business even if some years have a loss.  OTOH, if it's a net loss for those 8 years, she'd need a very good story about how the next years will be profitable.

We've had four litters.  The first one was a wash, the second we came out ahead by about a grand (penciled out to almost $1/hr when accounting for our time), the third we came out a little behind, and the fourth we just about broke even.  Next year's is expected to be more profitable if everything goes well, since each puppy will be worth more this time than in the past.

The show breeders I know have not made money. The only breeders I know making money are puppymills. I suppose if you have a valuable winning dog at a high level then the puppies would be valuable.

Yeah, this is our first particularly big winning dog.  That's the main reason we may actually come out ahead a decent amount this time.

[Cassie]

I have really mixed feelings about this. We have done a lot of Maltese rescuing that the dogs were puppymill dogs. Then I met a ethical show dog breeder that gave us 3 young retirees and it warmed my soul after all the death and old age.

[ketchup]

I have really mixed feelings about this. We have done a lot of Maltese rescuing that the dogs were puppymill dogs. Then I met a ethical show dog breeder that gave us 3 young retirees and it warmed my soul after all the death and old age.

We absolutely won't be looking for homes for any "retirees".  That feels kind of gross to me.  They are still first and foremost our pretty pets that we love.  I know not all show people are like that.

And plenty of show people turn out to essentially be puppymills.  I know someone recently that had eleven litters on the ground at the same time... there is no fucking reason to do that unless your only motivation is dollar signs.  Ugh.

[Cassie]

This breeder only had a litter every 3 years and Maltese usually have one or 2 puppies at a time.  Good that you are keeping the retirees but she ended up with 8 which was too many. She actually quit breeding/showing because of the expense.

[ketchup]

This breeder only had a litter every 3 years and Maltese usually have one or 2 puppies at a time.  Good that you are keeping the retirees but she ended up with 8 which was too many. She actually quit breeding/showing because of the expense.

I... may or may not have exactly eight dogs in our house right now.

Most of the crew:

[GuitarStv]

Fan of aussie shepherds?

[iris lily]

The show breeders I know have not made money. The only breeders I know making money are puppymills. I suppose if you have a valuable winning dog at a high level then the puppies would be valuable.

Exactly.

If you (the generic you) want to make money on dog flesh, aint no law against it. It is ethically a problem, though.

(The following does not address IRS standards, is only social commentary.)

Hobby  breeders are people who breed occasionally and to improve the breed and who always keep one out of a litter. By the time they go to shows, pay vet bills, trainers and equipment bills etc they are not making any money.

There are several ways to tell the difference between hobby breeders and backyard breeders who do it for the money. Some searching questions to distinguish the two are:

Which one of this litter are you keeping?

Tell me about your contributions to breed rescue

Does your contract provide full refund at all points in the dog’s life?

Let me also say that finding a home for retired show dog isn’t a bad thing at all. I have adopted a few of those dogs and they are the best dogs ever!  They are beautiful and well trained,  I love them. All of my dogs have been adult dogs. I don’t do puppies, but the retired breeder/ show dogs are the best.

When you say you won’t find a home for retired dogs then you will very soon have so many dogs you’ll be at puppy mill levels so good luck with that.

[iris lily]

This breeder only had a litter every 3 years and Maltese usually have one or 2 puppies at a time.  Good that you are keeping the retirees but she ended up with 8 which was too many. She actually quit breeding/showing because of the expense.

I... may or may not have exactly eight dogs in our house right now.

Most of the crew:

There are entirely too many smiles in that photo! Haha.what a cute bunch.

[SeattleCPA]

You might find this post about an equestrian interesting...

http://redravenequine.com/what-ms-topping-learned-writing-off-all-your-horse-expenses/

TLDR summary: You can combine two businesses with synergy and maneuver around the hobby loss rules.

[ketchup]

The show breeders I know have not made money. The only breeders I know making money are puppymills. I suppose if you have a valuable winning dog at a high level then the puppies would be valuable.

Exactly.

If you (the generic you) want to make money on dog flesh, aint no law against it. It is ethically a problem, though.

(The following does not address IRS standards, is only social commentary.)

Hobby breeders are people who breed occasionally and to improve the breed and who always keep one out of a litter. By the time they go to shows, pay vet bills, trainers and equipment bills etc they are not making any money.

There are several ways to tell the difference between hobby breeders and backyard breeders who do it for the money. Some searching questions to distinguish the two are:

Which one of this litter are you keeping?

Tell me about your contributions to breed rescue

Does your contract provide full refund at all points in the dog’s life?

Let me also say that finding a home for retired show dog isn’t a bad thing at all. I have adopted a few of those dogs and they are the best dogs ever!  They are beautiful and well trained,  I love them. All of my dogs have been adult dogs. I don’t do puppies, but the retired breeder/ show dogs are the best.

When you say you won’t find a home for retired dogs then you will very soon have so many dogs you’ll be at puppy mill levels so good luck with that.

We are definitely in the category of hobby breeder.  We absolutely come out behind when accounting for all showing costs and whatnot.  We do keep one from every litter (sometimes a co-own living with someone else).  We have gone to great lengths in the past to get a dog back from someone.  The contract does spell that out.  I do agree with your thoughts on backyard breeders.

You might find this post about an equestrian interesting...

http://redravenequine.com/what-ms-topping-learned-writing-off-all-your-horse-expenses/

TLDR summary: You can combine two businesses with synergy and maneuver around the hobby loss rules.

Holy. Crap. This is blowing my mind and makes so much sense.  Her showing and breeding do function as a marketing platform for her photography business.  She knows that taking photos of her own dogs and her own dogs having notoriety are the only reason her business started to flourish and has been as successful as it is.  Lots of her connections are as a result of it.  And her business would fade if she stopped.  Thank you for this - this is a fantastic reveal.  It really essentially functions as a "loss leader" arm of her business that helps her connect with clients over time.

We'll definitely talk to a CPA to do this right, but this will help a lot. Wish we'd known about this a few years ago. Thanks again.

[SeattleCPA]

You might find this post about an equestrian interesting...

http://redravenequine.com/what-ms-topping-learned-writing-off-all-your-horse-expenses/

TLDR summary: You can combine two businesses with synergy and maneuver around the hobby loss rules.

Holy. Crap. This is blowing my mind and makes so much sense.
<snip>
Wish we'd known about this a few years ago. Thanks again.

:-)

But read the actual tax court case so you do this right.

And FYI another similar case blew up for taxpayers. A married couple (I think) included an IT consultant and a cat, hmmm, aficionado? And they tried to combine the IT consulting business and the cattery. That, not surprisingly, did not work.

Among other things, no synergy. (Why does an IT consultant need a cattery?)
Here's that case: https://caselaw.findlaw.com/us-8th-circuit/1606237.html

[robartsd]

Holy. Crap. This is blowing my mind and makes so much sense.  Her showing and breeding do function as a marketing platform for her photography business.  She knows that taking photos of her own dogs and her own dogs having notoriety are the only reason her business started to flourish and has been as successful as it is.  Lots of her connections are as a result of it.  And her business would fade if she stopped.  Thank you for this - this is a fantastic reveal.  It really essentially functions as a "loss leader" arm of her business that helps her connect with clients over time.

We'll definitely talk to a CPA to do this right, but this will help a lot. Wish we'd known about this a few years ago. Thanks again.

I think you have strong arguments that the marginal breeding operation really is supporting the profitable photography business. I'd explore the possibility of filing amended returns for prior years with your CPA.

It sounds like overall your breeding operation attempts to be profitable (though very poorly compensated for your efforts). Fortunately for this type of hobby business, the IRS doesn't seem to care that your hobby business doesn't make enough to be worth hiring someone to run, only that overall you reasonably expect to profit from it. I think it probably could stand on its own under IRS guidelines.