Monday, May 24, 2010

Equine Accounting: What expenses are deductible related to buying and training a horse for sale?


It depends on many factors:

What was your intent when you purchased the horse? When you purchased the horse, was your intent to buy the horse, put some training into it and then resell it? OR - did you purchase the horse to use in your lesson program and it wasn't a good fit, bought him as your own horse and you outgrew him, etc?
To document your intent, write a business plan at the time you purchase the horse including how long you will keep the horse, any shows and/or clinics you plan to attend, when and where you will advertise the horse and any other plans that demonstrate the business purpose of this purchase.
If you purchased the horse to train and sell, regular expenses such as feed, farrier, vet, etc would be deductible. BUT the amount that is deductible MAY be limited to the amount of your related income for that year. (See below)
Have you engaged in this type of business venture previously? Is this horse one of a number of horses that you
have purchased and sold? If you have a regular history of engaging in this type of business, then your related expenses would be deductible in the year that you incurred them.
Is this business venture part of a related equine business (lessons, boarding, training barn...) which is a significant source of income for you? If you currently operate a related business, then buying and selling horses could be seen as a natural extension of your current business and all regular expenses should be deductible in the period in which they were incurred. Please note that the related business should represent a significant source of income for you. If you board one horse in your barn in addition to your three but you work as a CPA full time, the IRS will probably not recognize your buying/selling activity as a regular business and the amount and timing of your deductible expenses may be limited.

Do you have income related to this activity in the current tax year? If the IRS considers this buying/selling activity to be a hobby activity, then you may only deduct expenses to the extent of your income from this activity. So if you have no sales in the current year and this is deemed to be a hobby activity, no expenses are deductible.

Basically, it all boils down to whether or not the IRS would view this activity as a business or a hobby. If it is deemed a business, regular related expenses are deductible. If it is deemed a hobby, then only expenses less than or equal to your income from this activity in the same tax year would be deductible.

For example: Suzy bought Flame in Jan 2010. She trained him and sold him in Dec 2010. She paid $6,000 for him and sold him for $10,000. Her expenses related to keeping Flame for bedding, food, farrier, vet and occasional lessons were $5,000 in 2010.
If Suzy is a regular buyer/seller of horses or has a related equine business that the IRS would deem to be a business activity, here is the calculation for this transaction:

Horse sales price: $10000
Less horse purchase price: -$ 6000
Gross profit $ 4000
Less related expenses -$ 5000
Loss ($ 1000)
This loss can be applied against other income such as salary of spouse, investment income, etc.

If the IRS would deem this to be a hobby activity, Suzy can only deduct related expenses up to the amount of the gross profit ($4000) in this example. And if Suzy bought the horse in 2010 and sold it in 2011 (as a hobby activity) and had no other related income in 2010, she could not deduct any expenses incurred for this activity in 2010.

So what sometimes starts as a money-making opportunity can end as a tax nightmare. Be sure you understand all of the details of how this may impact your tax situation. It may still be a great idea to buy a horse, put some training in and then resell. You'll have some extra income and NO Tax surprises on April 15.



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