Equine Accounting: Tax Return Review

When there are SO many more interesting subjects, WHY AM I WRITING ABOUT TAX RETURNS IN THE SUMMER? Some time ago, I had written an article on reviewing your tax return - intending to include it in a newsletter in March or April of next year. But based on several tax returns that I have reviewed recently upon taking on new clients, I've decided to publish the article ASAP. Lately, I've seen some returns that are just plain wrong. Ultimately, it is the responsibility of the taxpayer to review their tax return. Some of the consequences of errors on a return can be overpayment of tax or interest and penalty upon audit.
So please, dig out your 2009 tax return and run an eye over it after having read this month's newsletter. Anything really out of line will jump right off the page at you. It's worth the effort.

Your tax return -most of us have to submit one each year. You either do it yourself or you pay someone to do it for you. For some people, it may be the only form of financial statements that are prepared for their business each year. You want to be sure that it's been prepared correctly BEFORE you get a notice from the IRS that they "are proposing changes to your tax return". Ultimately, YOU are responsible for what is on that return. So take some time and look it over before giving the OK for it to be sent off to the IRS. I know this sounds painful but read this article (average reading time 4 minutes), print this page and set it aside until your tax return is ready. Better be safe than sorry.

Here is a brief guide to what should be entered where.

There are basically four sections where financial information is entered into your Form 1040 U.S. Individual Income Tax Return. The 1040 Form itself is just one page, front and back. All the other schedules and forms provide information which is entered (directly or indirectly) onto the 1040. On the front of the 1040, after the spaces for your name, etc., filing status and exemptions is the Income section of the form. You have 17 lines to enter every type of income you received for the tax year: wages, interest, dividends, business income, Social Security benefits, capital gains and the catch-all "Other Income".
If your business is a sole proprietorship, Schedule F (Farm Income) will be completed, or in some cases Schedule C. The "bottom line" from those schedules will be entered either on Line 18 for Schedule F or Line 12 for Schedule C. If your business is a partnership or S corporation, Schedule E will be completed and that result will be entered on Line 17.
You may feel a little unsure about reviewing other parts of your tax return but no one knows your business better than you. If the schedule doesn't look right to you, it probably isn't. No matter how fancy the tax software program, returns are ultimately prepared by people and people make mistakes.
Reviewing the return also might give you information about some aspect of your business of which you weren't really aware. (Did we really spend $10,000 on farrier bills this year?)
The bottom half of the front page addresses Adjustments to Income. There are only a few lines that are generally of interest to owners of horse-related businesses. Lines 27 through 29 are related to self-employment tax, retirement plans and health insurance and Line 35 would be of interest to breeders.
The top two sections of Page 2 cover Taxes and Credits. On Line 40a, either the Standard deduction or an itemized deduction is entered. The itemized deduction is calculated on Schedule A and consists of personal expenses such as medical, real estate tax, charitable contributions, interest, casualty and theft losses and other miscellaneous deductions. Once the itemized deduction is calculated, subject to certain limits, it is compared to the standard deduction and generally the larger of the two is entered onto the 1040 Form. Your exemptions are also deducted (generally $3650 for 2009/person for you, your spouse and each of your dependents).
Your preliminary tax is then calculated but you may be eligible for certain tax credits - which are deducted from your tax, rather than deductions, which are deducted from your taxable income. Two credits which may affect many owners of horse businesses are the Credit for Child Care Expenses on Line 48 and the Child Tax Credit (for dependent children under the age of 17) on Line 51.
You may also be subject to other taxes such as Self Employment Tax (Line 56). Finally, all of your taxes are totaled on Line 60.
Finally, the lower section of Page 2 calculates the Payments that you have made toward your tax liability in the form of estimated taxes, taxes withheld from your paycheck and/or checks from customers. Several other credits are thrown in for good measure and a final calculation is made of what you owe (final tax liability) or what is owed to you (refund).

The good news is this only happens once a year.

Equine Accounting: These are the days of our lives...

In this era of Facebook, Twitter and YouTube, people document a lot of information about their lives - where they are, what they think and who they know. Documentation for business purposes is far less common but some might argue (particularly the IRS) far more necessary. What types of documentation does your business need and for what purpose?
Written Documents:
1. Contracts: boarding, training, leasing, sales, etc. To avoid any confusion or disagreement after the fact, you should document all of the terms of the arrangement in a contract. If it is a contract that you will use on a regular basis, such as a boarding contract at a boarding barn, you should have an attorney that specializes in equine law review the contract periodically.
2. Receipts: for all business expenses. When you get the receipt, take the time to write notes on the back regarding what the business purpose of the expense was - e.g. lunch with Sparky's owner, Chris, to discuss her show schedule this year. By tax season of the following year, you may not remember anything about the business purpose for the receipt so make a note when it happens. If you cannot document the business purpose of the expense, it may be disallowed by the IRS.
3. Daily Journal: Find some way to keep a daily journal of relevant business activity and ideas. All the information doesn't have to be included in one source document but there are a lot of pieces of information you need to include.
Let's use one day at a boarding and lesson barn as an example. Your day sheets should include the time of the lesson, the name of each student and the horse they are assigned, the name of the instructor, any management notes (use a different bridle, payment owed from last week, etc.), instructor notes after the lesson and payment information (paid with check # 123 for $45). There should be instructor notes for each rider every week. In one legal case, the lack of instructor notes was used by the plaintiff's attorney to attempt to prove negligence by the instructor.
Your day sheets will also be used for internal control purposes to track that each student has paid for their lesson and that all checks have been deposited to the bank.
You should also track daily farm activities and note any unusual occurrences. Document your order from the feed and grain store, the farrier's visit (who was shod, what customers owe you for holding their horse, etc). Make extensive notes about any activity that could possibly have legal/medical repercussions such as a bale of hay falling from the loft onto an employee, a horse demonstrating symptoms that could be the beginning of colic, etc.
4. Travel log: For any auto travel related to business, the IRS requires that you keep contemporaneous records which should preferably include the date, the business purpose (who and why) and the beginning and ending readings on the odometer. Remember that trips to the Post Office to mail marketing materials, the office supply store to buy file folders and other business related auto travel are all deductible.

Photo/Video Documents:
1. Marketing documents: Take photos/video of happy students, training horses going well, whatever your marketing focus - visually document your successes and use it in your marketing materials. If you are a clinician and want to expand your target market, create a DVD of one of your clinics, with snippets from various riders and send it to the appropriate potential clients.
2. Client relations: Use your happy student photos as Christmas presents for students or parents of students.
3. Insurance documents: Photograph the tree that fell on the fence BEFORE you begin to remove it. Take a photo of your boarder's horse after he is released from being cast in his stall to document his injuries (or lack of them).
4. Sales videos: enlarge the geographic market for your sales horse by posting the videos on You Tube and various equine sales websites.

When in doubt, write it down or take a picture of it! Your business will probably benefit from the information

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.

Equine Accounting: Getting your information for your tax return organized...

How to organize your tax return documentation for your tax return in a few easy steps:Day 1: Read this article. It's probably going to be the step that takes the greatest amount of time so it's all downhill from here.

You need to get your records organized. But you open the file/shoebox/drawer and there is just so much there, in no particular order. That looks like a whole day's worth of work and there are horses to be ridden, lessons to be taught and stalls to be cleaned. So you put away your good intentions for another day.
It doesn't have to be that way. Here's how to get organized without spending lots of precious time sitting at your desk. But first a brief review of what your records should include.
The IRS requires documentation for all expenses that you deduct. You must be able to back up deductions with documentation such as canceled checks or receipts. If you are selected by the IRS for an audit, you may not be audited for several years after you file your return. Memories fade so be sure to create a system of organization that you will remember and understand in years to come.
Generally, the law does not require any specific kind of records. You can choose any recordkeeping system suited to your business that clearly shows your income and expenses. For most small businesses, the business checkbook is the main source of recordkeeping. In addition, you must keep supporting documents. Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks.
Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents that show gross receipts include:
· Bank deposit slips.
· Receipt books.
· Invoices.
· Credit card charge slips and statements
· Forms 1099-MISC.
Expenses are the costs you incur to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following.
· Canceled checks.
· Credit card sales slips and statements
· Invoices.
· Petty cash slips for small cash payments.
Get started:
The trick of getting this done is to do little bits each day. Set a reasonable daily goal. If you can't accomplish the goal you set, the next day you need to finish that goal before moving on to the next one.
Day 2: Get together all of your bank statements, credit card statements, receipts and other supporting documentation (your proverbial shoebox), prior year tax return and check book .
Day 3 and for each succeeding day until done: Decide on categories of expenses for your business. If you look at the portion of your prior year tax return which reports the activity of your business, you will see the types of expenses that your tax preparer used - e.g. Utilities, Feed and Grain, Legal and Accounting, etc. Grab a manila envelope, label it with the name of one expense type and go through your pile of receipts for only that type of expense. Toss all of the Utilities bills into the Utilities envelope and pick a different category the next day. Save all of the receipts that are for miscellaneous expenses for the last day and create a Misc envelope for those. HOWEVER, if you have more than a few documents for the same category and the total for that expense is significant for your business, you should probably create an envelope just for that type of expense. If you have a category with only a few documents, do an additional category that day.
The day after all the expenses are sorted and each succeeding day until done: Take out of the manila envelope the documentation for one type of expense. Put the receipts in order by date, earliest date first. Make a list on a piece of paper for each document listing the date, the vendor (who you paid), the amount and the business purposes for the payment (e.g. hay and grain, saddle fitting, etc). When you are done with that expense, put the paper into the envelope and the next day, start with the next expense. Again, if you have a category with only a few documents, do an additional category that day.
The day after all of your expense envelopes have lists and each succeeding day until done: Pick an envelope and review your credit card statements, bank statements and check book for expenses that may be included there but for which you don't have supporting documents in your envelope. On a piece of scrap paper, put the date, vendor name, amount of the expense, toss the paper into the envelope and add the expense to your list.
Follow the same procedures for gross income. Income categories might include lesson income, board, training, sales commissions, etc.
Now you are ready to hand everything over to your tax return preparer. Going through this process has many benefits. It:

· Has saved you the cost of having your tax preparer sort through everything.
· Reduced the possibility of the preparer misclassifying an expense ("What's a gogue???")
· May show you that there are some documents missing.
· Provides a good review for you of your business finances.

Equine Accounting: NewSecurity of Information Law in MA

Does your business accept checks or credit cards?
If your business accepts checks or credit cards from Massachusetts residents, this article is definitely for you. Even if you live in a state where there are currently no requirements for this type of security, something similar may be coming to your state soon. So see what plan Massachusetts is putting into place. No matter where your business is located, safeguarding your customers' personal information just makes good business sense.
Effective March 1, 2010, every organization who collects, owns or licenses personal information about a resident of Massachusetts should be in full compliance with 201 CMR 17. This new personal data protection law establishes a standard set of regulations for businesses to protect and store Massachusetts residents' personal information. Personal information is defined under the new regulation as a resident's first name and last name, or first initial and last name, and one or more of the following:

· Social Security number· Driver's license number or state-issued ID card number· Financial account number (bank account number) or credit or debit card number (with or without any type of security or access code or password).

So this law applies to ANY BUSINESS, regardless of size, who accepts checks or credit cards.

The law requires companies to develop and implement several security safeguards, including:

· A comprehensive written information security plan (WISP) creating effective administrative, technical and physical safeguards of personal information.· Protection against any anticipated threats or hazards to the security or integrity of personal information (such as restricted physical access, computer passwords).· Policies regulating employees' ability to access and transport records outside work.· Disciplinary measures for violations of these new safeguards. MGL Chapter 93A, section 4 specifically "authorizes the Attorney General to seek injunctive relief against the organization involved in the unauthorized act or practice and allows a court to impose a $5,000 civil penalty for each violation". If "violation "is interpreted to mean the unauthorized access to a single individual's personal information, potential damages could be enormous.
It's not as daunting a task as it sounds. Most of the procedures are fairly simple to implement. Here are links to the law and WISP guidelines.If you would like more information or assistance, you can contact a private company who specialize in helping you implement an acceptable plan.

Thank you to David Javaheri at http://r20.rs6.net/tn.jsp?t=zlc7kgdab.0.0.tnz777cab.0&ts=S0464&p=http%3A%2F%2Fwww.compliancehelp.net%2F&id=preview for his help with this article.

Equine Accounting: Seven tips for getting paid by your clients on a more timely basis...

You've got a barn full of boarders and lots of lessons scheduled. Everyone's happy with your services. But you are having trouble collecting from those clients. What can you do to make collection easier and faster?

1. Bill your clients on a timely basis. Your invoices for board should reach your clients at least one week before their payment is due. Take the time to create an actual invoice - even if the amount due stays the same from month to month. If you don't have the time to bill your clients, hire someone to do it for you. You know that the reason that you don't have time to do the billing is because you are too busy cleaning stalls, turning out and doing all the other things it takes to make your clients and their horses happy. But the message they get when you don't bill on time is that the money isn't that important to you. So why should it be to them? 2. Have new boarders sign a contract that specifies when board is due and have current boarders initial the contract yearly. It may not have a lot of legal clout but it reminds your clients that you are first and foremost a business and operate as such. If you use this procedure with everyone, you aren't likely to get objections to doing so.
3. Ask for a security deposit from new boarders. This is standard procedure when you rent an apartment so why should it be any different when someone rents a stall from you? Having the security deposit gives you a little cushion should someone get behind. But never offer the client the option to apply the security deposit to an arrears balance unless it is their last month of boarding with you. If you increase your board, then the client must increase the amount of the security deposit. Your state may have regulations relating to maintaining security deposits so check with them before setting up any policy.
4. Have clients prepay your boarding or lesson fees. Offer them the option to "buy in bulk". This is especially effective for lessons. Offer a package of ten lessons with a discount for prepayment. Boarding barns can offer a discount when payment is made in advance on a quarterly basis.
5. Offer clients the opportunity to pay by credit card. PayPal and Intuit offer affordable credit card services that you can access from a smartphone or computer. There are fees involved but accepting credit cards can save you the time you spend chasing clients for payment. But I would not suggest maintaining credit card information on file. Massachusetts is in the process of implementing a new privacy of information law that includes security of credit card information and your state may have a similar law in place. Instead, explain to clients that they will need to provide their credit card for each charge. Some barns currently will only accept credit cards as a form of payment. This eliminates the need to make bank deposits and the problem of a check returned for insufficient funds.
6. For invoices for board, consider e-mailing the invoices rather than handing them out or leaving them in tack trunks. Clients are more likely to forget the invoice at the barn, in the car, etc than an invoice delivered directly to their computer. Checkbooks are usually kept close to the computer so it's easy to write out the check right then and there. For lessons, you should not have to be sending invoices, unless it is for a prepayment package. If the client does not prepay, then payment should be made at the time of the lesson. 7. Some barns charge extra fees for time spent holding the horse for the farrier, administering meds, etc. You may get distracted during the day and forget to make a note that the client needs to be billed for those extras. So consider either increasing the monthly board to cover all of the extras or offering an annual charge (to be paid at the beginning of each year) to cover all of the extras. The fee wouldn't be mandatory for all clients but by discounting it, you can make it attractive enough that many of your boarders will sign on.

Equine Accounting: Bartering- It’s not really income, is it?

You may trade services from your farrier for lessons for his daughter. Your favorite restaurant may provide goodies for your barn's Christmas party in exchange for the owner's occasional use of your indoor arena. But that's not actually income for you (and for the fellow barterer), is it?
There are two aspects of that question. Is it income to you for tax purposes and is it income to you for "business" purposes? First, the tax aspect: To quote the IRS: "Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company. Income from bartering is taxable in the year it is performed."

An example of an even swap would be two hours of riding lessons (regularly priced at $50/hr) in exchange for having 5 horses clipped for winter (regularly priced at $20/horse). For tax purposes, you have $100 of income from your lessons and the person doing the clipping has $100 of income for clipping your horses. Cash might be included in a barter situation if you provided one hour of riding lessons but only had one horse to be clipped. The person doing the clipping might also pay you $30 in cash.
Income from bartering should be tracked separately from regular income. Any business expenses incurred in performance of the bartered transaction are deductible - e.g. the cost of ring fees for the lessons for your farrier's daughter if they are not held at your facility. The IRS offers guidelines on record keeping for barter transactions at the IRS Website.
Be sure to use a reasonable value for the property or services received in a barter transaction to include in your income. If you exchange a $2000 filly for 6 months board (in a barn where board is usually $500/month), there is a $1000 gross profit on the transaction because goods worth $2000 were exchanged for services worth $3000.
An especially tricky barter situation occurs if you are bartering and giving and/or receiving services that could be construed as employment. For example, you exchange barn help for a reduction in the cost of board. The IRS may consider this relationship to be employment on your part. In addition to reporting the barter income, you would also be responsible for the employer portion of Social Security and Medicare taxes.
Depending on the nature of the work, at the very least, the person doing the work might be considered an independent contractor by the IRS. If you provided $600 or more of some form of compensation to the worker, you would be responsible for providing them and the IRS with a Form 1099 at year end.
There can also be sales tax issues if the product/service that you barter is considered taxable in your state.
Second, the business aspect: if you are receiving vet services in trade for lessons for your vet's daughter and the daughter loses interest in horses, you now have to pay for your veterinary services. For future planning, you need to know how much you "spent" on vet services previously.
For some services, such as lessons, the cost is easy to quantify. You may charge $50/hr for a lesson. Your vet bill is $200 so you owe your vet four lessons. But what about something like exchanging handyman services for rough board? What may seem like a good deal when you have several stalls available and plenty of work to be done, might not be economically advantageous when you have someone willing to pay top dollar to rent your last stall.
If cash is in short supply or you are giving/receiving a commodity that is scarce, bartering can be a wonderful opportunity. But be aware that it is not as simple a transaction as it may seem.
See the IRS Bartering Center for more information.