Man’s Best Friend is his dog. That’s the cat’s meow! Just a bird in a gilded cage. A horse of a different color, Elsie the milk cow and lipstick on a pig. Animals are a huge part of our everyday lives. For some folks their world revolves around these four-legged friends. (Not all of which have legs, I had a client in the office once, for a very short time, with a boa constrictor around her neck, shudder….) So that got me thinking about my other favorite subject, taxes.
Pets have long been the subject of some of the tax professions best “Let me tell you what my client tried to deduct” stories. Who hasn’t heard of the “Cat lady” who wanted to take her babies as dependents and actually applied for SS numbers for them? Or the homeowner who wanted to deduct the costs of his dog because he was a guard dog, all 3.5 pounds of him! But let’s look at some practical (and legal) applications to the use of our furry friends in an income tax situation.
There are the obvious things that come to mind, such as the trained companion animals for people with disabilities. It has long been established by case law that the expenses for these animals are considered legitimate medical expenses. (Section 1.213-1(e)(1)(iii) and Rev. Rul. 68-295) Therapy animals are a relatively new but burgeoning field in this same area.
Let’s go back to our vicious trained killer Chihuahua for a minute. What about those businesses that legitimately use guard dogs, either alone or with a handler, in the conduct of their business? As with any venture into the income tax world, taxable income is the goal and the IRS has long established the road markers to get to that goal. If my business is in a crime ridden area of town where break-ins are the norm, then having a guard dog could be a sound business decision. However, if I decide that little Paco can’t stand to be left alone all day, so I take him to work. That probably won’t fly as a business deduction, no matter how cute your customers say he is!
So, if the disabled person can take a medical expense deduction for the care and expenses of a companion or therapy animal and the business owner can deduct a legitimate security animal; what about the people who breed, raise and train those animals? You betcha! As long as the business end of the equation meets regular IRS standards for the conduct of a business and does not fall into the definition of a hobby or charity venture.
Falling into a hobby or charity venture is where most taxpayers meet their downfall when dealing with pets. How do you determine the difference between a hobby raising and showing pure breed dogs and a business venture? How do you escape the trap a recent presidential candidate fell into with show horses? How do you make your cat who is a kitten factory into a business as opposed to a hobby? Or the rabbit in the back yard who is used in the local magic show?
It all comes down to the IRS “Nine Profit Motives” (Section 1.183-2):
1. Manner in which the taxpayer carries on the activity.
2. The expertise of the taxpayer or advisers.
3. The time and effort expended by the taxpayer in carrying on the activity.
4. Expectation that assets used in the activity may appreciate in value.
5. Success of the taxpayer in carrying on other activities.
6. Taxpayers history of income or losses with respect to the activity.
7. Amount of occasional profits, if any, which are earned.
8. Financial status of the taxpayer.
9. Elements of personal pleasure or recreation.
Not every business needs to meet every motive, but there must be a preponderance of issues to weigh in the favor of a profit being sought. Examples would be betting all your “profit” on one horse. If you have a show horse or race horse you will have a better chance of meeting the IRS guidelines if it’s not your 15 year old barrel racing it at the county fair.
How about using pets in a charity venture? We’ve all seen the heart-warming news stories about people bringing animals to nursing homes and children’s hospitals to cheer up the patients. These visits are usually set up by the hospital through a charitable organization and are therefore deductible as a charitable donation by the pet owner. But let’s not go overboard. Taking Fluffy to the kid’s hospital a couple of times a year does not equal being able to write off all of his food, grooming, and vet bills. Any special costumes you make Fluffy endure during the visit, treats you get for the kids to feed him, and your mileage costs would probably be about the only legitimate deduction.
Pets and animals are as much a part of our families as the two-legged members. But, just like with the human members of the family, you still have to meet IRS guidelines in order to claim a deduction for those loved ones. And then of course there are farm animals………… but that’s another whole story!!