Tax Deductions for Home Cattery

[LLC_Newbie]

I've been working on getting a cattery business started for many years. I've invested well over $10,000 on the cost of cats with registration papers, veterinary bills, food, CFA and TICA registrations, renovating a room in the basement to make suitable for a breeding kennel, etc.

These expenses go back roughly 10 years, but I have not registered an LLC yet because I was not ready to actually breed and sell any cats until just this year. I've saved receipts/invoices for all of the biggest expenses over the years, but I'm wondering if I can write them off next year when I do my taxes. For example, the first male I purchased with breeding rights cost me $2,000, and he later had a medical issue which cost me about another $5,000 (he swallowed chunks of rubber floor mat), but both of these costs occurred more than 3 years ago. Are these still eligible tax-writeoffs for when I do my taxes next year?

How far back can I go to find business expenses and capital investments to write-off for my cattery business startup costs? I simply didn't have enough money to make all of these investments all in the same year, so I'm hoping I can still get credit for them all as tax writeoffs next year.

[Carl]

You "need" to seek the services of a tax professional for "at least" your first year of business. Especially if your state taxes personal income, as doing things wrong could be a double-whammy on the tax front then. If things are done wrong, then the fines, penalties and back taxes could quite easily put you out of business, before you even get it off the ground.

In my limited experience with start-ups, the average period of time for start-up costs is 3 years before the business is actually "open for business". But you're saying 10 years. While that is truly a dedication to a vocation I'm sure you love, I would fully expect the IRS to question ten years of start-up expenses to start any business.

Some of the items you mention would be classified as business assets and depreciated over time. The cost of the animals and their upkeep and care for years before starting the business, I really can't be sure about, as it's not like you're starting a farming endeavor that would handle cattle as a depreciated asset or something of that sort.

So professional help for that first year is highly advised, so you can get educated on your specific endeavor as far as the tax requirements and liability goes. Then after that first year, you can deal with the tax yourself if you feel comfortable doing so.

I have not registered an LLC yet

There really is no need to register an LLC until the year you are ready to open the business. For example, most banks will require a business registration of some sort before you can open a business account with them.

Typically, it's not necessary to register a business if you are the only owner. It's just a sole proprietorship then. But it depends on your state requirements for running a business.  For example, no registration is required for a sole proprietorship in FL, but a county issued occupational license is required. Whereas registration of a sole proprietorship is required in CA.

[Opus 17]

I agree that you should talk to a professional, especially given the long time frame.  Here are some general principles. 

The general rule is that you report your startup expenses in the first year you are actively engaged in the business, even if you don't make a profit in that first year.  Your expenses can sometimes be deducted in the first year, and sometimes must be spread out over 15 years, and sometimes are mixed between immediate and amortized deductions.

You can be actively engaged in business without actually having a DBA, a business license, or an LLC.  Those things are matters of state law and don't affect whether or not you are actively engaged in business activities for federal tax reporting.

You can also be actively engaged in business even if you don't make a single dollar.  For example, if you began active and ongoing business activities in September 2021 (breeding your cats) you would not have income until you sold the kittens in 2022, but you would have lots of business expenses, and so you would report your business starting in 2021.  All your expenses with no income would make a loss, that you can deduct against other income (with limits).  

If audited, you might have an issue with expenses for a cat purchased 3 years ago for breeding but not actually bred for 3 years.  Questions could be asked about whether you really had a business purpose at the time.  You can't deduct expenses for hobbies.  The IRS has a 9-factor test for whether an activity is a business or a hobby.

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business