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Dear Tax Talk,
We are a small German shepherd breeding kennel. In 2008, we had four litters of puppies. We also lost two litters due to complications. During the year, we sold a total of 21 puppies and four adult dogs. We also lost a total of 15 puppies to death (two full litters and portions of the others). Is there any way that the cost of the puppies that died can be claimed as a business loss on my Schedule C?
-- Paul
Dear Paul,
There's nothing sadder than dead puppies, especially during the holidays. As a sole proprietor, you would most likely report your income using the cash basis method of accounting. This means that you recognize income when you collect for the sale of the puppies and recognize expenses as you pay for them -- either by cash or credit card.
In a breeding operation, there would be no cost associated with the puppies because they were bred. In other words, because you did not pay for the puppies, there is no cost. Incidental costs such as veterinary, food and advertising would be deductible regardless of whether the puppies survived. Unlike a farming activity, these costs are not required to be capitalized.
If instead you purchased puppies for resale, you would have a cost to deduct if they were to die before being resold. You cannot deduct the value of the puppies, as you have no cost associated with them. For tax purposes, puppies are not considered livestock because they are not farm animals and therefore breeding is not considered a farming activity. The rules applicable to farmers are not applicable to your activity, and you should continue to report the breeding activity on Schedule C.
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