With tax season upon us the taxpayer is always looking for a tax deduction to lower or eliminate any potential tax liability before the filing deadline. You might think that the stories about people taking their pet as a deduction is more myth than fact. But, I am writing this informational guide to let you know; "it ain't so Joe". Again this tax season I have had to counsel one to two of my clients that although their vet bills are high it is still not deductible as a medical expense.
It is a fact that some pets are treated better than family members are. They are fed better than some people in third world countries are. They are allowed more privileges than your first born. But, this can be attributed to the fact that the pet doesn't talk back and gives unconditional love without you having to make loans that you know won't be paid back.
Yet, and still your pet cannot be listed as an exemption because you provide over half of their support. Despite breeding origins they are still considered to be American, so they are not part of any foreign treaty that includes them as exemptions. And, yes, they are dependent on you, but you still cannot take the medical deduction subject to the 7.5% limitation. To the governments both Federal and State your pet is considered a personal item per Internal Revenue Code Section 262 and therefore is not deductible. I mean think about it. Can you even get a social security number for your pet? Well, yes, it has been done. But, it hasn't been that successful. And now that the Federal and State governments are asking for more verification it wouldn't be long before the charade is discovered and you have to pay back the money with interest and penalties. And, is it worth it? Unless it is a joke--NO. And because the government doesn't like these types of jokes it would not sit well with the enforcer at large.
Ha! Ha! There is! Your pet has to become your Internal Revenue Code Section 162 trade or business. Are you ready for this? You must already know many have tried. To make your pet have any deductibility you must create a potential for profit. How? You see those animals in the movies and on television. They are earning money that is taxable. So, per the Internal Revenue Code Section the owner is allowed to subtract all ordinary and necessary business expenses to keep the money making pet. Do you think an auditor would disallow the expenses for Lassie or Rin Tin Tin? They were moneymaking dogs. When the owners negotiated the contracts you know they were listed as the manager or talent agent who got at least ten (10) percent off the top. And, they deducted the vet bills, trips with the dog, the fabulous Hollywood dog-groomer, the "hip" psychoanalyst and the business meals subject to a fifty- (50) percent limitation.
Or, there are the dog shows and breeding possibilities, but there is a big catch to that. Namely, when does the showing of pets become more of a hobby than a business? This is when Internal Revenue Code Section 183 thrusts out its ugly head. If you show losses on a continual basis for more than three years, there is the audit potential of not being in a trade or business due to the nine points outlined per the Treasury Regs. 1.183.
One last area that has potential is the search and rescue dog. There is potential for some food and vet bills to be taken as a charitable deduction, but it limits the pet that you can use. I've never seen a search and rescue canary, parrot, or cat. But, if you do have one of the aforementioned pets as a search and rescue animal, you can be assured that once that extraordinary pet goes on Ripley's Believe it or Not the money from the public appearances, the movie rights, and book deals will generate more than enough money for you and your pet to enjoy a pleasurable life, a tax deduction, and, unfortunately a profit that will be subject to personal, as well as, self-employment tax.
OK, that's about it in a nutshell. Hopefully, this is the first of many little tax tips that can make you aware of the possibility of your pet becoming a tax deduction. Next time we will cover veterinarians. No, not vegetarians, but animal doctors and how to possibly reduce their tax liability.
Until next time, Ciao!
John H. Higgins, EA
Walpole & Co.
3891 State Street, Suite 201
Santa Barbara, CA 93105
john@walpolecpa.com
