Starting a business - taxes, deduction, capitalization and more

Hi everyone,

My brother and I are turning our snake hobby into a breeding business this year and I'm the lucky guy who gets to do taxes for the partnership.

The goal is to get some rough numbers down on all the applicable IRS forms, and then have an accountant double-check everything. I searched the forums (and the IRS website) already and found answers to lots of my questions, but I still have a few questions I'm hoping someone can help me out with:

1) Are snakes purchased for breeding stock classified as a regular deduction, or do they need to be tagged as a capitalized expense and depreciated on a yearly basis?

2) Are cages, feeders, and equipment (thermostats, heat tape, etc) categorized as regular deductions or capital expenses?

3) When you calculate the adjusted basis in order to figure a limit to the deductions you can take, how does breeding stock and equipment figure into the calculation?

4) Is this kind of a business classified as "Animal Production (including breeding of cats and dogs) - code 112900" by the IRS?

These questions I'm sure are best answered by an accountant, but I'm guessing that at least a few people on here do their own taxes and can give some general advice that'll get me most of the way through the forms before I take them to a professional. I will greatly appreciate any help anyone can provide! Links to publications or website explaining taxes for animal production business would be appreciated as well, as I can't seem to find any.

Thanks!

Well I'll go ahead and answer my own question here... I finally stumbled the Market Segment Specialization Program (MSSP) on the IRS website, which indicates that this business would be classified as "alternative livestock" breeding (chapter 9). The information in that section references specific section of the tax code which pretty much answers all my other questions

Originally Posted by obelix

1) Are snakes purchased for breeding stock classified as a regular deduction, or do they need to be tagged as a capitalized expense and depreciated on a yearly basis?

I'll point something out here that it seems most accountants I have handled (in my limited experience) in the same way. You do NOT buy snakes for breeding stock. You buy snakes for resale. They just HAPPEN to breed while in you collection before you sale them. Face it, for enough money, we'd sale ANY snake we own. It might take a million dollars for one well loved pet, but we would sell it for that amount! That means it, legally, IS for sale, right? You just don't advertise it....lol.

It seems to simplify everything, and might save you money. I don't know why they do it that way...but they do in my experience.

KJ

Thanks KJ, that's interesting. I'll look into it.

I have another general question: Is it best to stay classified as a hobby until you turn a profit? The IRS website says that you're not running a breeding business until you turn a profit in at least two of the previous seven years. My understanding is that you have to report income either way, but the benefit of being a business is that you can take more tax deductions. But if you say you're a business and take the deductions, and your records don't show that you have profits in two out of seven consecutive years, the IRS will make you pay taxes on all the deductions and give you penalties on top of that. So it's probably best to stay a hobby anyway until (if/when) profit occurs... ? And there certainly hasn't been any profit yet

I can't help you there. In Texas, you really need a sales tax and use permit to sale anything - even one snake. hobby or business - it doesn't matter. I got my permit as soon as I moved here, so I considered myself in business from year one.

Don't show a profit often enough as a business? Well, I don't BELIEVE that applies, in the strictest definition, when you have a "real job" as a supplemental form of income. Personally, I'm not sure showing a profit is a problem. Is there any law saying you HAVE to take all of the deductions that you CAN take? Ask your accountant, but I BET you can just show less deductions (don't take off ALL of the feed or something) to show a small profit when necessary.

ASK YOUR CPA! I can't see why that would be illegal, though. I can't speak from personal experience. 2007 is the first year we really took a major loss, so every year previously was OK. Even this year's loss was due to mileage for a cross country business trip, acquisition of a new snake building, and new rack systems for all of the snakes in all three of our "snake rooms/buildings." I sure as heck hope that doesn't happen again any time soon! LOL.

IF you want to claim breeding stock as a deduction then it will have to be depreciated. KJ has a good point though. Rarely do snake breeders buy an animal as breeding stock and keep it until it dies of old age. You change directions, upgrade your breeders (replacing hets with visuals), or just get tired of a certain project and decide to sell it.
If you have depreciated the value of those animals it'll hit you with more taxes when they are sold.
I myself do not claim any purchases of snakes as a deduction. I deduct all my expenses, rodent feed, cage materials, bedding etc, but not animal purchases.

As far as having to show a profit to remain classified as a business, KJ's solution is just fine. Say you've gone 3 years and shown a loss. The fourth year you make $5000 in sales but only had $2000 in expenses. Claim $1900 of the expenses and pay tax on the remaining $100. You've made a profit and not had to pay much tax on it.
The problem with remaining classified as a hobby is you have to report 100% of your sales, but don't get any of the deductions for the expenses it took to produce the snakes that generated the sales.

That definitely makes sense. Especially since you can deduct the original purchase price of a breeder when you resell it. Seems much better than trying to depreciate it over 12 years, which apparently is what the IRS wants...

Do you file a Schedule F (profit or loss from farming)? I'm thinking Schedule F is appropriate because snakes are "alternative livestock" and not really dogs or other pets.