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TAXING QUESTIONS
Are you clear on the top four tax issues in the equine industry?
BY LISA MUNNIKSMA
If you’re like many equine professionals,
you might liken the pleasure
of tax preparation to that of unsedated
tooth extraction. Even if you work
with an accountant for your annual
tax-time deadline, the legwork of
recordkeeping, receipt collecting and
file organizing is probably not high
on your to-do list.
Unfortunately, tax issues are a
routine aspect to business ownership.
In the equine industry, there are several
tax areas that can be confusing.
Here, tax attorney and “American
Horse Council Tax Handbook” author
Thomas A. (Tad) Davis of The Law
Offices of Davis and Harman in
Washington, D.C., guides you
through the top four tax issues in the
industry:
1. HOBBY VS. BUSINESS
While the horse business probably
isn’t one that you entered to get rich
Tax attorney Thomas A. Davis.
quick, it is one from which you should
expect to generate a reasonable profit.
The basic rule of thumb is that
you need to show a profit two years
out of seven to be presumed to be a
business operation rather than a
hobby farm. This does not mean that
your horse-related activity is a hobby
if it does not have two profitable years
in seven. However, Davis says, “If
you’re not making money, you have
to be able to demonstrate to the IRS
that you have intent to make a profit
and be able to say, ‘Here is the way I
am going to do it.’”
According to the IRS “Farmer’s
Tax Guide,” in determining whether
you’re in the horse business to make
a profit, they’ll consider a range of
factors, including whether:
• You operate your business in a
businesslike manner.
• You put in the time and effort
appropriate to making your equine
business profitable.
• You depend on this income for
your livelihood.
• Your losses are due to circumstances
beyond your control or are
normal in the startup phase of your
business.
• You change your methods of
operation in order to improve profitability.
• You and your advisors have the
knowledge to carry on this type of
business profitably.
• You were successful in making
a profit at this activity in the past.
If your motive behind your equine
business is called into question by the
IRS, they might examine your business
plan, income and expense
records, and interview you for an
explanation of your management
methods. Because your tax returns
from up to three years ago can be
audited, it’s important to keep up with
Tax Resources
The American Horse Council publishes several good tax resources for
equine professionals, including Thomas A. Davis’s “Horse Owners and
Breeders Tax Handbook” and “Tax Tips for Horse Owners,” as well as the
bimonthly “American Horse Council Tax Bulletin.” These publications are
available through the AHC at www.horsecouncil.org or (202) 296-4031.
Additionally, the IRS publishes a number of helpful guides on its website,
www.irs.gov, including:
• “Market Segment Specialization Program Audit Techniques Guide,” a
guide to IRC section 183 Farm Hobby Losses for tax agents and auditors.
While the guide is meant for IRS professionals, it can give you an idea of
what they’re looking for to determine whether you’re operating a hobby
farm or a business.
• IRS Publication 225, the “Farmer’s Tax Guide,” with depreciation schedules
and additional information about taxation in an agricultural business.
• IRS Publication 553, “Highlights of 2007 Tax Changes,” a summary of
the new guidelines affecting your business and personal taxes.