Posted on January 24, 2014May 31, 2016 by Jan Roberg

Depreciating a Bitch

Dog breeders - You are entitled to certain deductions that many others are not qualified for. Get the deductions you deserve and maximize your tax benefits. Photo by Mike Bitzenhofer at Flickr.com

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First and foremost, we’re talking about dogs here.

I’m often asked by dog breeders about how to write off the cost of purchasing a dog for breeding purposes. If you are planning on going into the business of breeding dogs, then your dogs are livestock and would fall into the same rules as farm animals.

Depreciation for a dog begins when the dog reaches maturity. If you buy a puppy for breeding, depreciation begins when the dog can be bred. If you purchase a dog for working, (such as herding or security) depreciation begins when the dog can actually be worked.

You cannot buy a puppy and write off the entire cost because you say that you intend to breed it. You must actually be breeding the dog to claim an expense.

How long do you depreciate a dog for?

Because dogs are not specifically listed in the IRS depreciation tables, the timeline on depreciating a dog is seven years.

Can I just write off the whole cost the year I start breeding?

Yes, that would be called a Section 179 Expense deduction. But there’s a catch with claiming a Section 179 expense deduction that most people don’t know or forget about. Remember, dogs are depreciated over seven years. If you write off the entire cost of the dog the first year of breeding, but then you quit breeding your dog—you’re required to “recapture” any remaining depreciation.

What does recapture mean?

Well, let’s say your dog cost $2,000 and you claimed the full expense the year you start breeding her. After two years, you decide it’s not worth it and you have her spayed. You only got two years of breeding from the dog, so you have 5 years of depreciation that you have to reclaim.

If you used the MACRS depreciation schedule, you would have claimed $286 the first year and $486 the second year for depreciation. That makes a total of $772. To reclaim the Section 179 expense, that means that you would subtract the depreciation you could have claimed from the $2000 that you wrote off before and you’d have to claim the $1,228 left as income.

Yes, it does stink, but that’s the rule. And remember—a dog breeding business is a more likely candidate for an audit than most other businesses so you’re going to want to maintain your books nice and tight.

A few other points about dogs as business property:

If you buy dogs to resell, that’s considered inventory and you don’t expense them until you actually sell them.

If you buy a dog for breeding, and then sell the dog later, you have to reclaim the depreciation as ordinary income. Example: buy dog for $2000, claim section 179 expense of $2000, sell dog for $3000, you would claim $3000 as ordinary income.

You may purchase a breeding dog and choose not to depreciate the dog, just keep the dog as an investment. When you sell the dog, the profit is taxed at capital gains rate instead of ordinary income (which is a lower tax rate.) Example: dog costs $2000, sold for $3,000, only $1,000 of income is realized and would be taxed at lower capital gain rate.

There’s a lot here to think about. Don’t go trying to claim the cost of your dog on your tax return unless you truly are in a dog business. Expensing a dog is going to be a red flag for an audit—so dot your “I”s and cross your “T”s and make sure you’ve done all your homework.

If you do plan on depreciating your dog, click here to get my handy dog depreciation schedule to help you figure your expenses.

Posted on March 16, 2011May 31, 2016 by Jan Roberg

Leaving Your Estate to Your Dog

Photo by Blaise Machin

I don’t often get requests for what to post in my blog, but I was actually asked to write this one.

You can leave all of your money to your dog when you die. Now I don’t recommend it, but it’s possible. Maybe you heard about Leona Helmsley, the wealthy hotel maven who left her money to her dog in her will. Yes it’s true. And, it’s actually more common than you might expect.

But is leaving your money to your dog the right thing for you? Probably not, and here’s why. First, a dog doesn’t have a social security number. (I’m reading this back to myself and it sounds like an episode of Mr Roger’s Neighborhood; “Dogs don’t have social security numbers!” But it’s true.) Without a social security number, dogs can’t file a regular tax return. And you’re not getting a social security number for your dog– so don’t even try to go there.

If you want to leave your money to your dog, you have to set up a trust. My dog’s name is Lady so if I wanted to set up a trust for her I’d probably call it the “Lady Browser Inheritance Trust.” Two points about naming the trust: first, it should properly identify the trust. If you just call it “dog trust” there could be dozens of other dog trusts out there and there could be some confusion. It will have an identification number, of course, but a unique name is helpful to the people who will be working on it after you’re gone. Second: don’t give it a terribly stupid name. Remember that someone is going to have to manage your trust after you’re dead. You might have no problem calling your dog “Kitchikookoo-picky-poo-poo” but the person managing the estate might.

You will fund the trust by making it the beneficiary of your estate. For example: Let’s say that you name the trust, “Duke Dog Trust.” Then, you would make “Duke Dog Trust” the beneficiary of your bank and financial accounts. If you’re really serious about doing this, you need to think which accounts should go to your dog versus which accounts go elsewhere. You also need to think through who your secondary beneficiary will be should your dog die before you do.

Setting up the trust and funding it isn’t all that hard. Really you just have the legal expense of setting up the trust. What’s more difficult is figuring out the care program for your dog. Anyone who’s serious about leaving their estate to their dog is really more concerned that their pet is well cared for than anything else. You’ll have to include specific care instructions outlining feeding, grooming, exercise, veterinary care, etc. and who is going to be responsible for that care and how it’s paid for.

Once again, that brings me back to my original observation—you probably don’t want to leave your money to your dog. Why? The taxes! Dogs can’t really inherit money, everything goes into the trust. Trusts are usually set up as “pass through” entities. Usually a trust is set up so that people get money from it. For example: Grandparents setting up a trust for a grandchild. The money in the trust earns interest, the interest is “passed through” to the grandchild and the grandchild pays taxes on the interest at his income tax rate. (10, 15, 25, 28 or 33 percent) Income in a trust is taxed at 35%. You don’t get a deduction for the expense of caring for the dog. About the only deduction you get is paying your attorney and accountant fees, the rest is all taxable. Leaving your money to humans is much more tax effective. First, if you have less than $5 million dollars, your heirs can inherit the money tax free. And your estate can be settled within about year. Income from your estate can be passed through to your heirs at their personal income tax rate instead of the estate tax rate. People you love will get more of your money instead of it going to lawyers, accountants, and taxes. Leaving money to a trust for a dog is the worst possible tax strategy for your estate. Now if it’s the only option available to you, then so be it. But if you can arrange to have your pet cared for after your death and leave your money to a human, that’s that best situation from a tax standpoint.

Posted on March 11, 2011February 28, 2017 by Jan Roberg

Claiming Your Dog on Your Tax Return: Part 2

A working dog may be claimed as a business expense if the dog truly works on your business.

The first thing you need to know is that you can’t claim your dog as a dependent on your tax return. Never! Don’t even think about it. There are no special rules for St. Bernard’s or Great Danes. It doesn’t matter how much your dog depends on you or that he’s a regular member of the family. A dog can never be claimed as a dependent on your U.S. income tax return.

There are two places you can claim a dog on a tax return, as a medical expense, such as a service dog, or as a business expense. This post is about claiming your dog as a business expense. If you’re looking for information on dogs as a medical expense, then you need to check my other post http://robergtaxsolutions.com/2011/03/claiming-your-dog-on-your-tax-return-part-1/

If you intend to claim your dog as a business expense, you have to remember the two most important words for business expenses: regular and necessary. Is the dog a regular and necessary expense for your business? For example: my dog likes to help me when I work from my home office. She guards my door and prevents my college age children from coming into the room to bother me (i.e. ask for money.) Her favorite part of her job is barking at the IRS agents whenever I’m on the phone. How she can tell I’m talking to an IRS agent instead of a client amazes me. As you might have guessed, I cannot claim my dog as a business expense. Her service to my company is neither regular, nor necessary. (No matter how much I get a kick out her barking at IRS agents.)

Real working dogs, on the other hand, are a legitimate business expense. Sheep herders, guard dogs, bomb sniffers and rescue dogs all are legitimate working dogs. My dog neighbor used to star in the dog program at Busch Gardens—once again, a legitimate working dog, although now he’s retired.

Breeding dogs can be a little trickier. A real dog breeder is a legitimate business. Where it gets a little tricky is that fine line between dog breeding as a hobby versus breeding as a business. For example, if you’re treating your dogs as “livestock” they have a depreciation rate of 7 years. If you buy a full grown bitch with the intent to breed her, you may claim the purchase price as a section 179 deduction (that means you can write off the whole purchase price.) If you purchase a puppy—with the intent of breeding it when it grows up, you can’t write off the whole cost immediately. The best you’ll be able to do is to claim depreciation.

I once was consulted on a “dog breeder” case. The woman had purchased two “designer puppies” for $2,000 each with the purpose of mating them together and selling the puppies. She wanted to write off the entire $4,000. The woman had no experience with breeding dogs, no experience running any type of a business before, and didn’t seem to have a clue about raising dogs in general. First, the IRS is clear about not completely writing off “immature” animals so a total write off was out of the question. Additionally, because there was no income and the client just wasn’t meeting any of the business qualifications, claiming any kind of deduction would be problematic. I recommended holding off on claiming any deduction. If the business truly panned out, she could depreciate the dogs when (and if) they were put into service. Just because the puppies you buy are expensive, they don’t necessarily qualify as a business expense.

Once again, you have to make sure that if you are claiming a dog as a business expense, you really need to make sure you’re on the up and up. A dog on your return is going to be a red flag so you start out with the assumption that you will be audited. Document everything. Have receipts for your expenses, and proof that your dog is a necessary and regular expense for your business. Dot your i’s and cross your t’s and you’ll be okay.

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