Equine Accounting and Tax - Who Gets the House?

When an asset owned by a spouse is transferred as a result of divorce, there are no immediate tax consequences to either spouse. The one transferring title to the other spouse does not recognize any gain, even if the home may have appreciated in value since it was purchased. LIkewise, the spouse receiving the home does not recognize any income either. However, the spouse who obtains title to the home steps into the shoes of the other person when it comes to basis (generally the amount of your investment in a property for tax purposes). In effect, the spouse who winds up with the home also winds up with a potential tax bill. When the spouse that has received title to the house later sells the house, the gain on the sale (prior to exclusions) will be calculated using the original basis of the house, not including any payments that you made to your spouse as part of obtaining title. That can mean a hefty tax bill for you.

For example, Mary and John Smith buy a farm during their marriage for $600,000. At the time of divorce, the fair market value of the house is $800,000. Mary pays John $200,000 to obtain sole ownership of the property. Years later, she sells the property for $950,000. She has assumed that she will owe taxes (subject to other tax exclusions) on $150K ($950K less $600K original basis less $200K that she paid to John). Wrong! The $200K that she paid to John is not included in the tax basis of the property so she will owe taxes on $350K.

The "payment" does not just include money that you pay to your spouse. If you agree to receive the farm in the settlement and in exchange your spouse will be allowed to maintain ownership of $200K in a joint bank account, that would treated by the IRS as a payment by you to your spouse. And there are other similar situations that would be treated as a payment by you subsequent to a divorce that would not be included in the basis of the property for purposes of calculating a gain.

What does that mean to you? Your tax professional or attorney needs to make an educated guess at what your future tax liability would be on any payments you make to your spouse in the settlement and include that in the negotiations.

How you plan now can make a big difference to your wallet down the road.

5 Minute Fixes

Tax season was very busy for me this year and there were times that I felt that I didn't have time to breathe. Riding was out of the question and even routine tasks such as grocery shopping and cleaning the house seemed out of reach. One day, I was sitting at my desk daydreaming about what I wish I could be doing (how much time did you waste daydreaming you may well ask!) and I thought about an email newsletter that I get on a regular basis, called the "Profitable Horseman", written by Doug Emerson. At the top, he includes the amount of seconds it's going to take to read the newsletter (always less than a minute). I ALWAYS read his newsletter because I always have at least 42 seconds to spare in my day. 42 seconds later, I have learned something and feel that I've accomplished something worthwhile.

So I applied the same principle to my problem of feeling overwhelmed. What could I do in a relatively short period of time, that wouldn't take unnecessary time out of my schedule or put me further behind and that would give me some feeling of satisfaction? Into my life came the "5 Minute Fix". I started keeping a list of things that I could accomplish in five minutes. It might not be a completed task but a portion of a task that I could accomplish in 5 minutes. Pretty soon, I was using my travel time or time in the grocery store line (I did get there eventually!) to mentally construct this list and to figure out how to break up large tasks into manageable pieces.

People with equine businesses typically spend so much time working at their business that they aren't able to spend a lot of time working on their business. There are things on your business to-do list that you KNOW you should be working on but you just don't have the time. Try the 5 Minute Fix. Here are some tasks that may be on your list that will take no more than 5 minutes to accomplish. Add whatever else is on your list. Once you get started, you'll find creative ways to make even the biggest tasks less imposing.

1. Go to the IRS website (www.IRS.gov) and sign up for an EIN (employer identification number). If you are using your Social Security number as the tax identification number for your business, you should get an EIN to limit accessibility to your SS #.
2. Email a client to let them know how much you enjoyed working with them today or a new contact how much you enjoyed meeting them.
3. Post a success story/photo on Facebook. It's great advertising for your business and a morale builder for current clients or employees.
4. Grab all your cc receipts for business expenses for this week/month and write a short description on the back of what the expense is for. This is especially true for meals and entertainment or gift expenses. If you are audited years after you incur the expense, you will probably not remember what the receipt represents and that expense could be disallowed by the IRS.
5. Find a Youtube video that is less than 5 minutes that covers a business topic that will help your business grow - anything from using QuickBooks to Social Media marketing.
6. Go to the website for your state Farm Bureau, Horseman's Council or Ag Dept - always a good source of information for horse businesses.

My first "fix" was to vacuum a small rug in my hallway - just the rug! No more than 5 minutes including getting the vacuum out and putting it away again. Not a huge deal in the scheme of life but it was something that I accomplished in the time that I had.

This article was mostly written in 5 minute fix fashion (which I hope doesn't dissuade from giving the idea a try).

Good clients = Good business!

If you own a business, EVERY decision you make impacts your bottom line – whether it be how many employees you have, who designs your website or where your business is located. But one of the most important factors that contribute to the success of your business is your clients. Good clients = Good business! Basically, a good client adds to the process of earning money, helping you achieve your goals and making your job enjoyable for you. So you need to be able to identify and attract good clients. If you are the client, you need to understand that time is your trainer/instructor/barn owner’s livelihood and need to be respectful of that. Make your expectations clear from the beginning and ask if the professional is agreeable to them. If you need to discuss something with the professional, schedule a time to do so. Your professional will enjoy working with you if you make it easier for them to do their job successfully.
So what makes a good client?
A good client is a person who is looking for someone with skills that you have. A hunter jumper rider looking for an instructor is not a good client for a dressage instructor. That example may be obvious but there are some situations that are less obvious but the same principle holds true. Preferences such as working with adults vs. children, amateurs vs. professionals, show competitors vs. those who prefer not to show, focus on the horse vs. the rider, etc. are all factors that need to be considered when matching your skill set to the needs of a client.
Beyond your skills, you need to ask some questions of the client to see if your method of operating is a compatible with the clients’ wishes. Does your client need someone to be proactive for them in arranging their show schedule, vet visits and other details of owning a horse or do they like to do it themselves? If you are a trainer, does your client expect a progress report after each training session or is checking in just once a week OK with them?
Are your fees well within the reach of this client? If not, you will be struggling each month to collect what is due to you or your client may be resentful toward you for charging what they consider to be “expensive” rates.
There are many more dimensions that should be considered in this matching process, depending on the services you offer. But make sure you discuss with each client at least the following subjects - expectations about price, availability, level of service and level of personal involvement.
No one can be all things to all people and especially when you are just starting your business or times are tough, you may be tempted to take on a client who you think may not be a good fit for you. Don’t do it! You will be investing your time (which in many cases = your money) in a relationship that has little chance of succeeding. You run the risk of creating bad will with the client who feels dissatisfied that they didn’t get what they expected out of the relationship. And nothing travels faster in the horse world that someone’s bad opinion.
If you are the client, you need to understand that time is your trainer/instructor/barn owner’s livelihood and need to be respectful of that. Make your expectations clear from the beginning and ask if the professional is agreeable to them. If you need to discuss something with the professional, schedule a time to do so. Your professional will enjoy working with you if you make it easier for them to do their job successfully.
So how do you attract good clients? There are lots of avenues for marketing your business but whatever you choose, be clear about who you are and what you have to offer. When meeting with a prospective client, ask all the questions you need to find out if there is a high probability of success for the relationship or whether the client needs to look elsewhere. If the match doesn’t seem like it’s made in heaven, suggest other professionals that they can contact who you know might better suit their needs. In doing so, you are building good will with that person for the future and with the professional to whom you refer them.
Good clients = Good business!

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What's too much and what's not enough?

Most people are happy to hear that they are receiving a refund on their tax returns. But when is a refund too much?

If you had unexpected expenses or had less income than you anticipated, you may receive a refund larger than expected. But if year after year, you are receiving what you would consider a "significant" refund, that's too much. By having excess income tax withheld from your paycheck or making excessive estimated payments, you are, in effect, making an interest free loan to Uncle Sam.

Some people do this intentionally. It's their method of putting money away on a regular basis. If that's your reason, ask your employer or bank if it is possible to set up periodic withdrawals from your paycheck or checking account to be transferred to a savings account or Christmas Club type account. The money will be earning interest (however minimal lately!) and will be accessible to you in case of emergency.

Speak to your Personnel Department or tax preparer and ask about increasing the number of your allowances or decreasing the amount of your estimated payments.

Conversely, when are your tax payments not enough?

If you had an unexpected windfall or your expenses were not what you anticipated, you may end up owing on your tax return. And if the amount of payments that you have made through December 31 are below a certain threshold, you may end up also owing interest and penalty. Again, if this happens infrequently, it's not a big problem. But if year after year, you are accruing interest and penalty, you need to take action. Speak to your Personnel Department or tax preparer and ask about decreasing your allowances or having an additional amount withheld or having the amount of your estimated payments increased.

If your current year payments reach the safe haven threshold compared to your prior year tax liability (that is how much tax was due in total over the course of the year, NOT how much was due with your return), in most cases, you will not incur any penalty or interest on your tax due. Safe haven thresholds vary with your level of income so consult your tax preparer for specific information.

Remember that income taxes are on a pay-as-you-go system. If you won the lottery in January, you can't wait until December to pay taxes on your winnings. If you do, you could owe interest and penalty on that income.

The rules for paying estimated taxes are different for farmers and fishermen than for most businesses so be sure to take those into account.

 What could you do what the extra money that you are loaning to Uncle Sam or that you are paying in interest and penalty?

Tax credit vs Tax deduction...

What's a tax credit? What's a tax deduction? Which is "better"?


Simply, a tax deduction reduces your taxable income. A tax credit reduces your tax liability. Let's use a simple example to see the effect of each. In our example, your total income for the year is $80,000. That includes, but isn't limited to, income such as wages, interest and dividends, business income, capital gains and pensions. You are then allowed to take a standard deduction (the amount is determined by your filing status - single, married filing jointly, etc) or itemize your deductions. Common itemized deductions include mortgage interest, charitable contributions and real estate taxes. In our example, your itemized deductions are $12,000. You are then allowed another deduction, in this case called an exemption - also based on your filing status and your tax is calculated based on all of these adjustments.

Total income: $80,000
Itemized Deductions: (12,000)
Subtotal: 68,000
Exemption: ( 3,700)
Taxable Income: 64,300

Using a sample tax rate of 20%, your tax liability would be $12860.


But instead of $12,000,what if your itemized deductions were $15,000? In that case, $80,000 - $15,000 - $3,700 (exemption) = $61,300 taxable income and at 20%, your tax would now be $12260. That additional $3,000 in itemized deductions saved you $600 on your taxes. So a tax deductions reduces your taxable income, which is the basis for calculating what you owe.

A tax credit reduces the tax itself. So in our example of a tax liability of $12860, if you had a tax credit of $500, you would then owe $12360. Common tax credits include the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit and the Retirement Savings Contribution Credit.

The reason that I've dragged you kicking and screaming through this process is because I want you to understand that large tax deductions don't translate into equally large decreases in your taxes. So if you are considering making a large charitable contribution, have your tax preparer crunch the numbers so that you know what effect this will have on your tax liability. This is especially important if you are considering the decision between donating your horse and selling it at a price well below the appraised value.

Before you make any big decisions about discretionary actions that will effect your taxes, be sure to consult with your tax preparer. It's part of their job to help you make the best choices based on your particular circumstances.

Tax Tips for the Self Employed


This is taken from the IRS website and provides answers to questions that I'm asked on a routine basis. My only addition would be that in #3, many of you may be eligible to file a Schedule F for farmers, rather than a Schedule C.

IRS Tax Tip 2012-16, January 25, 2012

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1.Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2.If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3.You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4.If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5.You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6.To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Year End Checklist

1. Get together all of your receipts. Organize them by type of expense - feed and grain, farrier, etc. Compare them against your checking and credit card accounts to make sure that you haven't missed any deductible expenses.
2. Balance your checkbook. There might be checks or deposits that cleared the bank that you have omitted from your checkbook.
3. Are there any customers that owe you money at year end? How old are the balances? Are they still collectible? Contact the customer and remind them of any overdue balances. Negotiate for partial or periodic payments if possible.
4. If you purchased anything using a loan, be sure to include the basic loan information in the documents you give to your tax preparer.
5. Are there any bills that you owe that aren't recorded?
6. When you have your preliminary financials ready, compare them to 2010 for reasonableness. Do they make sense, knowing what you know about your business?
7. Have there been any major changes to your life in 2011 - gotten married, had a baby, lost a job? Will there be any major changes for you in 2012? Be sure to share that information with your tax preparer.
8. Make a list now of topics that you want to discuss when you speak with your tax preparer - retirement planning, funds for your child's education, paying off your mortgage, etc.

Preparing your return is something you have to have done every year. Use it as an opportunity to know and grow your business. During the year, you are "in the trenches" day after day. But getting ready for your tax return gives you a chance to step back and give your business a more objective, global examination. Maybe you'll need to make changes, maybe things are great as is. But by taking a long, hard look, you'll know.

Are you a Material Girl/Guy?

I'm never sure when I listen to Madonna sing "Material Girl" if she thinks that being a material girl is a good thing or a bad one. But being a material girl/guy in relation to your business is definitely a good thing when you are dealing with IRS matters.
If you own a business and that business incurs a loss, the amount of the loss that is deductible for tax purposes may be limited by several factors. One factor is whether you materially participate in the business. Material participation only becomes an issue if your business is organized as a pass-through type entity (sole proprietorship, partnership, S Corporation or LLC for tax purposes treated as a sole proprietorship or partnership).

Before I discuss what factors the IRS uses to determine material participation, a little necessary background info. about pass-through entities. In pass-through entities, the profit or loss is calculated for the business as an entity and the information is submitted to the IRS but no tax is due at the entity level. The profit or loss is "passed through" to the owner(s) and included on their personal return. If a loss is passed through, it can generally be applied against other types of income such as wages, interest and dividends. That makes a loss valuable to the taxpayer because it can decrease the total amount of tax due on the return. However, if an individual does not materially participate in her business, losses are treated as "passive" losses, which mean they generally are only deductible against passive income such as rent, royalties or other businesses with passive income. Not so useful now, right?

What factors does the IRS use to determine material participation? Generally, for an individual to be considered to materially participate in a business, she must be involved in its operation on a "regular, continuous and substantial basis". More specifically, there are seven tests that the IRS uses to determine material participation and a business owner must satisfy at least ONE of the tests:


* 500 Hours: individual participates in the business for more than 500 hours during the tax year.
* Substantially All of the Work: the individual's participation constitutes substantially all of the participation in the business compared to all individuals involved in the business.
* More than Anyone Else: the individual participates in the business for more than 100 hours during the tax year and that time is not less than any other individuals involved in the business.
* Significant Participation Activity: The activity is a "significant participation activity" (SPA) and the sum of SPAs in which the individual works 100-500 hours per year exceeds 500 hours for the year.
* 5 Out of 10 Years: The individual materially participated in the activity for any five tax years during the prior ten tax years.
* Personal Service Business: If the individual materially participated in the activity for any three tax years preceding the current tax year and the activity is a personal service activity, the loss will be treated as non-passive. A personal service business is one in which capital is not a material income-producing factor. Examples of PSBs are accountants, lawyers and doctors and in the equine world, free-lance instructors and equine chiropractors.
* Facts and Circumstances: The facts and circumstances test may apply if none of the other tests are met. This test does not apply unless the individual worked more than 100 hours a year. Also, the taxpayer's time spent managing will not count if:o A paid manager participates in the business, ando Any person spent more hours than the taxpayer managing the activity.


Material participation is determined on an annual basis so you may be considered to materially participate in your business one year and not another.


Material participation is only one factor that can limit the amount of loss available to the business owner. Other factors include limitations due to basis, amounts at risk and hobby loss rules. So be sure to consult with a qualified tax advisor to understand all of the factors affecting your situation.

The first year that I prepare a tax return for a client, it isn't unusual for me to get a lot of receipts for deductions for clothing related to their job or business. Many times, I have to be the bearer of the bad news that the cost of most of the clothing is not tax deductible. The types of clothing that are tax deductible are very limited and I use what I call the "Department Store Rules" as general guidelines to determine what is and is not deductible. My "Department Store Rules" are 1.) Can you buy something similar to your potentially deductible clothing item in a department store? 2.) Would most people feel comfortable wearing this item of clothing into a department store? If the answer to either question is "Yes", chances are that the cost of the clothing is NOT deductible. So on the "NOT deductible list would be items such as:

Sports bras
Muck boots
Favorite polar fleece jacket even if that jacket is manufactured only by an equestrian clothier
Extra warm coat you wear when you are giving lessons, teaching a clinic, judging, etc.



You get the idea.



So what is deductible?



Protective/Safety Clothing: hard hats, riding boots, chaps, riding gloves, protective vests and any other type of protective clothing not suitable for everyday wear.








Show Clothing: breeches, top hat, hunt jacket, etc IF the showing is a business expense (e.g. you are showing your clients' horses, sale horses, etc) AND the item of clothing is not suitable for everyday wear (e.g. your lucky show socks, the T shirt you wear under your show coat ...).



Something you can do to expand this rather narrow window of what is deductible very slightly is to have some of your regular business-use clothes embroidered with your logo or otherwise use them as a marketing device. For a trainer who frequently coaches at horse shows, you could have your baseball cap and jacket embroidered with your business logo and the cost of the clothing and the embroidery would normally be deductible. Don't go over the top on this idea and have everything in your closet embroidered or the IRS could disallow all of the deductions. Weigh the cost of the tax savings you gain by getting the deduction and the possible marketing benefits against the cost of the embroidering to see if the idea works for you.





Remember that for any expense to be deductible it must be a business-related expense, ordinary (common and accepted in your type of business), necessary (helpful and appropriate to your business) and you must have documentation (receipts) that you actually incurred the expense.








So on your next trip to the tack shop, remember my "Department Store" Rules and you'll know how much of your purchase should be tax deductible.

It's all about you!

You can have the best employees in the world but the reason most clients will start to do business and stay with your business is because of you. This business was your brainchild, is your heart and soul, you who makes or loses money...no one should be more invested in your business than you. But sometimes, it's not just working hard. It's working smart.



For example, you could try to save your business some extra dollars by doing all of the office work yourself. But if you are out in the barn, instead of in the office, you can connect with clients and employees. Checking in with clients may result in additional lessons, training or showing and can certainly result in more revenue for your business than whatever you'll save working in the office. You don't have to hold big parties or give great Christmas gifts. It can be as easy as taking a couple of photos of great moments in a lesson and e-mailing them to the student (or student's parents) later on.



Clients want to be treated "professionally". By dressing appropriately and focusing on your clients' needs, you show that you value the time and money that they are spending on your business.



You can also create goodwill by being approachable when you are away from home. Potential clients frequent the rail to watch how you interact with your students and horses in training. But be sure that potential clients can identify who you are by jackets, saddle pads, etc with logos that are easily readable from a distance. Check with your showing association to see what is allowed.



Try to find high exposure opportunities to which you can donate your time - clinics to benefit a cause, speaking at your breed or show association, etc. The return on your time will be rewarding to your business in terms of good PR and eventually, in dollars of revenue as well.



In the end, EVERY business decision you make (and remember, not making a decision is really making a decision not to act) effects the bottom line of your business. Represent your business well and work smart and you'll get monetary as well as personal satisfaction from your career.

Even the most diligent employees won't watch over your money as carefully as you do. So if you aren't responsible for all of the purchasing decisions at your farm, you need to create incentives for employees to make cost-conscious purchases. The easiest way to do this is to set an annual budget for each type of recurring purchase - feed and grain, supplies, maintenance, etc. The budget should be attainable and realistic and there should be some reward to the person responsible for purchases (e.g. barn manager) for coming in at or under budget. Suggest possible strategies for reaching the budget goals - purchasing in bulk, buying generic rather than name brands, etc. Require that any major changes be subject to your review before making the change. You want to save money but you don't want to replace a satisfactory product with an inferior one.

Another way employees can help save you money is by following established safety procedures. Accidents or injuries due to an employee neglecting to follow established safety rules will be reflected in increased rates for your workers compensation and general liability insurance. If your worker is injured, it will cost you money in the form of additional labor costs, possible reimbursement of medical costs and even potential lawsuits.

Is it possible to utilize your workers to do some of non-income producing work that you currently do? If you could be producing income but are instead stuck behind a desk, that's a lost opportunity cost. For example, if you can find a suitable substitute, you can hand over responsibility for monthly invoicing of clients and start teaching more lessons yourself. Finding a suitable substitute may mean hiring a part-time bookkeeper at an hourly rate less than what you'll be making teaching lessons. You'll be making more than you are spending for the bookkeeper and you'll be interacting with clients, where you belong.

Ask your employees for suggestions for cost-saving measures. They may notice poor quality or waste that is costing you money. They see a side to your business that you may not and can be a great source for ideas. Also, including your workers in the decision-making process is great for team-building and instilling a greater sense of responsibility.

Your employees can be a drain on your business or a resource for your business. It's up to you to create a work environment to benefit you both.

Equine Accounting: Looking for "People People"

When you look for an employee for your horse operation, you want someone who is good with horses, someone who can paste worm the most difficult horse in the barn with one hand tied behind their back, clean five stalls in less than five minutes and other equally impossible tasks. A big part of your livelihood comes from horses so, of course you want to hire employees who are strong in those skills - "Horse People"

But horses are only half of the equation. Horses are owned by people, expenses incurred by horses (like hay, grain and shavings) are paid by people and some people can complain a lot more loudly than most horses if they aren't happy with the services provided. Yet most employers don't consider the skills that are required for good customer service when making a hiring decision - "People People" and not just "Horse People".

While it isn't likely that most of the job applicants for horse businesses have had extensive training in customer service, some may have had experiences that will serve as a good basis for developing awareness and consideration of customer needs. So don't just focus on how many barns the applicant has worked at in the past. Also ask about experiences working in retail or service industries, where customer service is key.

No matter what their experiences, you need to provide training so your employees KNOW how you want them to handle a situation. Role play scenarios and offer suggestions for responses. When a client mentions that she heard that her horse wasn't turned out today as promised, "I forgot" is not an appropriate response but "Let me find the barn manager/owner and I'm sure she can answer your question" might be one example of how you'd like your employees to address the situation.

Spend some time in your barn and listen with the ears of a customer, not the owner. You might be surprised at what you hear - a barn manager berating an employee at full volume, a barn employee explaining to a customer why she hates working there, etc.

Good "People People" employees = satisfied customers who are eager to patronize your business and put money in your pocket. So invest in your employees by providing them with the customer service skills they need to help make your business a success.

Visit my website www.blueribbonaccounting.com to learn more about equine businesses.

Equine Accounting and Taxes: And with Sales Tax, your total comes to $$$....

Before someone goes on a horse hunting trip, hopefully they check their wallet to see that they have enough money to cover the cost of the horse, the vet check, transportation costs, tack (because the new horse is always a different size that all of your current tack), etc, etc. But many potential buyers never consider that sales tax may be due on their purchase.

There have been efforts to create a uniform sales tax that would be the same for all states but for now, each state regulates the imposition of sales tax in that state. As I mentioned in a previous post, some states charge sales tax on horse boarding. But many more charge sales tax on the sale of horses. Generally, most sales of tangible personal property are taxed and horses would meet that description.

If you purchase tangible personal property in a state with no sales tax, or the sales tax percentage where you made the purchase is less than your home state, you may be liable for use tax for the “use, storage or consumption” of that property in your state.

Because each state is different, I can’t write 50 articles about sales tax on the sale of a horse. But I can tell you about a situation which is a good example of possible sales/use tax liability for someone engaged in the business of selling horses. A regularly imports horses from Europe, both as an agent for his clients and buying horses directly himself, for training and resale later. A had a working relationship with several sales barns in Europe. So for purposes of simplification, even when acting as an agent for a client, it was A’s name on the paperwork for U.S. Customs. A was recently contacted by the Department of Revenue for his state regarding use tax liability on the horses purchased in Europe and brought to his state. If his state decides to audit these transactions, they could audit multiple years and some states have no statute of limitations for the examinations of returns. With some states charging as much as 60% in penalty and interest, this could become a very expensive problem for A.

There are many possible scenarios for the sale of a horse including: resident seller to resident buyer, resident agent (who holds no title to the horse) to resident buyer, resident agent to nonresident buyer, resident seller to nonresident buyer and nonresident seller (outside United States) to resident buyer and each may involve sales/use tax liability.

In my state of Massachusetts, if a horse residing in Mass is purchased and delivered to another state, the seller should provide the buyer with a letter of delivery. If there is sales tax in the new owner’s state, the new owner is responsible for the liability. But, if the horse comes back into Mass to live within six months of purchase, the owner would be responsible for Mass sales tax if they had not paid sales tax in their state. Sound complicated? It is. Some CPA firms specialize in this area due to the complexity and variety of regulations among states.

Though sales tax audits may not sound as familiar as an audit by the IRS, they are much more common. And with the current state budget shortages, some states look to sales tax audits as a way to make up some of the difference. So it’s important to the future of your horse sales business to learn more about the sales/use tax regulations of your state. Contact your state Department of Revenue as well as your state horse council, farm bureau or other related agency for general information. If you find that you have a potential sales tax liability, contact an attorney or CPA who specializes in this area.

Equine Accounting and Taxes: Potential Sales Tax Liabilities for your Horse Business

A potential client contacted me to ask if I would be willing to prepare her sales tax return for her. I've prepared sales tax returns for over 20 years so this should be no problem. "What have kind of product have you been collecting sales tax on?" I asked.

"Horse board".

"Are you sure about this?"

She sounded pretty sure. So I decided to investigate myself.

She lives in New York State, so I contacted the New York State Department of Taxation and Finance. Yes, I was told, horse boarding in New York State is subject to sales tax. The customer service rep there referred me to their tax regulations and several tax memos and advisories. Further digging uncovered the NY State Horse Council, which has website including an index of legal issues affecting horseman, including a list of what is and is not subject to sales tax for commercial horse boarding operations.

Sales tax is regulated by individual states, or in some cases, individual counties or cities. But there are some general concepts. Generally, all tangible personal property is taxable except with exemptions. So if you are a farrier and also sell hoof supplements to your customers, in most states you would be required to collect and remit sales tax on the supplements you sell. In many states, sales tax should be collected and remitted for sales of horses - a subject to be discussed in a future newsletter.

The difficulty sometimes becomes defining what tangible personal property is. In NY State, horse boarding is compared to leasing storage space. It's the stall itself that is considered to be the primary item in a boarding transaction, so sales tax is assessed on that tangible personal property. If in a sales tax audit, you feel that sales tax should not be assessed on a certain type of personal tangible property, the burden of proof is on you -the taxpayer- to prove this is the case. Conversely, generally only certain services are taxable. In a sales tax audit, the burden of proof is on the auditor to make the case that the services at issue are subject to sales tax.

Sales tax audits are much more common than IRS audits of income tax returns. Some states have no statute of limitations for examination of prior years' sales tax returns and penalty and interest can amount to up to 60% of the tax.

What can you do to find out more about the possibility of sales tax liability for your horse business?

1. Contact your state Department of Revenue. Ask for information regarding what goods and services are taxable in your state.

2. Contact your state Farm Bureau, Horse Council, etc. for more information. If you feel that you may have potential sales tax liability, ask them to recommend an attorney with expertise in this area.

3. Contact a CPA firm or attorney that deals only with matters of sales tax. Sometimes, this is less expensive than people fear and gets them a definitive and relatively quick answer. If you do need to collect sales tax, you will need to register with your state but speak with the attorney or CPA first. There could be serious tax consequences if you register and owe back taxes. Your attorney may be able to negotiate a settlement before you register. If you register first, the chances of negotiating a settlement is very small.

4. If you don't use one already, consider putting your financial data into an accounting software program like QuickBooks. You can create invoices with sales tax included and track and remit sales tax liabilities relatively easily using QuickBooks.

Remember that each state is different. Find someone that is familiar with the sales tax regulations that affect you. A little attention now may save you time and money in the future.

Famous Last Words... My tax situation is pretty simple

Several years ago, I met a woman who was involved in carriage driving. I remarked on how well behaved her horse was and asked who trained her. The woman said that she got the horse from a family who bought the filly as a yearling and trained her themselves. They had never owned a horse before and decided that as a family project, they would buy a horse and train it to drive. Their only resource for how to train the filly was a book that they bought on raising and training horses.
A lot of you who are reading this are probably cringing, thinking of all the ways this experience could have gone terribly wrong. 99% of the time, it wouldn't have a happy ending. Horses are complicated and some of the time most of us need assistance from professionals who know how to do the job right.
Most of us wouldn't try to do electrical wiring or writing our own legal contracts. So why do so many people do their own tax returns?



It isn't uncommon when I first meet a prospective client or speak with an attendee at a seminar that they tell me that their tax situation is pretty uncomplicated. But when we go on to discuss the situation further, it can prove to be anything but straightforward. As I start to explain the intricacies of some of their tax issues, I hear "How am I supposed to know that?" or "This is more complicated than I thought".

Quoting U.S. Representative Spencer Bachus from AL:

"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."




CPAs and Enrolled Agents spend a significant portion of time staying informed about current tax law. How can someone who only prepares one tax return once a year be aware of all of the issues that can affect their tax situation?



Here is a sample of questions that I've heard recently:



Personal:

1. Is the scholarship I received taxable?

2. How much of my Social Security benefits are taxable?

3. I surrendered my life insurance policy for cash. Does that affect my taxes?



Business:

1. If I give my employees gifts for Christmas, is the cost deductible?

2. If I am a one person S Corporation, can I set up a health insurance plan for myself that is non-taxable to me and deductible for the corporation?

3. What is a Section 179 deduction?



If something is wrong on your tax return, it may be a red flag to the IRS which can trigger an audit or it may increase the amount of taxes you pay or decrease the amount of your refund. But it's not something you realize at the time. It can take years to discover the problem which could translate into amending the tax returns for all the years involved.



There are certainly people other than CPAs and Enrolled Agents who can correctly prepare a return. And there are tax returns that are fairly simple and straightforward for the average taxpayer to prepare. How do you know if that's your situation?



1. You can hire a tax preparer to review your prior year return to see if you have any potential problems.

2. You can hire a tax preparer to prepare your return this year. Compare it to what you did last year (assuming your situation has not changed significantly) and see what the differences are.

3. Schedule a consultation with a tax preparer and explain your business or personal situation. They may be willing to point you toward tax issues specific to your situation.



Tax returns done wrong can be a costly problem to remedy. Get expert advice and then decide whether preparing your tax return yourself is the best alternative for you.

Equine Accounting: Qualified Joint Venture for Husband and Wife Operations

At many horse farms, the revenue from the farm represents the primary source of income for both the husband and the wife. In order to receive credit for their income for purposes of calculating future Social Security benefits, many couples have resorted to changing their form of taxable entity from sole proprietorship to a partnership or S corporation. This results in an initial expense for legal costs as well as additional fees for preparation of more complication partnership or S corporation returns each year. However, there is another less expensive and less complicated option: the qualified joint venture.

Beginning in 2007, an unincorporated business that is jointly owned by a married couple may elect to be treated as a qualified joint venture. The couple must file a joint tax return. Each spouse must "materially" participate in the business and the business may not be owned in the name of a "state law entity" - an LLC or LLP.

Each spouse must report their share of the all of the business income and deductions and each will receive credit for purposes of Social Security benefits calculation. The division of income and deductions between the couple should be based on each spouse's interest in the business. Generally, this can be calculated based on time and/or funds invested in the business. So each spouse would include in their jointly filed Form 1040 a separate Schedule C or Schedule F, with their share of income and expense as well as a separate Schedule SE to report self-employment tax. In most cases, this division of income does not increase the amount of tax due.

If, however; Spouse 1 substantially controls the management of the business and Spouse 2 is under the "direction and control" of Spouse 1, an employment type of relationship exists and would not meet the criteria of a qualified joint venture. Spouse 2 should be considered an employee and is subject to income tax and FICA (Social Security and Medicare) withholding. As the employer, Spouse 1 is responsible for FICA taxes but not Federal Unemployment Tax.

Why is this important to know? If you and your spouse are planning to spend a considerable percentage of your working life on the farm, you need to be sure that each spouse is accumulating wages that are included in calculating future Social Security benefits. We don't like to think about the possibility of losing our spouse but especially in the case of a family with children, it's important to plan in advance to minimize the economic impact of the death of a spouse.

Equine Accounting: Assistance from the IRS to pay for Child Care

Whether you work for yourself or someone else, worrying about care of your children while you are at work can cause both financial and emotional stress. Well relax; the IRS is here to help. The Child and Dependent Care Credit is available to many taxpayers for care incurred during vacations and throughout the year. For parents who are working (or looking for work) and arrange for day care for their children under thirteen years of age, this credit may provide some reimbursement toward the cost of this care.
What you need to know:



•You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to calculate the credit.
•The range of the actual credit is between 20 and 35 percent of your qualifying expenses, depending upon your income. Unlike many other deductions and credits, there is no upper limit on the amount of your adjusted gross income.
•You (and your spouse if filing jointly) must have earned income during the year.
•Both in-home sitters and daycare facilities outside the home qualify you for some tax benefit if you are eligible for the credit.
•The cost of day camp may count as an expense towards the credit. However, expenses for overnight camps do not qualify.
•When you submit your tax return, you must complete IRS Form 2441 and provide the name and tax identification number for the individual providing the care.
•This is a tax CREDIT, which directly reduces the amount of tax due on your return. However, it is a nonrefundable tax credit - which means that it cannot reduce the amount of tax due to less than zero.
Please see IRS Publication 503 (http://www.irs.gov/pub/irs-pdf/p503.pdf) for more information.

Reflections on Equine Affaire MA

In my opinion, this year Equine Affaire attracted an even bigger crowd than in recent past years - this in a time when the sentences in many news broadcasts start with phrases such as "Due to the recession", "As a result of the poor economy", etc. And people weren't just there - they were buying! How did they do it? What is it about Equine Affaire that attracted you to attend?
This month, rather than discussing an accounting or tax topic related to horse businesses, I want to get down to basics. Equine Affaire has found a way to attract vendors, presenters and consumers in droves. Rather than accept the premise that a poor economy is an insurmountable obstacle to a successful event, they just "made it work".
Do you view the current economy as an opportunity? Demand still exists in the horse industry but it might no longer be for the goods or services upon which your business is currently focused. Has your business kept pace with the changing economy? Is there something you can do to meet these new demands?
There will be a wide variety of options available to you, based on your individual situation. But you need to evaluate which ones are best for you. Do some research. Talk to your customers to find out what they need, not what you think they need. Do they have an unmet need that you can satisfy? Look at businesses that are successful now. What are they doing right?
Identify your target market? Who is your ideal customer and how can you market to reach them?
When you have a defined concept of what needs to be done in your business in order to change to adapt to current conditions, create a business plan. Be as detailed as possible with benchmarks that you hope to reach within a specific timeframe so you have a method to evaluate your progress. Keep detailed financial records so you have solid numbers, rather than using impressions and feelings as guideposts.
I know that when times are tough, it feels pretty overwhelming to consider making big changes that involve a lot more commitment and energy on your part. But the payoff will make it all worthwhile. You know owners of horse-related businesses who were "making it work" for them so it is possible. We can't all be Equine Affaires. But maybe you can be.

Equine Accounting: On the road again...deductible expenses from horse show travel

With show season behind us for most parts of the country, it's a good time to discuss which expenses which are incurred while you are showing "away from home" are deductible. This will help you when getting information together for your current year tax return as well as preparing for next season's expenses.
In general travel expenses are deductible if they are directly related to conducting your business. "Ordinary and necessary" (as defined by the IRS: an ordinary expense is an expense that is common or accepted in the taxpayer's trade or business; a necessary expense is one that is appropriate for the business) travel expenses such as transportation, lodging and incidental travel costs, such as laundry, tips etc. would be deductible if supported by documentation such as receipts. Be sure to document the business purpose of each expense.
The cost of meals consumed on a business trip are deductible, subject to a 50% limit. Again,only the ordinary and necessary costs of meals are deductible. Facts and circumstances dictate what is considered ordinary and necessary but keep in mind the ultimate determination is made by the IRS (if your are audited).
If you engage in both personal and business activities while on your trip, be sure to document in detail which costs are associated with your business. If you travel to a location for primarily personal purposes and while there, transact business, the costs of travelling to and from the location would NOT be deductible. But if you travel for primarily business purposes, then your costs of travelling to and from the location would be deductible. You would allocate the costs incurred while there between personal and business and only the business portion would be deductible. If your transportation costs for showing are significant, the tax savings of determining those costs to be deductible could b substantial.
If anyone else (including your spouse) accompanies you on your business trip, in order for those expenses to be deductible, the person accompanying you must work for your business, their presence must serve a bona fide business purpose and the costs would have been deductible had they been incurred by someone who was not accompanying you.
There MUST be a business purpose for showing, in order for the related expenses to be tax deductible. Don't rely on theory and generalities to prove your point to the IRS if you are audited. At every show, keep a record of who you coached, what potential clients you met, the sales horses you rode, etc. If you need to accumulate certain scores or ribbons in order to be certified as a judge/instructor/etc., document which shows and which classes you entered in order to fulfill your requirement. You can use this information not just in case of an audit but in planning for the same show next year, to send out marketing materials and to track fulfillment of any continuing education requirements.
Showing can be a great marketing tool and a legitimate tax deduction. Keep detailed records and follow IRS regulations. Best wishes at the show!

Equine Accounting: Entity ABCs

SP, LLC and Subchapter S - what does it all mean and why do you need to know? These are several of the different types of legal entities that businesses adopt, which allow the business to take on an existence apart from it's owners - though the owners still control the business.
The type of entity that you choose will affect your personal responsibility for the liabilities of the business. A lawyer can best advise you as to which entity would be the optimum solution for your personal situation.
But the choice of legal entity also affects your personal income tax liability. In order to best utilize the tax advantages of each type of entity, you need to understand how the incomes goes from your business cash register through your tax return and into your pocket.
Flow through entity types: An entity is considered a "Flow through" type because the income of the entity is treated as the income of the owners. For Federal tax purposes, a flow through entity avoids double taxation because only owners themselves are taxed on the revenue. Net Income is divided among the owners and each owner pays taxes on that income as part of their personal income tax return. Generally, losses from the business can be applied against income from other sources (investment income, salary of spouse, etc), which will decrease the individual tax liability. Whether these losses can be applied against other income is subject to regulations on hobby loss, tax shelters and material participation, among others.
Types of flow through entities include:

1. Sole Proprietorship: This is the simplest form of doing business for tax purposes. a business operated by one individual owner (or married couple who jointly own and operate a business may elect for each spouse to be treated as a sole proprietor) is a sole proprietorship. You file a Schedule C or F (Farm income) as a schedule of your personal Form 1040 and the business is not required to file a separate tax return.
2. Partnership: When a business is operated by two or more owners (in this type of entity, owners are known as "partners"), with each owner contributing to the business and each sharing in the profits and losses of the business, the owners may elect the partnership as the legal form of entity for that business. The partnership is required to file a tax return (Form 1065) but the form is informational only. There is no tax liability for the business itself.
3. Subchapter S Corporation: A business with 100 or fewer ownrs (in this type of entity, owners are known as "Shareholders") may elect to be a Subchapter S Corporation. As a type of flow through entity, income or loss of the business is included as part of the personal income of each shareholder and except for under very limited circumstances, the business has no income tax liability. The corporation is required to file a tax return (Form 1120S) but the form is for informational purposes only.
4. LLC: The LLC (Limited Liability Company) is a legal entity but is not recognized by the IRS for tax purposes. So a business organized as an LLC would be required to elet to be taxed otherwise - as a Sole Proprietorship, Partnership or C Corporation. Owners in an LLC are known as "Members".

Non flow through entity type:

C Corporation: This probably the most complex form of doing business. A C Corporation is a separate taxable entity from its owners. It not only files a separate tax return but has its own tax liability. Profits by the business are taxed on a corporate level and if distributed to the owners, taxed again on an individual level.
Some important considerations when determining the best type of entity for your business would be the extent to which you need to limit legal liability and the future plans for your business in years and generations to come. In some cases, relief from personal legal liability has more value to the owner than simplicity of operation or tax benefits. Seek the advice of an attorney when making this important decision. Be sure you understand not only the benefits but the future responsibilities involved in your choice.