Claiming Kennel as a Small Business

[RyanC]

Does anyone claim their kennel as a small business, for taxes?

[Newcastle]

No.  In order to claim a small business, you have to operate with the intention of making a profit, and then at some point you actually do have to make a profit.  While many home breeders could claim they're intending to make a profit (or at least, not intending to operate at a loss), most don't actually end up in the black often enough to qualify. 

I could argue, for example, that by showing my dogs, advertising in magazines and catalogs, belonging to breed clubs, and having a website I am "marketing" my breeding program in an effort to sell puppies and stud services and improve profitability.   However, the costs of these activities each year generally far exceeds any income I have from puppies or stud services at the rate I breed.  So, I'm relegated to "hobby" status, and must claim hobby income but can only deduct a portion of hobby expenses (only up to hobby income, and subject to the 2% floor - meaning only the amount which, combined with other miscellaneous deductions, is greater than 2% of my adjusted gross income).

Plus, frankly, I don't want "the Man" that involved in my breeding.

[BurningRiver]

So, would it be legit to claim losses for all years, but show a profit by not writing off as much the next? (I'm tax dumb.)

[Newcastle]

Well, you can either show a profit or a loss, but not both.  You can claim expenses every year, but with a business for three out of the last five years you must have shown a profit.  I suppose you could not claim some of your expenses so that you did show a profit some years - such as not claiming show expenses, for example, with the argument that they're not really related to the breeding business because you'd show the dogs even if you weren't breeding.  I'm not entirely sure as to the legality of that, honestly; the IRS might consider the show expenses to be related to the business regardless, and determine that because including them would result in losses for at least three of the past five years, your business is really a hobby. 

The IRS has some information on businesses vs. hobbies, here:

http://www.irs.gov/irs/article/0,,id=186056,00.html
http://www.irs.gov/newsroom/article/0,,id=169490,00.html
http://www.irs.gov/newsroom/article/0,,id=172833,00.html

(Basically different ways of saying the same things.)

[BurningRiver]

Right. This is what I'm saying. For example, I think it's easy to see that some years you'll have high expenses via showing and health testing and then other years you might have come out a bit ahead, say, if you had a litter of 10.

[Newcastle]

Yes - which is why responsible breeding is usually only considered a hobby, and not a business.   You are allowed to profit from a hobby every so often (actually you could probably profit from a hobby single every year), but you must profit from a business three out of the last five years. 

It comes down to the way you treat the activity; if you have a reasonable expectation of making a profit, at least somewhat consistently, and you take steps to ensure that you are likely to make a profit, you are running a business.  (In your example, one might cut back on showing for a year, to reduce expenses so that a profit could be realized.)  If you don't intend to make a profit, don't do much to promote your service or product, and happen to be in the black anyway, the activity is still likely to be considered a hobby because of the way you treat it.

Kind of like the whole "responsible breeder don't make money" thing.  The truth is that yes, sometimes they do make money on a litter - if they have a large one, for example; however they don't breed with a primary intention of making money, it's just something that happens once in a while.