Horses, Taxes and the IRS

[wildhorses]

As usual I have procrastinated doing my taxes, so have been working on them the past several days. For the last several years I have itemized my taxes claiming my horses as a business. I keep good records, keep all my receipts, etc. Like most people I have never been able to show a profit with the horses. For the last couple of years my tax preparer has cautioned that the IRS may view my horses as a hobby and not a business if a profit is not shown, however they do agree that I am running my operation as a business, not a hobby. And I know most people are probably in the same boat as me giving our economy. A while back I read an article on Yahoo about the 5 most commonly audited business, and Horse Breeders was on that list. Of course no one wants to go through the audit process, myself included. I advertise and promote, maintain a website, and of course do sell horses. But we all know that the economy hasn't been kind to the prices we are getting for our horses, not able to sell nearly as many, and the price of everything, feed, fuel, etc. has sky rocketed. Some years are worse than others and Vet expenses can be triple than some other years. As I sit here working on my taxes, I find that I am in the same boat this year (which I knew and probably why I procrastinated doing taxes).

I am wondering everyone elses experiences, and if anyone is finding themselves in the same position I am in. I hate to say that I am bringing in more income from my horses than I really do as I don't feel that is the right thing to do, and I don't feel I should have to lie about my actual expenses to make it look like it's not costing me as much as it is. But maybe making it look like I break even is the only choice at this point....or is it best to just no longer claim the horses as a business. I do work a full time job, so the horses are not my only source of income, and I do have deductions for my job as well.

I am meeting with my CPA next week to prepare my taxes, but would like the advice of some of the people who are maybe in the same boat as me, or have been down this road before. Any input would be appreciated. Thanks in advance!

 

[Sandee]

Talk with your CPA or at least someone very tax savy because, I believe, if you cannot show a profit (used to be within 5 years) that you could not continue to list it as a legitimate business.

 

[cretahillsgal]

I was also told by my tax accountant that if they do determine that it is a "hobby" they can go back and make you pay any taxes that you would have owed on previous years had you not claimed the horses as a "farm loss"

Just something to think about. I no longer claim my horses because it really is just a money-losing hobby for me.

 

[wingnut]

One of the reasons my husband agreed to go down this path of horse ownership was for tax purposes. He jointly owns about 180 acres with his brother under an LLC identification. The property has been leased to the same local farmer since 1988. That farmer grows corn and soybeans on this property. When their mother died, the farm came to the brothers jointly and they created the LLC. The few expenses are paid and the rest of the rental income is split 50/50.

In the two tax years that we've had the horses, we itemized our expenses agains that rental profit. I asked our tax preparer how long we could "get away with this" and her reply was that as long as we continued to show more income vs. expenses, the IRS wouldn't even bother giving us a second glance. It's the continued losses that will trigger their attention.

While my BIL has no part of our horse ownership, to keep things easy, we give over all the expenses of our horses to the LLC and he benefits from that. I'm not even sure he realizes it!

 

[valshingle]

Last I heard, you had to show a profit two years out of five to satisfy the IRS.

That being said, I've never claimed the horses as a business. I've heard that horse businesses are a big red sign saying "Audit Me" to the IRS.

 

[vickie gee]

I am also a procrastinator. My bootbox is now an assortment of neat little piles getting close to going to taxperson. If I do not file an extension this year it will be the first time in 3 years. But at least while co-workers and family have their refund spent by this time of the year I still plan how we will budget the much anticipated refund. My previous tax man constantly lectured me about this being a "hobby." Having a horse go through a major surgery both of my first two years certainly did not make it a profit making business, along with my stallion being a "colt" when purchased. But we claim our business as livestock guardian dog and miniature horses. Well guess which has actually made money? Yep, not the horses... but expenses are combined on the tax form. Changed tax person a couple of years ago. His angle was a little different. This one did not show vehicle, gas, expenses because he said with all our deductions it would be a red flag. He passed away last year. I might let his son who just "picked up" his father's business do ours or we might take them elsewhere. Certainly most of us are not going to make money in this. I have not attempted any sales but reality has set in and I have determined to minimize to two broodmares (maybe three, here I go) and stallion. That means as soon as it gets warm enough to wash and clip them some advertising will take place. Basically I would reduce from what is now eight by selling last year's colt and this year's colt and two or three mares. But even if and when I do it might not offset the expenses enough to show profit. The closer I get to retirement the more I realize that it would make sense to get out of owning minis so hopefully in a two to three years I will not even be bothering with farm expense in relation to taxes. I love these little guys but when I retire I want to be footloose and fancyfree so I know that in a couple of years whether it is a hobby or a business it is going to phase out.

 

[Miniv]

If you can find a tax accountant who really knows the horse and/or "exotic" livestock industry, that's who I would go to.

 

[drmatthewtaylor]

You are not required to profit. Many businesses lose money year after year. The IRS can't require a business to profit.

The IRS doesn't let you write off a hobby so you have to run it like a business.

I've had many clients audited. Never seen one lose.

Dr Taylor

 

[Michelle@wescofarms]

We run ours as a business and the 'intent' is to make a profit. Unfortunately in this economy it's a fine line. A couple of bad vet bills and your profit can evaporate. One year we had $19,000 in vet bills add the other expenses and although the 'intent' was there, profit wasn't!

We keep records, advertise and market our horses. I do sometimes wish I could be more 'business-like' with the older retirees, but they're animals not inanimate objects, but I do feel responsible for them.

Also if you're a breeder your's suppose to be breed, but if they aren't selling or selling for a very low amount, to me that's a stupid way to run a business. I cringe when I see people selling registered (often double registered) Minis for a few hundred dollars.

AMHA - stallion report, DNA test, 4 month foal registration - $71.00 + membership $65 = $136.00

AMHR - 4 month foal registration $20 + membership $65 = $85

So double registered minimum $221

Add that maintenance on your mare for eleven month and a foal for however long it takes to sell - it's a losing proposition for selling for a few hundred dollars.

Off the soapbox.

Here's a good article on Business vs Pleasure

 

[midnight star stables]

Great thread. Thanks!

 

[Lori W]

I love the saying "How do you make a small fortune with horses? Start with a large fortune." Keeps things in persepctive for me!

 

[Nathan Luszcz]

You need to show a profit for 2 years out of 7. You WILL pay back taxes if you are audited. My friend is closing his business because he can't show a profit for four years, and doesn't want to risk it. Because horses aren't livestock, they are considered a hobby farm if not profitable, and are therefore taxable. Talk to your tax person, they will help you with the details.

 

[kaykay]

You are not required to profit. Many businesses lose money year after year. The IRS can't require a business to profit.
The IRS doesn't let you write off a hobby so you have to run it like a business.

I've had many clients audited. Never seen one lose.

That is the key right there! If you file and you show no advertising, marketing, no horses sold etc then you are not running a business. But if you file and do all those things, then the IRS has no reason to mess with you.

Heres an article I wrote last week

Filing a horse farm

 

[Nathan Luszcz]

If you read the tax law, you are required to make a profit at least once (or twice, I don't recall) in seven years. You can not run a loss every year indefinitely. You can put so much investment in that you pay no taxes, yes, but you can't run a complete loss. No business would (should) exist if it never ever makes a profit, that's called tax evasion.

 

[kaykay]

Nathan what I am saying is it is not so black and white. A lot of determining factors go into what the IRS decides.

Link if anyone wants to read the whole page IRS hobby or business

From the IRS site:

In order to make this determination, taxpayers should consider the following factors:

Does the time and effort put into the activity indicate an intention to make a profit?

Does the taxpayer depend on income from the activity?

If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

Has the taxpayer made a profit in similar activities in the past?

Does the activity make a profit in some years?

Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

But even then its not cut and dry. Especially when you look at "If there are losses, are they due to circumstances beyond the taxpayer’s control"

Like I said if you do not show that you are actively selling horses to offset expenses then yes you are probably going to be in trouble.

 

[keely2682]

the irs is cutting down on staff due to budget cuts so your chance of an audit is going down

 

[DianeT]

My tax man agrees with Dr. Taylor.

 

[horsehug]

Our tax man agrees with him also.

Susan O.

 

[Nathan Luszcz]

Mine and my friend's (two different ones) disagree, and had us both close down our businesses to avoid the penalty, since things didn't look like they'd turn a profit any time soon.

As far as "less audits", just because you get away with it doesn't mean its ethical.

 

[kaykay]

Its only tax evasion if you are making a profit and hiding it. If you do not make a profit you do not owe.

It wouldnt be ethical either to make money selling horses and not file.

I dont think anyone here is encouraging anyone to lie or try to evade paying taxes.

Its just not cut and dry (black & white)

The reason farms are given longer to try and show a profit is because we are dealing with live animals. The unexpected can happen. A bad vet year will put anyone in the red.

We have shown a profit so I am not being unethical in anything.