This website is the one I've been searching for, for years; a compilation of knowledge on all things horsemanship, including practical advice on how to start an equestrian business.
No matter your experience level with horses or homesteading, I hope this is a place you can get lost in, and learn something along the way - we welcome everyone from vets, to lifelong ranchers, trainer, to nonprofits contributing.
Is your horse business eligible for tax deductions? Yes! Here’s how:
When building Fairway Stables, one of the first questions I looked into was whether or not our horse business would constitute tax deductions under IRS laws.
If you’re like me, you may have wondered: Does the IRS think about equine-related businesses? Or do they have their own rules for horse businesses? What does the IRS consider a “horse business” anyways?
I looked into all of these questions and more, so, of course, I wanted to share my findings with you!
First and foremost: yes, your horse business can qualify for IRS deductions, but only if you’re running the business properly. We’ll go through those steps below.
But before we dive in, I’m not a tax advisor, and this is not tax advice. This content is for general educational purposes only. If you have any questions, ask your accountant. (If you’re looking for an accountant who actually understands your business, contact me. I trust one firm with all of my family’s and clients’ businesses.)
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Luckily, this is one area that is fairly straightforward. A horse-related business can be any business relating to horses as a means of generating revenue.
And the list goes on…
If, and only if, your horse business actually qualifies as a business (more on this below), the IRS will allow you to report receipts as business income, deduct business expenses, and take depreciation deductions on business assets.
Losses on horse-related activities are reported on tax returns as deductions from other income sources, such as salaries or investments.
At the time of this writing, under 26 U.S. Code § 179, businesses may deduct the full purchase price of “qualifying business equipment” that was purchased or leased during the previous tax year.
“Qualifying business equipment” generally means equipment used in the active conduct of trade or business. So, equipment that you use to operate your horse business.
However, these potential savings all hinge on the next question: are you really running a horse business, or would the IRS classify it as a hobby?
In previous articles, we’ve talked about why it’s so important (legally) to run your business as a business, rather than a hobby. It can be your saving grace in a lawsuit. But this is just as important from a tax perspective, because the IRS won’t subsidize taxpayers’ hobbies or pastimes through tax deductions.
The good news: the IRS is more focused on your intent to turn a profit than your actual ability to do so. In other words, you don’t have to make a profit year after year, which takes a bit of pressure off of the performance of the business, at least from a tax perspective.
How many profitable years do you need to qualify as a horse business? Section 183 of the Internal Revenue Code states that if a horse business shows a profit for two years out of a seven-year period, it will be presumed to be a for-profit business. The “clock” on that seven-year period starts with your first profitable year.
If you can prove you had two profitable years within that period, then losses resulting from the business may be deducted from other income. This shows the IRS you went into business for the purpose of making money, and therefore deserve a deduction.
With that being said, this isn’t a black-and-white rule. For example, if the profits are minimal and the losses substantial, the IRS will question why you continue to run a business that’s not turning a profit, and consider it a hobby instead. When deciding whether you have a business or a hobby, they’ll also weigh these 9 additional factors:
When reading through this list, keep in mind that no one factor is controlling. In other words, you can’t just satisfy one of the 9 and qualify as a business. The IRS (and courts) will look at all of the factors together:
I know this can be a lot to digest at first. If you were to focus on one factor to start, focus on keeping your money (books, records, etc) up to par. Keeping records of day-to-day business operations and how you carry out your business’ activities will give you a stronger argument that your horse business is in fact a business, rather than a hobby.
Keep in mind, if you’re just starting out and incurring losses, or losses were due to something beyond your control, that would be viewed very differently than a hobbyist who isn’t aiming to make any attempts to turn a profit.
Audits are something we never want to think about, but it’s important to always be prepared for an audit, especially since the IRS keeps such a close eye on whether horse businesses are businesses or hobbies. If the IRS determines that your horse business is a hobby, it will recalculate your tax liability, and sometimes force you to pay back taxes (plus interest.)
The best way to prepare your horse business for an audit? Make sure that you’re keeping all of your books, records, and financials for your horse business separate from your personal financial statements. I also recommend working with an accountant from the start. After all, a good accountant will be able to help you save money and keep your business on track. If you want to know who I recommend to all of my family members and clients, reach out to me here!
I’m sure we can agree that reading about taxes isn’t particularly exciting. But, taking the initiative to learn the IRS rules and regulations for horse businesses can save you lots of money! The biggest thing to remember? Always keep thorough records for your horse business and keep them separate from your personal documents.
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