preview

Tax Case

Decent Essays

June 3, 2016 Renee Harding 123 Dog Lane Raleigh, NC 27695 Dear Renee, I appreciate the opportunity to advise you regarding the tax treatment for your loss of $25,406 in 2015 from your dog breeding activities. I understand that you decided to start breeding purebred terriers to keep yourself busy after your divorce with your husband in January. There are two possible ways to treat the loss under rulings in the Internal Revenue Code. One option is to treat your dog breeding activity as a business and deduct the losses on Schedule C, Profit or Loss from Business, of your individual income tax return. The second option is to treat your dog breeding as an activity not engaged in for profit, which does not allow you to deduct the …show more content…

The only deductions allowed are expenses that would be deductible regardless of the activities tax status, such as property taxes, and expenses that would be deductible had the activity been a trade or business. Since your activity is not for profit, your loss of $25,406 may not be used to offset other income. The deductions related to your dog breeding activities should be claimed as itemized deductions on Schedule A of your individual income tax return. During my research, I made the following assumptions. First, I assumed that before starting the dog breeding activities, you had no prior experience breeding animals. If you had, I would have to reconsider your activities as a business since previous experience would support having a profit objective. I also assumed that your annual alimony is your main source of income, as opposed to relying on the sale of dogs you breed, as this would also support a profit objective. There are also some implications to your tax return regarding my conclusion. One consequence is that you can only deduct your expenses up to the amount of your income. Having a loss from your not-for profit activity means that the receipts will be ignored and the loss will not be a part of allowable deductions. Depending on the amount of expenses, it could help reduce your taxes, but

Get Access