Question: A bitch whelps puppies in Jan of 2012 but some of the breeding expenses like progesterone testing, stud fee, surgical implant etc. are done about 2 months earlier in 2011. Can these expenses be used on a 2012 income tax filing (filed in 2013) for the Jan 2012 litter? What about clearances that are done prior to 2012, are these legitimate expenses? There are no other breeding bitches or litters. TIA

It would depend on whether or not your accounting method is cash or accrual based.

Can you explain this with an example?

The cash method of accounting is used when accounting records revenue when cash from customers is received, and records expenses when the they are paid in cash. In the tax environment cash basis tax payers include income when it is received, and claim deductions when expenses are paid.(Most kennels are set up this way)

Accrual basis taxpayers include items when they are earned and claim deductions when expenses are incurred More like a business that will bill you for a service that they've done, so the income is earned but not yet rec'd.

I hope this helps.

Nope, lol, I still don't get it. This is a first litter, bills for vet services are paid at the time of service and supplies are paid for when purchased. There is no credit unless I pay with my credit card but the bill is paid off when it comes the next month. I think your saying with the accrual basis, if I had had supplies or services from Nov or Dec. 2011 but I didn't pay the credit card bill until Jan 2012 then I could deduct these expenses for 2012. Is this correct? This is only for delayed payments?

If most kennels use a cash basis can they recoup these breeding expenses from a previous year if they have a Jan. litter?

I really appreciate your trying to help me understand this. If I had clearances done 2 years ago and they were paid for at that time then I couldn't claim them as expenses for a 2012 litter, right? I had a couple of misses trying to get her in whelp during that time so I assume these aren't legitimate deductions either?

Anyone?

I'll give you a CPA answer ( since I are one LOL) - it sounds to me like you don't have enough to convince the IRS that you are a business rather than a hobby. Hobby breeders have tests that must be met, otherwise their dog activities are deemed a hobby and you can deduct expenses only to the extent of revenue - in other words you cannot use a hobby to generate a loss, thereby reducing taxable income.

As to the question about accrual vs. cash basis accounting, if you don't record accounts receivable and accounts payable you are most certainly not using accrual accounting. This business about trying to offset income with expenses occurring in different periods is a game that the IRS knows, and knows well. It's also one that most tax accountants won't be a party to unless it is strictly legitimate. I know that's probably not the answer you are looking for, but it's the right one.

True...just doing litters unless it's massive usually won't fly~ If you're doing business outside of just your litters, your CPA can indeed set it up for you but 'intent of profit must always be shown'...otherwise, it'll get kicked out/you'll be audited. I know of more than a few that have tried it and it didn't work for them.
I've been doing it for years and I don't have many litters. However, I board/train here also~

And to your question about expenses paid in a previous year and deducting on the next year... That answer is no.

Thank you so much. I never intended to claim my litter as anything but a hobby and I knew I couldn't claim any losses. What a shame that my expenses from 2 months prior to whelping the litter can't be used to reduce my taxes just because they occurred prior to Jan. 1st. This might change when I chose to breed the next time. I appreciate everyone's help that responded.

I breed once in a blue moon. I don't keep track of my dog expenses because I have them as pets first and foremost. And if I have a litter, my expenses and any income wash out themselves (I keep a spreadsheet), but do we really need to get the IRS involved? I don't and certainly don't plan to if I have another litter 5 years down the road.

My circumstances reflect the OPs perfectly.

Come next year, when doing taxes for 2012, do I need to report any of my expenses (dog food, vets visits, shots, etc.) and income (money paid for the puppies) on my taxes?

I am kind of confused by the "hobby" classification regarding taxes. Obviously, this is a hobby, I work outside of dogs to provide for my family and my dogs. On a normal year, the dogs are only an "expense" and don't make any income. In 2012, I had a "profit" from my litter, who knows what the expenses for the rest of the year will be. How should this be handled? Should I save all my dog "expense" receipts? I don't want to risk an audit.

Audit? My puppy buyers pay me in cash? What's there to audit?

My puppy people paid me via cash/check. Can they still audit you if they see it in your bank account?

See what? Cash is cash. I keep it and pay things in cash. Checks? How much money are you making off puppies? Even a few grand isn't going to set off any alarms. I think folks can GIFT up to $10K without raising any tax flags. You got some gifts if they even bother looking. I would say if you have this happen once every few years, no one will be the wiser.

I can't believe some of these comments on this subject. Good thing you didn't sign a name to some of these replies. Folks, our tax system is by and large an honor system for reporting income. If you are not going to report income that you receive in the form of cash, that is basically tax fraud and not something you should be recommending to others Enough said!.

I think most people want to be honest. I am merely wanting to know how you present the expenses and income of a litter or if I even need to worry about it.

Some of us just want to educate ourselves on the topic.

Things are sold every day (a trailer or ATV for instance) that aren't considered income and therefore aren't reported. I don't know if selling some puppies you owned and a trailer you owned would be considered the same thing...

I'm not a CPA and this is the way I see it.
You can't do "per litter" finances. You do yearly income and expenses finances.
Keep track of all your income and all your expenses through the year and get your net profit. If it is red, then you owe nothing to the IRS. if you make profit, then you pay tax over that.
IRS doesn't care about litters or puppies, they care about when you got the money and how you spent it. If you are making a big profit every year (about over 10K, I don't know that numbers), then you should file as a business and not a hobby.
Make sure you deduct all show expenses, vet bills, miles, dog food, even toys and treats, food you eat while doing dog stuff, and cloth you buy to handle your dogs or money you pay to a handler. After all it is hard to make a profit, but it does happens if you get lucky.
To answer better your original question: if you had a litter in 2009 and then nothing until 2012, you can't deduct the expenses 2010 and 2011 in the 2012 taxes.
Again, not a CPA, so correct me if I'm wrong because this is the way I've been doing it for the last 10 years.

My expenses far outweigh any cash I receive for any puppies. It's a wash in my eyes and no one's business but my own, certainly not Uncle Sam.

Most dog breeder methods are from January to Dec 31. (unless they are an extablished as a business)

What did you do last year, previous?

I would think that you would file as a hobby, and in that case, it is expenses from Jan to Dec 31.

I file mine as a hobby, not as a business. A business has to show a profit for 3 years out of 5.

If filing as a hobby, the total income on line 21, and write hobby income-dog breeding.

And the expenses go on line 23 of schedule A (itemize deductions)

The catch when filing as a hobby is that you deduct expenses ut to the total income MINUS 2# of the adjusted gross income.

You still to have receipts for proof of income & deductions.

if you do not take in any money for selling puppies or stud service, etc, you cannot deduct expenses when filing as a hobby. But you can, if you file as a bonified business.