Wouldn’t it be great if you could write off all of those pesky bills you pay each month to keep your horse? You are planning on selling him one day, maybe even for a profit. That should count as business income, right?
Many horse owners have followed this line of thinking and attempted to claim their horse expenses as business expenses that can be deducted against ordinary income. Ordinary income is the good stuff. It’s the income that appears on your W-2’s and 1099’s among others that is generated from completing standard “work” as opposed to passive income received from investments. Most people have a lot more ordinary income on their tax returns than passive income so any deduction against it is very valuable.
If you run a business and are actively participating in its daily management and operations, your losses associated with that business can be claimed against ordinary income. However, there are some significant hurdles to overcome to qualify. For equestrian businesses, you must show a profit in 2 out of 7 years. You have to actually be attempting to make money. By that I mean that you should have a business plan and strategy to make the business profitable. The goal should not be to break even each year or post a loss. The IRS will see right through that strategy. I would also suggest keeping a separate bank account for the business revenue and expenses and hiring out the accounting to show you have third party oversight.
Horse syndications have gained in popularity and they are considered passive income generators, thereby restricting loss deductions to passive income only. Typical hallmarks of this type of investment are hand’s off owners who write the check for the expenses but don’t have enough knowledge or interest to participate in the daily care of the horse. If you have an ownership interest in a horse, there are some generous depreciation options for the purchase price of the horse that can offset any gains you receive from the investment. Accounting for these types of investments is tricky and I recommend using a quality tax professional to help you navigate the nuances.
You will notice that I have not discussed how you can deduct your personal horse expenses. Unless you can prove to the IRS that your riding expenses are business related, these costs are considered hobby losses and not deductible. There have been a few unusual cases where riders have been able to deduct the expenses but they have all been predicated on the assumption that the activity ultimately served to generate business income. My favorite example is this woman, who successfully argued that her riding participation was a marketing tool for her high end barn and interior design business.
If you would like to learn more, check out the links below and contact us to set up a free consultation to discuss your business needs.