To self-prepare a return, you just need to take your time and carefully follow the software’s instructions. And one final general observation about equestrian taxpayer tax returns: Do-it-yourself tax preparation should present little problem if your finances are fairly simple and you’re pretty organized.
Because business losses are so easy to deduct and can shelter other income (including wages you or a spouse earns), the Internal Revenue Service is suspicious of any business that includes elements of personal pleasure, leisure or recreation. You want to consider, for example, the time, effort and expertise you or your advisors deploy.
You also want to be able to convincingly argue that you pursue the activity in order to make money either in the short or long run. Your daughter probably only spends a small portion of her time and effort on the “business” of having a horse.
However, an experienced trainer who spends 30-40 hours a week caring for horses and giving lessons? One other thing to note: The IRS presumes that any horse-related activity which produces a profit in at least two years in a consecutive seven-year period is a business and not a hobby.
I always recommend any taxpayer or business owner keep clean, organized accounting records. Furthermore, good accounting records would tend to reflect that an activity is being conducted in pursuit of profits.
This entry was posted in Business Planning on March 6, 2015, by Britt. Many business owners aren’t aware of many deductions that are available to them and end up paying taxes that otherwise could have been avoided.
Railway and bus tickets Car rentals Hotels Meals (50% is deductible) Parking Taxis Tolls Also note that if your business is categorized by the IRS as a hobby, your ability to deduct these expenses will be severely limited.
In our next post, we will cover the tax treatment of buying, selling, and trading horses. * The information contained in this blog should not be used as a substitute for a consultation with your equine accountant and/or tax attorney.
Despite its overall shortcomings, the new law contains a number of provisions that can be utilized to your benefit, and we have been working with numerous equine businesses to take the best advantage of them. In this post, we introduce some provisions of the new tax law that have a direct impact on horse-related businesses.
Pass-through entities, including sole proprietorship, partnerships, “S” corporations, and CCS are now entitled to a 20% deduction on qualified business income, subject to phase-outs for taxpayers in “specified service trades or businesses” who earn over $157,500 (single) or $315,000 (married filing jointly). This includes members of any profession where the principal asset of their trade or business is their reputation or skill (except engineers and architects).
Note that you must take the Section 179 deduction first, and may only apply the bonus depreciation allowance to any remaining basis amount. After full expensing under Section 179 and then 168(k), you are then permitted to depreciate the remaining balance of your business purchases under the Modified Accelerated Cost Recovery System (Mars).
), as amended (the “Act”), that severely restrict the reducibility of losses against other sources of income. No other industry in Canada faces this kind of barrier to the deduction of legitimate business losses.
In 1977, a prominent Supreme Court of Canada decision, Moldovan v. The Queen , 77 D.T.C. ), attempted to interpret this nonsensical provision and identified three types of farming operations.
This test is being used by Canada Revenue Agency (CRA) to present day. Such a taxpayer must operate the farm with a reasonable expectation of profit but devotes the major part of his or her time and effort to other business or employment.
The amount of the farming loss deductible in the year by such a taxpayer is substantially restricted to a maximum of $8,750. The whole amount of such farm losses will be disallowed as personal or living expenses.
The Mansard notes from Parliamentary discussions in Ottawa repeatedly reference this blight on the farmer created by this bad law. Apart from the rhetoric, Ottawa did nothing to fix this problem despite intensive lobbying from industry groups and the recommendations of its own Standing Committees on Finance over the years.
The Courts have removed the requirement instituted by the Moldovan case that farming income be the largest income for the business operator to avoid the section 31 restrictions on farming losses. In 2011, the Federal Court of Appeal expanded the group of taxpayers that can avoid section 31 and claim full deduction of horse racing business losses against other income.
Mr. Craig is a lawyer in Toronto whose primary income is from his law practice. Mr. Craig deducted full losses from that horse racing business against his income as a lawyer.
In summary, the Supreme Court listed the test for application of section 31 as follows: When considering the application of section 31, the Court should take a contextual approach to the combination question.
The question is whether, looking at these factors together, the taxpayer places significant emphasis on each of the farming business and other earning activity, and if so, the combination will constitute a chief source of income and avoid the loss deduction limitation of s. 31. Cases will resolve depending on their individual circumstances as applied to these enunciated factors.
This redrafting is a complete rebuke to the Supreme Court of Canada and the wisdom implicit in their decision in Craig. The Supreme Court of Canada tried to make sense of a nonsensical provision of the Act and did a good job of it.
Prior to 1952, the right to deduct losses from one business against a taxpayer’s chief source of income did not exist. However, an administrative practice had arisen which gave relief from this treatment to “gentleman” or part-time farmers.
Fifty percent of losses incurred in part-time farming activities could be deducted against a taxpayer’s chief source of income. This practice was formalized in 1951 when the “gentleman farmer” was given a $5,000 tax deduction on his primary business income because of the farm.
In the early century, the intention of the Legislature was to increase arable farm land by giving a tax break to those individuals that were farming without any reasonable expectation of profit in order to promote this expensive and important use of land for the benefit of Canada. Over the years, this original intention was forgotten and suddenly, farmers that are clearly in the business of farming were restricted in the losses they could deduct.
Catherine Wilson is counsel at Goldman Sloan Nash & Haber LLP in Toronto (www.gsnh.com). For these reasons, this information should not be relied on as a substitute for specialized professional advice in connection with any particular matter.
Wouldn’t it be great if you could write off all of those pesky bills you pay each month to keep your horse? Typical hallmarks of this type of investment are hand’s off owners who write the check for the expenses but don’t have enough knowledge or interest to participate in the daily care of the horse.
Accounting for these types of investments is tricky and I recommend using a quality tax professional to help you navigate the nuances. You will notice that I have not discussed how you can deduct your personal horse expenses.
Unless you can prove to the IRS that your riding expenses are business related, these costs are considered hobby losses and not deductible. There have been a few unusual cases where riders have been able to deduct the expenses, but they have all been predicated on the assumption that the activity ultimately served to generate business income.
My favorite example is this woman, who successfully argued that her riding participation was a marketing tool for her high-end barn and interior design business. If you would like to learn more, check out the links below and contact us to set up a free consultation to discuss your business needs.
The IRS requires businesses to file certain information returns periodically such as 1099s. If you hire contract labor (this includes unincorporated blacksmiths, veterinarians, trainers etc.) The expertise of the taxpayer or his advisors: Are you an expert in the horse industry? No? Dont despair, this doesn mean you cant run a horse business, but it does mean you should seek the advice of individuals who are experts. Obtain all the information you can about your respectful equine business including if possible expected financial returns. Read books, magazines, watch videos, go to seminars, talk to people in the business. These are all avenues you can follow to obtain professional expertise. Consult an accountant regarding setting up your books, and developing your business plan.
The time and effort expended by the taxpayer in carrying on the activity: Devoting a large amount of the time to the horse activity rather than hiring people to do everything may indicate that the taxpayer has a profit motive. This doesn mean that if a person hires competent people to run the operation, and simply oversees the operation, that there is a lack of profit motives. 5. The success of the taxpayer in carrying on other similar or dissimilar activities: Has the taxpayer ever run a business before? Was he successful? This can help support your ability to prove that you are indeed running a business. This factor is perhaps not considered as relevant as the other factors; in recent court cases there has not been a lot of discussion in this area.
The taxpayers history of income and losses with respect to the activity: It is recognized that when starting up a horse business, not unlike any start-up business, that there may be losses in the start-up years. What the IRS likes to see is progress towards a profitable state. Are revenues increasing fairly steadily? Now that the operation is underway, have expenses declined in relation to the revenues? Is there a reasonable expectation of profit in the forthcoming years? The amounts of occasional profits if any, that are earned: The fact that your business has earned a profit of a couple of hundred of dollars in a year, will not necessarily convince the IRS that you are operating with a profit motive, if your losses over the next several years are in the thousands. The IRS regulations state that an occasional small profit from an activity that generates large losses, or from an activity in which the taxpayer has made a large investment, would not generally be determination that the activity is a business.
The financial status of the taxpayer: The fact that your horse business is your only source of income, may be considered a positive factor by the IRS. If on the other hand, you work full time and earn a substantial income from sources unrelated to your equine activity, you are more likely to be challenged on your profit motive. The amount of personal pleasure or recreation involved in the activity: The IRS regulations state that personal motives may indicate that an activity is not engaged for profit, and is actually a hobby. Most of us derive some kind of pleasure from our horses, and that is okay even if you want your horse activity to be considered a business, so long as the other factors support your profit motive.
Bookkeeping: First, you need to keep some books. Simply totaling receipts and invoices at the end of the year is not a good business practice. You can use a handwritten worksheet to enter your monthly receipts and purchases or perhaps you would prefer to use a simple accounting program, the choice is yours. You should separate your income and expenses in a fashion that will permit you to see what portion of your business is profitable and what portion is not. Take a look at the Schedule F to see the categories that will be used to prepare your income taxes, and keep in mind, your not limited to the categories that are listed on the Schedule F, expand the categories to suit your needs. At the end of each year, prepare an income statement. Compare this to your original budget, or financial plan. Can you isolate any unprofitable areas? Are costs in one particular category running over budget? If so, can they be controlled next year? What marketing strategy worked, which ones didn? This is the kind of analysis a well-run business will utilize to try to maximize profits.
Keep all your accounting records including receipts, invoices and bank statements for at least three years from the latter of: Business owners have the choice of reporting income and expenses on the accrual or cash method. The accrual method reports income and expenses as they are incurred, not necessarily paid, and the cash method reports income when it is received, and expenses when they are paid. Most small business owners choose to report their income on the cash basis. Expenses paid by credit card, are considered expenses when they are purchased, not when the credit card is paid.
Property and equipment purchases with useful lives in excess of one year are called capital assets. Capital assets are depreciated rather than being deducted as an expense all in one year. Section 179 of the income tax allows you to elect to expense all or part of qualifying property in the year you place it in service, up to a limit of $19,000 in 1999 and $20,000 for 2000. You can claim that portion of your vehicle expenses that pertains to business usage. You should keep a logbook to support your business mileage claimed, as well as note your vehicles odometer reading at the beginning and end of the year. If you do not operate more than one vehicle in your business at once, you may choose to calculate your deduction based on actual vehicle operating expenses (gas, oil, license tags, insurance, repairs, and depreciation) or on a standard mileage rate. The rate for 1999 is 32.5 cents a mile before April 1st, and 31 cents a mile thereafter. If you operate more than one vehicle in the business at one time, you must use the actual expense method. Note that if you want to use the standard mileage rate, you must do so the first year you use the vehicle in the business. Parking fees, tolls and interest on the vehicle may be claimed under either method.
Given the high costs associated with the horse industry, it may benefit those engaged in this business to familiarize themselves with the laws relating to taxes and taxation issues. It should be noted that these are both complicated areas of the law, and this article will provide a brief overview and introduction only.
Individuals with specific concerns or questions may require the assistance of a lawyer or accountant. In British Columbia, for example, assigning “farm status” is a function of BC Assessment, a provincial Crown Corporation which produces independent property assessments on an annual basis for all property owners in the province.
A better understanding of taxation issues relating to the horse industry could save you money. Property owners in Ontario should note that the Minister of Finance passed a regulation in March 2005 changing the way equestrian operations are assessed and classified.
The classification of the property will depend on whether the owner qualifies for the farm tax rate. Under the new Ontario regulation, activities that will continue to be classified as commercial include: tack shops or premises used to sell equestrian supplies or clothing; restaurants; snack bars; cafeterias; commercial racetracks and slots; grandstands; banquet halls; and areas used to provide blacksmith, farrier, or other retail services to the public.
If a property owner is dissatisfied with the property classification or assessment or, for instance, a request for farm status is declined, that decision can be appealed to the appropriate tribunal or court, as stipulated in the governing legislation. Personal Income Taxes: Business vs. Hobbyhorse engaged in the horse business may wonder to what extent they can deduct expenses or losses associated with their horses from their personal income taxes.
Whether such deductions are permissible will depend upon whether the expenses or losses occurred in the context of a business or a hobby. Conversely, a farming business, such as a horse breeding operation, is a commercial venture undertaken with an expectation of profit.
2341, the taxpayers deducted expenses related to the maintenance and showing of horses from income earned as life insurance underwriters. The Court found that the evidence was “compelling” that the horse-related expenses were “incurred for the purpose of gaining or producing income from the business.” The fact that the taxpayers enjoyed their association with horses did not make the expenses any less related to the purpose of gaining or producing income.
The Court overturned the Minister of Revenue’s decision and allowed the deductions, stating: “The Court is satisfied that the raising, maintaining, showing, sponsorship and riding of show horses was not a hobby of the but indeed a way of doing business. Any attempt to claim tax deductions for a hobby farm will generally be disallowed by the CRA.
For instance, in the case of Nu gent v The Queen, 2004 TCC 52, the taxpayer appealed a decision which rejected his right to deduct farming losses from his income. He had a small barn with three stalls located on 45 acres where he grew hay for the feeding and raising of his horses.
The taxpayer had minimal revenue from the sale of hay and prize money from shows. The Court held that the taxpayer was not entitled to claim farm losses as there was a “predominant personal element” in his operation.
He had no reasonable expectation of profit and the farm earnings were not his chief source of income. The taxpayer did not keep adequate books and records and had no business plans to improve upon his losses.
Although individuals in the horse industry may not necessarily identify themselves as “farmers,” activities such as horse breeding will generally be considered a “farming activity” generating “farming income,” which can bring with it many tax benefits. Readers are cautioned not to act on the information provided without seeking specific legal advice with respect to their unique circumstances and the applicable law in their province of residence.
Owning a racehorse can be the most exciting investment you will ever make. For a more thorough analysis please see LRF’s Tax Guide to Investing in Thoroughbred Partnerships.
It is important that you keep adequate records to prove that you intend to make a profit at the start of your horse venture. A written plan that shows how you intended to be profitable is very important in proving intent.
Most investments in thoroughbred partnerships do not fall under the “hobby loss rules”. Both types of investors can eventually deduct their capital investment in thoroughbred partnerships against any income.
Under IRS Tax Regulations, an individual is deemed to have materially participated in a horse business or other activity during the tax year only if the individual satisfies at least “one” of the seven tests set forth below: A personal service activity is a business such as law, medicine, accounting, performing arts or any other business where capital is not a material income-producing factor.
Based on all the facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during such year. However, the regulations do say that an individual's services performed in management of the business shall not be taken into account in applying the facts and circumstances test if: (i) a paid manager participates in the business, or (ii) the management services performed by such individual are exceeded by those performed by any other individual.
Investing in horse racing partnerships can be a tax write-off if the right planning is made. If you have any questions, please contact your accountant or feel free to call or email us.
You should keep all of your receipts, canceled checks or other records that document your donations and purchases for the charity. Animal fostered and rescue volunteers can thank Jan Van Duse, an Oakland, CA family law attorney, and cat rescuer, for battling the IRS in court for the right to deduct animal rescue expenses.
Van Duse devoted essentially her entire life outside of work to caring for the cats. She laundered the cats’ bedding and sanitized the floors, household surfaces, and cages.
Her expenses were deductible, including 50% of her cleaning supplies and utility bills. While you can elect to count your breeding animals in regular market inventory or as farm assets, choosing the latter offers a number of tax advantages, lowering both your taxable income and the tax rate you pay.
The IRS allows a deduction for all related expenses, including feed, veterinary care and transportation. When you count the breeding livestock as assets, report capital gains or losses from the sale of an animal on Form 4797 and Schedule D. IRS code 1231 allows you to pay capital gains tax rate on the sale, rather than recording it as farm or business income if you hold the animal for more than 12 months (24 months for horses or cattle) before selling.
Add in any expenses related to the sale of the animal and subtract any accrued depreciation. The full amount of the sale price is considered a gain by the IRS.