Beat the OBBBA/TCJA Rules That Punish Dog Breeding Hobbies

Are you involved in a dog breeding business or considering starting one? If so, you may be in the IRS’s crosshairs. The IRS often classifies dog breeding as a hobby rather than a business for tax purposes — and that distinction can have a big financial impact.

When it comes to taxes, hobbies are usually a disadvantage. Unlike a business, you can’t deduct your hobby expenses from hobby income (or any other income). However, you must still report and pay tax on any hobby income you earn.

There is one small exception — you can deduct your cost of goods sold (COGS) for each puppy you sell.

Fortunately, a dog breeder can qualify as a business under IRS rules, even if you lose money in some or many years. There are two ways to qualify:

1. Profit test: If you earn a profit in three of five years, the IRS must treat your activity as a business.
2. Facts and circumstances test: If you don’t meet the three-of-five-years test, you can still qualify by showing a genuine intent to earn a profit — your goal doesn’t need to seem reasonable to others, but it must be honest and bona fide.

The IRS reviews nine factors to determine your profit motive. The three most important are:

1. Operating in a businesslike manner
2. Having expertise in dog breeding
3. Devoting time and effort to the activity

To strengthen your position as a legitimate business, you should:

• Keep accurate and detailed business records
• Market your business consistently
• Integrate breeding with related services such as a kennel or grooming operation
• Create and follow a written business plan
• Dedicate steady time and effort to your breeding program

Forming a legal business entity (such as an LLC or corporation) also reinforces your profit motive in the eyes of the IRS.

How We Can Help

Sterling Tax and Accounting is here to help your business with proactive tax planning. Our comprehensive approach helps reduce your overall tax liability and keep more money in your pocket.

If all your accountant does is file your taxes, chances are you’re paying more than your fair share.

Learn how to proactively save on taxes by scheduling a call with our tax planning specialists.

Our tax planning, accounting, and business services help you stay on track. Sterling Tax & Accounting works with you to optimize your business and minimize taxes. We provide the tools and guidance you need to build a solid tax and business foundation.

We’re a trusted CPA Firm based in Sarasota, Florida, serving clients across the U.S. — always working proactively to help you save.

Welcome to the Sterling Standard of business!
Want to learn more? Schedule a meeting with our tax planning team here:
https://www.sterling.cpa/contact-us/