My accountant told me that with things the way they are right now the government does not want to hear boo from you if you are loosing money. If you are loosing money then breeding dogs is just a hobby. However, should you start making money, you had best be declaring every penny.
Breeder's CPA is on track w/ mine. I had 1 litter last year and at the end of the year was ~$6000 in the hole due to competition, etc, expenses. The IRS doesn't want to fool w/ the likes of us.
One of my puppy buyers is an IRS auditor. The IRS wants you to declare one puppy sold. And the board of equalization wants the sales tax on every puppy sold. If you do not report it they consider it tax fraud. You are allowed to deduct any expenses on your taxes but the government wants to hear about all sales, especially in this economy. I have taken a loss for 6 years in a row. The IRS is fine with your reporting a hobby with a loss for many years in a row just so you are showing that you are trying to make a profit like advertising, etc;
They need to see that if you are breeding and selling-- you report.
More importantly, watch your terminology. It is one thing to be a hobby kennel, another with any other wording. My Auditor caught that, and although I changed website and ads he scolded and warned me.
On Audit, I did show impecable records of about 2 litters per year, food, vet, handler and entry bills, etc.
He also owned a yellow lab!! so probably gave me a break.
I have 2 friends who are retired IRS auditors and I had a very long chat w/ the one a few years ago over this w/ regard to both dogs (they are breeders/show folks) and horses. He confirmed there needs to be an intent to profit over a period of time in order to set up as a business and file w/ the IRS. States differ in the minimum amount you can profit by a venture before registering it as a business so it behooves the OP to ask his/her CPA if they have one since that person will stand behind their work should you be audited.