If you run a business that breeds animals, the Internal Revenue Service allows different tax treatment than it does for businesses that involve animals used for other purposes, such as draft, sporting or dairy. While you can elect to count your breeding animals in regular market inventory or as farm assets, choosing the latter offers a number of tax advantages, lowering both your taxable income and the tax rate you pay. If you run a farm, use Schedule F to report your business income and expenses. If you breed animals but not on a farm, use Schedule C.
When you count breeding animals as assets, record purchases on Form 4562 (Depreciation and Amortization) in the year you buy the animal. You cannot write off the purchase price; instead depreciate the purchase price over the IRS-defined general depreciation system, from three to seven years, depending on the type of animal.
The IRS allows a deduction for all related expenses, including feed, veterinary care and transportation. The IRS requires that the expenses be typical for your industry and necessary to conduct business. If you breed animals that must be registered with a breed registry, the cost of registration is a deductible expense. Record all expenses on Schedule C or F in the year you pay them.
When you count the breeding livestock as assets, report capital gains or losses from the sale of an animal on Form 4797 and Schedule D. IRS code 1231 allows you to pay capital gains tax rate on the sale, rather than recording it as farm or business income if you hold the animal for more than 12 months (24 months for horses or cattle) before selling. You also are not required to pay self-employment tax on this amount.
For purchased breeding stock, the gain or loss is the sale price minus the purchase cost. Add in any expenses related to the sale of the animal and subtract any accrued depreciation. For raised breeding animals, the purchase cost is zero. You have already written off the expenses of raising the animal, and there is no depreciation. The full amount of the sale price is considered a gain by the IRS. Report this amount on Form 4797.