Are you involved in a dog breeding business or thinking about starting one? Whether you’re passionate about champion bloodlines, show-quality breeds, or simply love dogs and want to turn that love into income, there’s one thing you need to know upfront:

👉 The IRS is watching closely.

Dog breeding has long been on the IRS’s radar — often flagged as an activity that looks like a business but acts like a hobby. And when the IRS calls your breeding operation a “hobby,” it’s more than just semantics. It can mean thousands of dollars lost in deductions and increased tax liability.

In this post, we’ll break down how to ensure your dog breeding operation qualifies as a real business, the tax rules that apply, and how to protect yourself from costly mistakes that could get your deductions denied.

 

Why the IRS Targets Dog Breeders

The IRS has a simple rule when it comes to activities that could be personal or business-related: if they suspect you’re doing something “for fun,” they assume it’s a hobby, not a business.

Dog breeding, unfortunately, sits right in that gray area.
Many breeders start as pet enthusiasts who love a particular breed or want to preserve bloodlines — not necessarily to make a consistent profit.

That’s where the IRS gets suspicious.

According to IRS Publication 535, activities that don’t demonstrate a clear intent to earn profit are classified as hobbies under the Hobby Loss Rule (Section 183 of the Internal Revenue Code).
Once your activity is labeled a hobby, the tax consequences become severe.

The Tax Consequences of Being a “Hobby”

If your breeding operation is classified as a hobby:

• You must report all income you earn from selling puppies.
  
• You cannot deduct most expenses related to breeding (food, vet bills, equipment, supplies, etc.).
  
• You can only deduct your Cost of Goods Sold (COGS) — meaning the direct expenses that go into producing a saleable puppy (for example, stud fees or the direct cost of raising a litter).

That’s it.

So even if you spent $20,000 last year on kennels, vet visits, or transportation to dog shows, none of that is deductible if the IRS says you’re just a hobbyist.

And that’s what makes hobby classification a tax disaster.

 

The Good News: You Can Qualify as a Business

The IRS recognizes that not every dog breeder turns a profit right away. Some take years to build reputation, establish breeding lines, or expand facilities.
That’s why there are two main tests the IRS uses to determine whether your dog breeding qualifies as a legitimate business:

1. The Profit Test (The Easy Route)

This is the most straightforward way to qualify.

If your breeding operation earns a profit in at least three out of five consecutive years, the IRS must treat it as a business — even if the profits are small.

For example:
If you started breeding in 2021 and made profits in 2022, 2023, and 2025, that’s three out of five years. You’ve met the test.
No further justification needed.

Once you pass this test, you can deduct ordinary and necessary business expenses related to your breeding operation, including:

• Veterinary care
  
• Food and supplies
  
• Kennel maintenance
  
• Advertising and marketing
  
• Travel to shows and competitions
  
• Breeding stock depreciation
  
• Professional fees (e.g., dog handlers, trainers, accountants)
  

2. The Facts and Circumstances Test (The Harder Route)

If you don’t meet the “three out of five” profit test, you can still qualify — but you’ll need to prove your genuine intent to make a profit.

The IRS doesn’t require you to actually make money every year — they just need to see that you’re running your breeding operation like a business, not a pastime.

To determine this, they look at nine specific factors under Treasury Regulation §1.183-2(b).
But only three carry the most weight:

1. Operating in a Businesslike Manner

You should be running your breeding activity like any professional business.
That means:

• Keeping detailed books and records
  
• Maintaining a separate business bank account
  
• Registering your business entity (LLC, corporation, etc.)
  
• Having clear contracts and invoices for sales
  
• Advertising through legitimate marketing channels
  
• Tracking income, expenses, and breeding cycles

Essentially, your operation should look like a business on paper and in practice.

Having Expertise in Dog Breeding

If you’ve studied breeding techniques, genetics, animal husbandry, or have taken professional training, it shows that you take the business seriously.

Even better  if you consult with established breeders, veterinarians, or trainers, and document those consultations, you’re building evidence that your intent is professional and profit-oriented.

Devoting Time and Effort to the Activity

The IRS will also evaluate how much time you actually spend on breeding.
If you’re working with your dogs daily, managing records, and actively marketing litters, that demonstrates commitment.

On the other hand, if you’re only breeding occasionally and not reinvesting time or capital, it could look like a hobby.

Other Factors That Strengthen Your Case

Aside from the “big three,” the IRS also considers whether:

• You expect your assets (dogs, kennels, land) to appreciate in value.
  
• You’ve had success with similar business ventures in the past.
  
• You adjust your operations to improve profitability.
  
• You rely on breeding income for your livelihood.
  
• Your losses are due to circumstances beyond your control (e.g., disease, market downturns).
  

Documenting these points gives you a stronger case if you ever face an audit.

Practical Steps to Ensure You’re Treated as a Business

Here’s how to build a solid paper trail and structure that convinces both your accountant and the IRS:

1. Keep Accurate Business Records

Use accounting software like QuickBooks, Wave, or FreshBooks to log income and expenses.
Keep digital and physical copies of receipts, veterinary bills, and advertising costs.
Document every litter, sale, and payment.

2. Market Your Business Consistently

Have a professional website and social media presence showcasing available litters, services, and contact info.
Use Facebook, Instagram, or breeder directories to advertise your brand.
The more public your marketing efforts, the easier it is to show that you’re serious about generating sales.

3. Integrate with Related Businesses

If you also run a grooming service, boarding kennel, or pet-supply store, integrate the breeding operation with those businesses.
It creates synergy and helps justify that breeding is part of a broader, profitable business plan.

4. Create and Follow a Business Plan

A written business plan is one of your strongest defenses in an audit.
Include your breeding goals, expected expenses, projected revenues, and a growth timeline.
Update it annually and show how you’re adapting your strategy to improve results.

5. Form a Legal Entity

Creating an LLC or corporation gives your operation more credibility and legal protection.
It also allows you to open a dedicated business bank account and simplifies expense tracking.

6. Work With Professionals

Consulting with a CPA or tax advisor who understands agriculture or animal-based businesses can help ensure your setup is compliant.
They can also help with recordkeeping, depreciation, and deductions.

Tax Deductions Available to Dog Breeding Businesses

Once you qualify as a business, you can deduct a wide range of expenses under IRS Section 162, as long as they’re ordinary and necessary for your operations. These may include:

• Veterinary expenses (including vaccinations, check-ups, treatments)
  
• Food and supplements for breeding dogs and litters
  
• Equipment and supplies (crates, leashes, grooming tools, whelping boxes)
  
• Facility expenses (rent, utilities, cleaning, maintenance)
  
• Advertising and website costs
  
• Insurance (liability, property, animal mortality)
  
• Professional fees (training, legal, accounting)
  
• Travel and show expenses related to promoting your kennel or bloodline
  

Cost of Goods Sold (COGS): What You Can Deduct Even as a Hobby

Even if the IRS classifies your operation as a hobby, you’re still allowed to deduct COGS — the direct costs related to producing your puppies.

For example, if it costs $2,000 in stud fees, vaccines, and food to raise one litter and you sell a puppy for $3,500, you can deduct that $2,000 against your $3,500 income.
Your taxable income from that sale is $1,500.

However, you won’t be able to deduct other indirect expenses like kennel upkeep or show entry fees.

Common Mistakes Breeders Make (That Get Them Flagged)

1. Mixing personal and business finances — Using your personal bank account for dog-related expenses is a red flag.
   
2. Lack of written records — The IRS heavily relies on documentation. Verbal claims don’t hold up in audits.
   
3. Inconsistent marketing— If your business isn’t visible to the public, it’s harder to prove intent to profit.
   
4. Treating breeding as a hobby — Talking about breeding “for fun” or “for the love of dogs” in public marketing materials can backfire in an audit.
   
5. No formal business plan — Even a simple plan shows you’re intentional about growth and profitability.
   

Let’s say Sarah runs Golden Star Kennels and breeds Golden Retrievers.

For the past three years, she’s made modest profits — $5,000, $7,000, and $3,500  despite major expenses on new facilities and marketing.

She keeps detailed records, advertises her puppies online, and uses a CPA to manage finances.

Even though her profits are small, the IRS recognizes she’s operating like a business:
✅ She keeps records
✅ She reinvests earnings
✅ She advertises publicly
✅ She has a written plan

Sarah qualifies as a legitimate business.
She can deduct her operating expenses and avoid being labeled a hobbyist.

What Happens If the IRS Audits You

If audited, the IRS will request:

• Bank statements and accounting records
  
• Business plans and marketing materials
  
• Proof of expertise (certifications, course receipts, show participation)
  
• Documentation of income and expenses
  

If they decide your operation lacks a profit motive, they can disallow all deductions except COGS and recalculate your taxes retroactively, which can lead to back taxes, penalties, and interest.

That’s why proactive planning  not reaction  is key.

Turning Your Passion Into a Profitable, Compliant Business

Dog breeding can be both rewarding and profitable  but only when treated like the business it truly is.

By organizing your records, building a professional presence, and demonstrating profit intent, you can secure your rightful deductions, protect your income, and avoid unnecessary IRS scrutiny.

Don’t Wait for the IRS to Decide for You

If you’re breeding dogs and unsure how to position your operation for tax purposes, don’t leave it to chance. The difference between “hobby” and “business” can mean thousands in taxes and penalties.

A qualified tax professional can review your setup, identify weak spots, and help you document your profit motive properly.

Book a consultation with our tax specialists today. Let’s make sure your passion for dogs stays rewarding  financially and professionally.