Sam Ski Area Management - Index

Sam Ski Area Management - stable_management - Index

your financial records.
“People tend to leave details to
later, but I think it’s important to keep
up with your income and expenses as
you go along and have a good handle
on them,” Davis says. “Analyze the
numbers, and if you are not making
a profit, see where you can cut
expenses and improve income.”
By letting things go, it’s easy to
overlook expenses and items you
could be deducting. Plus, if you were
to get audited, Davis says, “it will be
a real pain to try to find all those
records, put them into shape and present
them in a reasonable manner. If
you have nothing but a shoebox full
of receipts, they’re going to be skeptical
about the expenses and skeptical
about the income.”
2. EXPENSES/DEPRECIATION
Regular expenses that you can deduct
against your income include stud fees,
training fees, show entries, feed, bedding,
office supplies, veterinary work,
employee wages, property taxes and
any other cost that is incurred during
the normal course of doing business.
One category of costs, capital
expenditures, is not immediately
deductible in the year in which they
were incurred. These items, including
horses, tractors, horse trailers and
computers, have a useful life of more
than one year. These are depreciated
over a period of time based on the
IRS’s schedule of depreciation, which
changes periodically.
You can start claiming the depreciation
of the equipment or animal the
year it is put in service. This is easy
to do when you purchase a tractor,
because you’re going to use it right
away. With horses, though, you might
purchase a weanling, and it might be
too young to use for your intended
purpose in that year.
Putting the horse into service is
determined by when you begin training
it for the intended purpose. Davis
points out “training” doesn't begin
when you start riding the horse, but
when you begin working with the
horse in preparation for its use in the
business. Racehorse yearlings purchased
at a bloodstock sale, for
instance, are placed in service when
you begin the initial training and conditioning
to race.
In 2009, the depreciation rules
change for racehorses. As of January
1, 2009, all racehorses will be depreciated
over three years, regardless of
their age when they’re placed in service.
Currently, racehorses must be
depreciated over seven years if
they’re placed in service before
they’re more than 24 months old.
Horses purchased and put into
breeding service that are 12 years of
age (144 months) or younger are
depreciated over a seven-year period.
Those purchased and put into service
when they are older than 144 months
are depreciated over three years.
The Economic Stimulus Act of
2008 included several perks for small
businesses that equine business owners
can take advantage of.
One is bonus depreciation. This
new law allows a 50-percent firstyear
depreciation deduction for capital
investments made in 2008.
Applicable to most types of tangible
property acquired and placed in service
in 2008, this provision allows you
to deduct 50 percent of the item’s cost
before taking regular depreciation on
the undepreciated balance. Bonus
depreciation only applies to new
property—property that is originally
used by the purchaser—so many
horses do not qualify because they’ve
been used for some purpose before
being purchased. Bonus depreciation
expires at the end of 2008.
Another perk in the bill is the
increased limit for expense
allowance. The Stimulus Act
increased the amount of business
property purchased and placed in
service in 2008 that you can claim as
an expense to $250,000; the previous
limit was $128,000. If you purchase
machinery and equipment, furniture
and fixtures or a single-purpose agricultural
structure, you may be able to
deduct the entire expense of the purchase
this year rather than depreciate
it over time. There is an investment
limit on the total cost of property that
can be purchased during the year. The
amount that can be expensed goes
down dollar for dollar as purchases
exceed $800,000. Next year, the
expense allowance returns to
$128,000 with an investment limit of
$510,000 (plus an inflation adjustment).
Depending on your situation, it’s
possible to receive the benefit of three
deductions—the expense allowance,
bonus depreciation and regular depreciation—on
the same property purchased
in 2008.
3. CAPITAL GAINS
A “capital gains” tax sounds like
something negative, but it can actually
work in your favor. Your capital
gain—a tax assessed on profits earned
from a sale—is taxed at 15 percent
rather than at your regular income-tax
rate.
A capital gain is the amount of
return in excess of what you paid for
the property. In the case of a homebred
horse, your purchase cost would
normally be zero, because the cost of
producing the horse has already been
deducted. If the horse or other property
was purchased by you and depreciation
was taken before the property
was sold, the portion of the gain you
received from the previous depreciation
deductions is not a capital gain
but is treated as ordinary income.
Generally, a horse has to be held
for two years or longer before its sale
is eligible for capital gains treatment.
If you’re in the business of buying
and selling horses with a quick turnaround,
your sales may not be eligible
for capital gains treatment, and
you would have to claim the sales
price as regular income instead.
4. CHANGING TAX CODES
The change in racehorse depreciation
and the Economic Stimulus Act benefits
discussed above are just a few
examples of the continually changing
tax codes that affect small businesses
and agricultural businesses. Keeping
an eye on what’s happening at the IRS
can be exhausting, but whether you
do it or you hire a qualified tax preparer
to do it, knowing what tax credits
and incentives are available to you
is vital. [sm] 29
/ October 2008