As April 15 looms, horse owners and equine business owners join the millions of other U.S. citizens preparing their annual tax returns. With many people around the country struggling due to the challenging economy, it only makes sense to hunt for every reasonable way to save money. That certainly includes paying less on your taxes whenever possible.
“The main thing is that you have the intent to make money and have a profit, otherwise it’s a hobby. Typically, the IRS wants to see a profit every few years. If you’re in business to make a profit, (almost) all of your expenses are deductible,” says Deborah Lawson of Crippen, Trice, Ford and Torres, LLP, an accounting firm in Ocala, Florida’s heart of horse country.
If you own a broodmare you breed and sell her foals, this is considered an equine business. Perhaps you own a trusty old schoolmaster and use that horse regularly to give lessons, which people pay for. In that case, your equine expenses become deductible. If you take in outside horses for boarding and/or training, you’re in business to make a profit.
Let’s say you have several well-bred, registered horses and show them regularly, as well as trail ride. You incur horse-related expenses on a regular basis throughout the year, but although you’re spending a significant amount of money, you’re a horse owner because you love them, not because you intend to make a profit. In this case, none of your equine expenses are considered deductible by the IRS.
Many horse people take fabulous care of their equine partners, yet don’t tend to be as savvy when it comes to the financial end of things. If you operate any kind of horse-related business, you need to keep detailed records of all expenses, including feed/hay, veterinary and farrier bills, insurance, medication, tack and equipment, travel, meals/entertainment, advertising, gas, mileage and vehicle/trailer maintenance costs, etc. Basically, you must keep track of any and all expenses related to your work with horses.
“You need to have good records of your income and expenses, whether you use QuickBooks or a spreadsheet, like Excel,” notes Lawson. “Keep track of everything you spend that is related to the business. You also need to keep track of all mileage related to any equine business, and meals or entertainment, such as meeting with potential clients.”
Not all expenses are 100% deductible, even if they’re completely related to the business. For example, let’s say you have some potential clients in town to look at a show horse you have for sale. You take the clients out for a fancy meal and pick up the tab. Go ahead and save those receipts, but realize that only 50% of meals and entertainment are allowed on deductions.
Some people set up their equine business as an LLC or corporation. The business may own the truck and trailer or other equipment. Lawson explains that even in an LLC or corporation, the personal portion of expenses is not deductible.
You may be able to depreciate equipment such as barns, fencing, tractor, mower, manure spreader, tack, etc. Typically, this is done over a period of years, but in some cases you may be able to write off all of a business-related purchase in the first year. This is an excellent example of why it’s important to work with a CPA who is experienced in equine business. They can often suggest legitimate deductions you might never have thought of.
If you have any doubt about the qualifications of an accountant, ask him/her if they handle many farms or equine businesses. Better yet, ask horsemen you know, such as your veterinarian, farrier, trainer, or boarding stable owner, who prepares their tax returns. Personal recommendations are often the best way to find a reliable CPA.
Bottom line, treat any equine business as seriously as you would a “regular” job. Save all receipts and maintain detailed records of both income and expenses. For many people, their horse business is a secondary source of income. That’s fine, but be sure to keep all expenses separate.
“If you have any other business (or source of income), you’ll want to keep all equine expenses separate because these will go on a separate schedule on your tax return. In most cases, if you file an individual return, that will be Schedule F, which is a farm schedule,” says Lawson.
The most important thing is to be diligent about record keeping. It is also advisable to draw up a business plan.
“Keep good records and have a business plan showing what you plan to do over several years,” adds Lawson. “This shows you’re serious and will work in your favor if you are ever audited.”
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Cynthia McFarland is an Ocala, Florida-based freelance writer and horse owner whose latest book is The Foaling Primer.