Posted by:
SD_Dan
at Fri Feb 19 16:11:08 2010 [ Email Message ] [ Show All Posts by SD_Dan ]
Regarding the IRS issues - For tax purposes a business must be engaged in with the objective of making a profit. If this is the case then you can, generally, claim all of your business deductions. If your business deductions exceed your income for the tax year, you can claim a loss for the year.
However, if the IRS deems your business to have no profit motive your ability to deduct losses is limited to the amount of income generated by the activity. This is refered to as the Hobby Loss Rules.
To make it simple, your business plan must show that you will be profitable. If you were to take losses from your business year after year, that increases the chance of an audit. Upon audit you would have to prove that you know what your doing and you're doing it to making money.
What a breeder would have going in their favor is that they may not make money year after year but they would be building their breeding stock, which adds value to the overall business. So while, over the initial 5-10 years you may not show a profit, it may be the result of holding back breeding stock and overall the value of the businesses underlying assets are growing. This is a valid arguement for deducting the losses.
At any rate, if you have a profit motive then you have a business. Set up a separate checking account for the business and use that account for all business related income and expenses. This will help when putting together your figures at year end. And find a good accountant. Don't use the cookie cutter franchises. Find someone that knows what their doing and is willing to spend some time with you, not just at tax time, helping you set up good records, etc. It will be worth it in the end.
Sorry I rambled on for so long....D
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RE: hobby or business? - SD_Dan, Fri Feb 19 16:11:08 2010