Introduction
Cat breeding can be a lucrative business for some people who are able to breed and sell kittens for profit. However, like any other business, income generated from cat breeding is subject to taxes. The question is whether the income from cat breeding should be considered a hobby or an actual business for tax purposes.
This article provides an overview of cat breeding as a potential business and examines the factors that determine whether the income is taxable. We will look at IRS rules differentiating hobbies from businesses, criteria qualifying cat breeding as a business, reporting requirements, allowable deductions, special tax considerations, estimated taxes, and using a tax professional.
Defining Cat Breeding as a Business
Cat breeding refers to the practice of mating selected purebred cats to produce kittens for show or sale. Unlike casual pet owners who may breed a litter of kittens from their household pet, cat breeders operate more like a business.
Expenses for a cat breeding business include purchasing breeding stock, registering cats with cat associations, veterinary care, breeding supplies, and marketing costs. Income comes primarily from selling kittens, stud fees for allowing outside breeders to mate with males, and showing cats in cat shows.
While many cat breeders view their operations as a hobby, the IRS considers it a business if the activity is carried out in a businesslike manner with the intention of making a profit. Factors like keeping detailed records, having a separate bank account, and devoting substantial time all support cat breeding as a business rather than a hobby.
According to How to Become a Cat Breeder, the average cost to start a cat breeding business ranges from $7,000-$20,000 depending on the breed and expenses involved. Breeding popular pedigreed cats like Persians and Ragdolls can generate over $100,000 per year in kitten sales for an established breeding business.
Tax Rules for Hobby vs Business
The IRS has specific rules for determining if an activity qualifies as a hobby or a business for tax purposes. According to the IRS, “A business operates to make a profit. People engage in a hobby for sport or recreation, not to make a profit.” [1]
Some key criteria the IRS uses to evaluate if an activity is a business include:
- Whether the activity is carried out in a businesslike manner and accurate records are kept.
- Whether the time and effort put into the activity indicate an intention to make a profit.
- Whether the taxpayer depends on income from the activity for their livelihood.
- Whether losses are due to circumstances beyond the taxpayer’s control or are normal in the startup phase of a business.
- Whether the taxpayer changes methods of operation in an attempt to improve profitability.
- Whether the taxpayer or their advisors have the knowledge needed to carry on the activity as a successful business.
- Whether the taxpayer was successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
If an activity is determined to be a hobby instead of a business, expenses can only be deducted up to the amount of hobby income. Losses from the hobby cannot be used to offset other income.
Factors that Make Cat Breeding a Business
The IRS uses several factors to determine if an activity qualifies as a business versus a hobby for tax purposes. When it comes to cat breeding, some key factors that point to a business operation include:
Large scale operation – Breeders with multiple breeding cats producing multiple litters per year are more likely to be considered a business than a small scale breeder with just one or two cats. As mentioned by How to Start a Cat Breeding Business, cat breeding businesses often have dedicated breeding facilities and staff to care for a large number of cats.
Seeking profit – A business aims to make a profit, while a hobby is for personal recreation and enjoyment. Cat breeders marketing their kittens for sale at prices meant to generate income are exhibiting a profit motive more typical of businesses.
Time spent – Breeders who spend significant time caring for, breeding, and marketing cats are behaving more like a business owner than a casual hobbyist. The IRS looks at factors like time and effort spent when determining if an activity qualifies as a business.
Expense deductions – Deducting expenses related to cat breeding is more characteristic of a business operation. Hobby breeders are limited in the deductions they can take. Tracking expenses and deductions thoroughly is an indicator of business financial management.
Reporting Cat Breeding Income
If you earn income from breeding and selling cats, you are required to report it on your federal tax return. The IRS considers cat breeding a business if it is carried out in a professional manner with the intent to make a profit. If cat breeding is a hobby for you, you still must report income, but you cannot deduct any expenses that exceed that income.
Cat breeders need to report their income on either Schedule C (Form 1040), Profit or Loss from Business, or Schedule F (Form 1040), Profit or Loss from Farming. Schedule C is for most businesses while Schedule F is designed for farming businesses. Some cat breeders may qualify to use Schedule F instead of Schedule C.
It is important for cat breeders to keep accurate records of income from cat sales and expenses. You will need documentation of income and expenses in case of an IRS audit. Good record keeping also helps cat breeders complete their tax forms correctly.
Allowable Tax Deductions
As a cat breeder running a business, you can deduct a variety of expenses related to your breeding operation from your taxes. Some common deductible expenses include:
Food and veterinary care: The costs of food, veterinary care, medication, and other health-related expenses for your breeding cats are deductible (Source).
Breeding and litter costs: Expenses related to breeding, such as stud fees, artificial insemination, pregnancy testing, birthing supplies, and care of kittens until weaned/sold are deductible business expenses (Source).
Home office deduction: If you use a portion of your home exclusively for cat breeding, you may be able to claim a home office deduction following IRS rules. This can include a percentage of rent/mortgage, utilities, etc. (IRS Source).
Depreciation: You can deduct depreciation on assets like cages, scales, breeding equipment, etc. following IRS depreciation schedules and rules (Source).
Special Tax Considerations
When operating a cat breeding business, there are some special tax considerations to keep in mind.
One is sales tax collection and remittance. In most states, you will need to collect sales tax on the sale of kittens and remit it to the state. Be sure to register for a sales tax permit in your state so you can properly collect and pay sales tax.
Another consideration is business structure. Many cat breeders choose to form an LLC (limited liability company) for their breeding business. This helps protect your personal assets in case of lawsuits. Talk to an accountant about whether forming an LLC makes sense for your cat breeding activities.
Paying Estimated Taxes
If you earn income from cat breeding that is not subject to withholding, you may need to pay estimated taxes quarterly to avoid penalties from the IRS and state tax authorities. The IRS requires you to pay estimated taxes if you expect to owe at least $1,000 when you file your tax return [1].
Estimated taxes are paid in four installments on the following due dates: April 15, June 15, September 15, and January 15. The IRS provides Form 1040-ES to calculate and pay your estimated taxes. If you miss paying estimated taxes or underpay, you may be subject to penalties like the underpayment penalty [1].
To avoid penalties, you must pay at least 90% of your total tax liability or 100% of your prior year’s tax liability (110% if your adjusted gross income exceeds $150,000). Paying 100% of your prior year’s taxes is the easiest safe harbor to meet [1].
Hiring a Tax Professional
Cat breeding can involve complex tax situations that are unfamiliar to the average individual. Since breeding cats is considered a business, breeders must report income and expenses, calculate depreciation on assets like breeding cats, determine if hobby loss rules apply, and handle many other tax technicalities.
Getting help from a qualified tax professional who understands the cat breeding business can provide multiple benefits:
- Ensure you claim all allowable deductions and track assets properly for depreciation
- Avoid audit risk and errors by having taxes prepared correctly
- Gain useful advice tailored to your specific breeding operation
- Have an expert handle complex Schedule C reporting and estimated tax payments for you
- Get guidance on managing taxes as your breeding business grows
With intricate tax rules around asset purchases, hobby vs. business status, and other issues, most cat breeders can benefit from personalized tax preparation. Partnering with an accountant experienced in breeding businesses helps optimize your tax return and ensures full legal compliance.
According to the American Kennel Club, a specialty cat breeder tax accountant knows the intricacies of tax regulations for breeding and can save breeders money over generic tax prep services.
Conclusion
Cat breeding can be a rewarding endeavor, but also comes with tax obligations if pursued as a business. The IRS uses factors like intent to make a profit, time spent, businesslike operations, and financial records to determine if cat breeding is a hobby or business for tax purposes.
Those breeding cats as a business must report income on their tax return, pay self-employment tax, keep detailed records, and may need to pay estimated quarterly taxes and hire a tax professional. Eligible business expenses like vet bills, supplies, advertising, and mileage can be deducted to offset taxable income.
For cat breeders, key recommendations include:
- Consult a tax professional if unsure if your breeding qualifies as a business or hobby.
- Keep accurate records of income, expenses, transactions, breeding activity.
- Learn tax obligations for paying estimated taxes and self-employment tax.
- Deduct all allowable breeding expenses from your taxes.
- Set up a separate business bank account and track all financials.
With proper documentation and compliance, cat breeding can be a rewarding and profitable small business opportunity. Our tax code aims to encourage entrepreneurship, while ensuring everyone pays their fair share.