Horse Biz

The expectation of appreciation of assets, such as a breeding stallion or a horse facility, is considered in determining whether the taxpayer intended a profit.  The expectation must be that the operating income and capital gains from selling the asset would more than cover the expenses involved in the activity. An example is showing a stallion accrues expenses.  Would the showing increase the value of the stallion covering the costs of showing?  Did a show record increase the number of mares bred to the stallion?  If you were audited you may need to provide proof by a horse appraiser.  Have you purchased a yearling with the intent of racing it as a two-old?  The race horse accrues training fees, trainer fees at the racetrack, veterinary fees etc.  Is the expectation of once the horse is raced you will cover the costs of training and racing?  Will training an unbroken horse increase the horse’s value?  Have you increased the value of your land by improving the fence, building a barn on the property, landscaping the property?  These would be an expectation that the improvements increased the value of the property.  Are there other assets purchased for the intent of increasing the value of the business?  Is this asset necessary to manage the business?  I try to make small improvements each year.  An example would be placing sand in my arena both increases the value but also increases the aesthetic look of the arena hopefully bringing in more customers.  If you were audited, you should be able to prove that the land was purchased, maintained and improved with the expectation that it would appreciate in value. You may need to have an appraisal conducted to show that the improvements you made to the property have increased the value, even if you have several loss years.

Dr. Peggy Miller-Auwerda  is an instructor of equine courses and extension specialist at Iowa State University. Dr. Auwerda developed the on-line newsletter Grazing News  and Master Equine Manager program. Visit eXtension Horses for  up-to-date information on everything related to Horses and visit the Equine Business Network Facebook page.

The time & effort expended by horsemen varies from operation to operation. One person may work with horses full-time while others work with horses part-time. I work full-time and work at my barn part-time. I do most of the feeding, fix fence, clean stalls, etc. It is easy for me to defend my time & effort in the business. Some owners hire competent individuals to manage the business. The amount of time devoted to a horse business is a factor the IRS uses to determine if the operation is a business. Neither case above by itself has more or less impact in the determination of a profit motive. A taxpayer is materially active if they meet one of following:

1. If the taxpayer spends >500 hours on the activity/yr. = substantial participation. 500 hrs. is equivalent to 9.6 hrs./wk.
2. If the taxpayer spends less than 500 but greater than 100 hours may also = substantial participation provided certain “other circumstances” exist.
3. Participates for more than 100 hours and participation is not less than the participation of any other individual
4. Materially participated in the activity for any 5 years in the preceding 10 years
5. Personal Service Activity and has materially participated for any 3 year period

Hours spent by a husband and wife can be combined to accommodate these requirements. Activities of others (family members and employees) will not automatically be attributed to the horse owner. If the taxpayer spends less than 100 hours/yr. does not equal participation in the business.

The kind of activities that a taxpayer should be able to document during each year may include the following: consulting with advisers or other experts in the industry; speaking with vendors on the phone or in person; attending horse races, sales or shows; attending horse shows, horse sales, or races; meeting with a trainer and watching a horse being worked; implanting and revising business plans; keeping records or maintaining financial data; grooming horses; riding or driving horses; maintaining a property and performing the many additional tasks required for a horse business. It is imperative that records be kept to reflect the number of hours involved and the number must be 100 or more hours per year.

Dr. Peggy Miller-Auwerda  is an instructor of equine courses and extension specialist at Iowa State University. Dr. Auwerda developed the on-line newsletter Grazing News  and Master Equine Manager program. Visit eXtension Horses for  up-to-date information on everything related to Horses and visit the Equine Business Network Facebook page.

Master Equine Managers Evaluating Hay

The second criteria used by the IRS to determine if you have a business are The Expertise of the Taxpayer or His Advisors. I have a PhD in Animal Nutrition with emphasis in horse research. So for me it is easy to defend my expertise in horse knowledge. However, I am not an accountant so I use the expertise of my tax accountant, who is knowledgeable about horse businesses. No one knows everything about a business. Therefore one should strive to learn! For your business did you consult with experts in the field or what is your knowledge in the field? Did you consult with professional breeders or trainers to start your business? Did you work in a tack shop followed by opening one of your own? Did you attend farrier school? Even if you have been in the business for years continuing to engage with professionals to learn is a plus in terms of the IRS. This means attending courses on aspects of the horse industry. Another area they will take into consideration is any magazines you subscribe to or books you read. Keep accurate notes and/or documentation on programs you attend and printed material you use to learn more about the horse industry.  It is not only the horse industry to learn about; how to run a business is important. How do you evaluate the profit margin of your business? Have you sought advice from experts on profits, expenses, cash flow projects etc.? Do you evaluate your business and make necessary changes to make it more profitable?  I use Quicken and Excel to keep tract of my income and expenses.  I can easily show what items cost and what income I obtain from the business. Next what are your bloodlines and the potential of that bloodline in the industry? When we were audited, Rich, my husband went through each horse’s pedigree and discussed the horse’s purpose in the business. Finally if you use consultants did you make changes based on their advice, are these changes implemented or ignored?

Dr. Peggy Miller-Auwerda  is an instructor of equine courses and extension specialist at Iowa State University. Dr. Auwerda developed the on-line newsletter Grazing News  and Master Equine Manager program. Visit eXtension Horses for  up-to-date information on everything related to Horses and visit the Equine Business Network Facebook page.