So what kind of pet- and animal-related expenses are tax deductable?

Our pets are near and dear to us. Some may consider our cat or dog worth its weight in gold (this is a figure of speech). But, did you know that pet-related expenses are, in certain circumstances, eligible for tax deductions. For instance, when relocating, a pet owner can file for a tax deduction specifically for the expenses incurred in relocating a family pet, in tax law in this circumstance, a pet can be considered a personal effect, and therein Mittens or Spot is treated as such.

A business might be able to deduct for the expenses of keeping a guard dog. Or a volunteer host of a therapy animal, such as a guide dog, might be able to deduct the veterinarian bills, and other such unreimbursed expenses (considered charitable donations). There have also been court rulings that have favored tax deductions for expenses related to caring for animals that serve visually-impaired, hearing-impaired, and physically-impaired individuals. There are also tax deductions in expenses related to the care of animals in an animal-breeding business.

The Cat Lady Case—Van Dunsen vs Commissioner

In 2004, Ms. Van Dusen shared her living space with 70 – 80 cats (7 of which she considered personal pets). She was a volunteer for a charitable organization (named “Fix our Ferals”) with the primary aim of neutering feral cats. The volunteer deducted $12,068 on her tax return. The IRS argued that the woman was rescuing cats on her own rather than incurring expenses as a volunteer for a charity. The tax court rejected this argument. The tax court did agree with the IRS, however, that many of the expenses (State Bar dues, DMV fees, Costco membership dues, and wet/dry vacuum repair cost) did not constitute an exclusively charitable expense.

Finally, all individual expenses that exceeded $250 were disallowed because Ms. Van Dusen did not have the required documentation for such charitable donations (i.e. a contemporaneous written acknowledgment from the donee organization.) For the deduction to be allowable, the donee must file a return with the IRS reporting the information that would be included in the written acknowledgment, such as:  1) the amount of cash contributed; 2) a description and good-faith estimate of any goods or services received in exchange; and 3) if the donee provides any intangible religious benefits, a statement to that effect).  If you want to deduct the expenses for your 70 cats, make sure you are acting on behalf of an appropriate charitable organization and make sure you get the required documentation.

How do I differentiate between tax deductable and non-tax deductable animal care-related expenses?

So you see there are possibilities for tax deductions related to the expenses incurred by care of pets and animals. And there are instances where these expenses are non-tax deductable. If you are considering a tax deduction related to the expenses of caring for pets or animals, seek the counsel of a CPA (certified public accountant). Don’t assume that just because your neighbor owns twenty cats, she can provide you informed pet-related tax deduction information and counsel.

In one bizarre instance, a landscaper attempted to deduct for the expenses of caring for a dog that helped him pull a wagon at work—presumably without the counsel of his tax accountant. This awarded the landscaper an audit. We can assume that this caused some working-relations strain, but we cannot verify this. Nor is it likely that either dog or boss will go on the record anytime soon.

Joe goes to the local office supply store occasionally to stock up on supplies. He stops for lunch now and then on the way back to the store, but he knows he can’t claim the lunch as an expense. He is eating by himself, and has no business-related purpose.

Joe picks up the tab when he meets with his banker for lunch, and puts the receipt in a special file when he returns to the store. Meals are only 50% deductible on his taxes, even an “entertainment” business lunch with a customer or business partner like the banker, so to keep his records straight, he has a separate file.

Joe wants to travel 1,200 miles to attend a conference in Las Vegas. The four day conference is in mid-November, and is sponsored by the Diving Equipment and Marketing Association. Joe is going to fly to save the two day drive each way. He expects he will make new contacts, and will learn about the latest trends in marketing for his business. The conference doesn’t include meals in the registration prices. Joe would like his wife to go also, and they want to see a show, maybe the Tournament of Kings. They are also considering renting a car to visit the new bridge over the Hoover Dam.

Because Joe is in the business of selling SCUBA equipment and he is going to a conference that is “ordinary and necessary” for his line of work, he can deduct the costs of the conference. His travel by air, the cost of the hotel, and the mileage on the rented vehicle going from the hotel to the conference are all deductible. He can still only deduct 50% of the cost of his meals even though he is away overnight. None of the costs related to his wife’s travel or meals can be deducted because she isn’t Joe’s employee. The visit to Hoover Dam can’t be deducted, nor the Tournament of Kings show. Joe needs to keep receipts for all of his expenses, and he should note on the receipt when and why the costs were incurred.

It turns out Joe’s wife can’t go after all, but he meets a potential supplier at the conference, and they decide to see the Tournament of Kings show after the seminars end for the day. The entertainment takes place immediately following a substantial business discussion, so Joe generously offers to pay for the outing, and he is able to deduct 50% of the cost of the tickets.

After he returns from the conference, Joe decides to put into practice some of the marketing information he learned at the conference. He takes a trip to Portland to promote his business to the 7:00 PM Oregon SCUBA Club meeting. This is about 200 miles from his home and store, so he drives his car. After the meeting he stays in a hotel overnight. The cost of the hotel is fully deductible, and his meals are deductible at 50%. He uses the standard mileage rate for travel, so once again he tracks his odometer reading. He also saves his receipts for parking and tolls, and deducts those as well.

Joe Taxpayer keeps his travel records orderly and documented because he has learned a little bit of effort now will mean tax savings when his tax return is filed.

Related Articles:

http://www.huddlestontaxcpas.com/travel-deductions-for-the-self-employed/

For a charitable contribution to be deductable on your tax return it must be a contribution of money or goods to a qualified charitable organization.  If you donate goods to a qualified organization then you can generally deduct the fair market value of those goods at the time of donation.  Charitable donations are usually limited to 50% of your adjusted gross income and are reported on Schedule A of your personal tax return.

Contributions that do not qualify for tax purposes are contributions from which you benefit, contributions to specific individuals, contributions to non-qualified organizations, the value of your time or services, your personal expenses, appraisal fees, certain contributions to donor advised funds, and certain contributions of partial interests in property.

If you have questions on whether or not a specific contribution you have made or are thinking of making qualifies for tax purposes it is always a good idea to consult your tax advisor.

How comfortable would you feel about your records if your were audited?

If the thought of the IRS paying you a visit gives you a miniature heart attack, you may be able to find some comfort in hiring a CPA. First of all, compliant bookkeeping will reduce your chances of being audited and having an accountable professional will help you retrace your footsteps in a worst case scenario.

Are you spending too much time with bookkeeping?

Businesses grow when the principles are out there interfacing with customers, developing products and improving the core competencies. If all of your time is consumed with paperwork, payroll and bookkeeping, then it might be a good idea to hire someone else to handle this relatively mundane aspect of the business.

Are you losing money and you don’t know why?

Having a clear financial picture of your company is key to improving your business. An accountant can give you an accurate snapshot of your cashflow and areas that need attention so you know where to focus your energies.

Are you thinking of restructuring?

Being a sole proprietor works for some businesses, but as you grow, you might want to think about incorporating. Choosing the right structure for your business can save you lots of time and money. A CPA can advise you on what’s best for you.

The bottom-line is that you should hire a CPA if you aren’t completely confident and comfortable with the numbers side of your business. This is a reality for many small business owners, since most entrepreneurs get into the business by following their innovation or passion and give little thought to bookkeeping. But accounting practices can make or break a business, no matter how ingenious your product is.

John Huddleston
Seattle CPA  

Most small business owners are able to choose which method they want to use for their business for tax purposes.  In some cases though, you have no choice but to you the accrual method.  This is when:

1.  Your sales are more than $5 million per year or

2.  Your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year

The cash method of accounting is the most commonly used method for small businesses.  When using the cash method you do not recognize income until the cash is actually received.  You also do not recognize expenes until the cash is actually paid out. 

The accrual method of accounting is different from the cash method in that you recognize income when a sale occurs, even if you have not yet received the cash from it.  You also count expenses when you receive the goods or services, even if you have not paid for them yet.  With the accrual method you do not have to wait until you receive or pay money to show the income and expenses

The advantage of the accrual method is that it more accurately shows you a picture of how your business is doing because it shows the ebb and flow of income and debts.  The disadvantage of the accrual method is that it can lead to cash flow problems because it does not always show you an accurate picture of cash on hand.  You also have to keep accounts payable and accounts receivable records which leads to recording more transcations.

The advatages of the cash method are that it gives you a better picture of your current cash on hand and it is also easier to maintain when it comes to bookkeeping.  The disadvantage is that it can give you a misleading picture of longer-term profitablity.

When you are a new business owner it is important to discuss with your tax preparer which method of account is best for you and your business.  Accural vs. cash method of account can be an important decision that you must make when first starting your business.

1. Have you met all the requirements to be considered a Certified Public Accountant in my state?

The first step when vetting a CPA is to determine whether or not they are a genuine CPA in your state. You can actually answer this question on your own via your state’s professional licenses website. You can find a list of CPA institutions by state at aicpa.org. Make sure your CPA is up to date with their requirements and are not suspended or inactive.

2. How many years experience have you had as a CPA?

The road to becoming a CPA is marked by years of education and training, so even a freshly minted CPA won’t be completely inexperienced. But it’s still best to choose a CPA who has considerable hands-on experience as a practicing CPA.

3. What is your financial expertise in?

There are a number of CPA specializations, including Assurance and Attestation, Corporate Financing, Corporate Governance, Estate Planning, Financial Accounting, Financial Analysis, Financial Planning, Forensic Accounting, Income Tax, Information Technology in accounting and auditing, Management Consulting, Performance Consulting, Tax Preparation and Planning, or Venture Capitalism. Make sure your CPA is well-versed in the area where you need the most help.

4. I need (state the requirements of your business) and I’m wondering if you have the necessary knowledge and experience to help me with this type of accounting?

Chances are, you know what part of your tax return is the most complicated and potentially problematic. Be up front about this issue and make sure they can address it with confidence.

5. What are your hours and availability? What kind of contingency is there if I am audited?

Lastly, you’ll want to make sure that your CPA firm will be there for you when you need them. Make sure they can meet with you when you are available (i.e. do they only operate during business hours when you are also at work? Are lunch meeting feasible?). You’ll also want to be sure that they’ll be accountable (no pun intended) in the case that you are audited. Otherwise, you’ll have to reverse engineer their work in order to answer all of the IRS’ questions.

These five questions should just get you started. Choose your CPA carefully and ensure that you feel comfortable and confident in their experience and expertise.

John Huddleston
Seattle CPA  

The tax preparer won’t sign your return.

There’s a designated area on your tax return for your preparer to sign. No matter what, you will be responsible to pay fees and penalties if there are mistakes, so there’s no reason a tax prepare should refuse to sign the return. By doing so, they put their stamp of approval on it. By refusing to do so, it’s clear that they have something to hide.

The tax preparer promises you a specific amount on your return.

If someone says they can guarantee you X amount of dollars on your return, they are blowing smoke. No one can know for sure how much you will receive until they’ve done all of your paperwork.

The tax professional bases the fee on the amount of your refund.

This is also suspect, since it may motivate the tax preparer to artificially inflate your return amount. Tax professionals should charge according to the complexity of your return, not on how much you receive from the IRS.

The tax accounting firm doesn’t have a history.

The IRS may initiate an audit up to 7 years after you file your return. If that happens, you’re going to want to talk to your tax preparer – make sure they’ll still be in business if you have questions. Watch out for accounting firms that set up temporary store fronts or just suddenly appeared right around tax time. One last bit of advice: You may be better off choosing a CPA. Aside from being the best fit for complex tax situations, you can easily verify a CPA’s license online. For example, you can check the status of a Bellevue or Seattle CPA’s license at the Washington State Board of Accountancy website with just a few clicks. It’s illegal to call yourself a CPA if you aren’t one, and if they don’t show up in your state’s database, that’s a deal breaker.

John Huddleston
Seattle CPA