Horse Business Tax Deductions

December 1, 2021

Hi, I'm Paige, half of the duo behind Fairway Stables™

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.

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Is your horse business eligible for tax deductions? Yes! Here’s how: 

IRS Rules for Horse Businesses

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.) 

Table of Contents

  1. What is a “horse business” according to the IRS?
  2. What are the IRS benefits for horse businesses?
  3. Do you have a horse business or a hobby?
    1. The 9 IRS standards that answer this question
  4. Tips to Prepare Your Horse Business for Audits

What does the IRS consider a “horse business” for tax deductions?

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. 

For example:

  • Horse boarding facilities
  • Horse breeding businesses 
  • Veterinarians 
  • Farriers 
  • Equine magazines 
  • Horse training
  • Showing Horses
  • Horse racing 
  • Shop owners who sell horse feed or horse tack

And the list goes on…

If you have a horse business, what kind of IRS benefits can you get? 

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?

Horse Business vs. 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: 

Hobby or business? The 9 IRS standards to earn horse business tax deductions. 

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:

  1.  THE EXPERTISE OF THE TAXPAYER/THE TAX ADVISORS.
    1. In other words, your effort or knowledge in learning how to run a successful horse business. For example, if you’re training horses, a knowledge about breeds, training techniques, and finding clients would help prove you have a business instead of a hobby. 
  2. EXPECTATION THAT THE VALUE OF THE HORSE BUSINESS’ ASSETS WILL INCREASE  
    1. Establishing a plan for profitable operation of a horse business can be important in proving a profit motive. What exactly do we mean by “assets”? The horse itself, the real estate, etc.  
    2. This is most useful in cases of new businesses: sure, you may not be turning a profit yet, but you can prove that you have a plan to. 
  3. THE AMOUNT OF PROFITS EARNED
    1. As you learned earlier, you need to be able to show 2 years of profit out of 7. But, the amount of profits is important: If the two profit years are small in comparison to the amount of losses in other years, OR small compared to your investment, your horse business could be considered a hobby. 
  4. THE TAXPAYER’S OTHER SOURCES OF INCOME.
    1. Do you make a substantial part of your income from another source? This may make your business look a bit more like a hobby.  But, one thing to note: this isn’t an end-all-be-all. After all, many courts have found that running a horse business isn’t easy–most people won’t just do this as a hobby. 
  5. THE MANNER IN WHICH THE TAXPAYER CARRIES ON THE BUSINESS. This is one of the most important factors, not just because the IRS says so, but because it’s critically important from a legal standpoint as well. Keep separate books and records, carry on your business in a businesslike manner, have a business plan, and abandon unprofitable strategies. 
  6. THE TIME AND EFFORT EXPENDED IN CARRYING ON THE ACTIVITY. If you devote considerable time to your horse business, including partial or total withdrawal from another occupation, this helps prove you’re a business. This can also be satisfied if you hire people to run business operations for you.  
  1. ELEMENTS OF PERSONAL PLEASURE OR RECREATION.
    1. What do your personal motives say about your intent with the horse business? You need to be able to prove that you have a motive to make a profit. 
    2. This doesn’t mean you can’t enjoy your horse business, of course! This is just another example of why having a business plan or other evidence that you conduct your business as a business is so important. 
  2. THE SUCCESS OF THE TAXPAYER IN OTHER ACTIVITIES.
    1. Can you prove a history of turning unprofitable activities into profitable businesses? This will help show that even if you aren’t bringing in a profit now, there’s a safe bet you can in the future. 
  3. THE TAXPAYER’S HISTORY OF INCOME OR LOSSES IN THIS ACTIVITY.
  1. If you aren’t making a profit in the first few years of business, this does not mean that you’re just running a hobby. But, the horse business should start to show a profit after a few years of operating. If you’re able to show mitigating circumstances, this will help your argument. 
  2. This is another reason why keeping good records is important. For example, if your business encountered a setback, like disease or an accident, records of these circumstances would help you overcome an argument about lost profits. 

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.

Audit tips for horse business tax deductions

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!

In Conclusion…

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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