The Money Pit Column written by Tax Lawyer Leonard Smith

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Photo of Ivory Pal by Cheri Prill Tennessee Walking Horse Issue August 2010

Successful Equine Tax Planning

The Horse business is your pride and passion. For all of us, first and foremost remember you are in the Horse Business.

In Equine tax and financial planning, the important rules to follow are:

Use a Corporation or LLC.

Maintain a written business plan.

Separate your business and personal accounts.

Maintain adequate books and records.

Consult experts.

Track your time.

Know when to hold ‘em.

Know when to fold ‘em.

A successful horse business is similar to the daily training of your horse. It has to be methodical and well thought. Remember, you are in business, the horse business. Now let’s get down to business, the Horse Business.

IRS audits are common in the horse industry. When it comes to the IRS questioning a horse business, the best offense is a good defense. Unfortunately, horse owners assume that by owning, selling, buying, training they are automatically qualified for business tax breaks and deductions. It is difficult for horsemen to receive the same tax treatment as other business owners.

It is difficult for horsemen to receive the same tax treatment as other business owners. IRS is skeptical when it comes to taxpayers claiming to use horses for anything other than a hobby.

Successful Example:

A taxpayer engaged in horse training operation need not prove that he had a reasonable expectation of profit” but merely that he had an “actual and honest objective of making a profit;

Horse breeding and racing operation must show only an honest profit objective; The taxpayer's profit objective must be bona fide. When investigating a person’s intent, the IRS considers the following:

Manner of doing business. My father always said, the road to ruin is paved with the best intentions. Every business must have a business plan. This is particularly true of the horse business.

Unsuccessful Examples:

The Horse breeding activity was not carried on in businesslike manner, indicating lack of profit objective, because the physician/breeder:

1. did not track expenses on per-horse basis,

2. no financial projections to aid in evaluating business' economic performance,

3. maintained financial records primarily for tax purposes, but did not advertise,

4. commingled personal and business funds, and

5. offered no business plan.

Taxpayer in horse-breeding activity lacked:

1. written business plan,

2. financial projections and

3. maintained a single bank account comingling farm and personal expenses.

LEONARD SMITH, LLM-TAX