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Business Tax Incentives for the Equine Professional

Let’s Talk About That

Recently, a segment in the UPHA interactive webinar series LET’S TALK ABOUT THAT featured Jen Shah of Dean Dorton, a leading Kentucky-based regional accounting firm. Ms. Shah presented “Are You Ready for Taxes? Let’s Talk About That.” Sponsored by Equidae Insurance, this webinar focused on tax updates for the equine industry.

Ms. Shah’s presentation shared accounting and tax topics which impact horse and farm owners, including deciding if a farm is a hobby or a business (and the tax ramifications), structuring an equine business, tax updates of economic relief benefits available to the horse industry, as well as a discussion of employee classifications for workers’ compensation.

For reader convenience, this blog does not include the entire transcript of this one-hour webinar but focuses on one topic many participants found of interest: business tax incentives. We will be including other subjects from this webinar series in future blogs, so please check back monthly as we continue to build our blog reference library. Now, let’s listen in as Jen Shah discusses tax incentives….

If you're operating an equine company from a business perspective, there may be some tax incentives available.

First and foremost, is cash basis reporting, for which most horse and farm owners qualify. It was expanded under Federal Tax Reform a few years back to allow those with even higher gross receipts to qualify. The big benefit in cash basis reporting is being able to accelerate the timing of your deductions, and before the opportunities to produce income. So, for example, if I'm paying for artificial insemination, or I'm paying a stud fee upfront to breed my mare to a stallion, that resulting foal will not have income producing opportunities until subsequent years – may be one, two or several years after this expense in incurred, depending on the type of horse and its use.

That stud fee or payment for the artificial insemination is deductible when paid, versus having to capitalize it and not recognize that expense until the foal can generate income. For this reason, you may want to consider prepaying expenses, but you need to have a non-tax reason for doing so, such as bulk discounts or access to a particular stallion, for example.

Depreciation is a fancy term for how you deduct the purchase price of an asset. If I buy a horse for $100,000 when can I report that $100,000 expense for tax purposes? Most horses qualify for a “seven-year depreciation life,” which is really over an eight-year period because you normally get a half year depreciation in the year of purchase and a half year depreciation in the final year.

There is also the “three-year depreciation life” for horses that are more than 12 years old when placed in service. A “five-year depreciation life” is used for cattle and for new, but not used, farm equipment. 15 years of depreciation can be used for land improvements such as roads and underground utilities, and 20 years of depreciation are available for barns. The IRS has tables that provides the tools for you to calculate any depreciation.

It's really a timing issue when you deduct a purchase price, but for federal purposes, we currently have this gift of bonus depreciation which is hugely beneficial to the industry. Essentially, you can write off or expense 100% of the purchase price of qualifying horses through 2022 at the time they are purchased and placed in service. And it's expanded to include breeding stock and used property if it hasn't been previously owned by yourself.

This bonus depreciation is not limited to net income and it can be used to create or increase net losses. You can still elect out of bonus depreciation on a class-by-class basis if you don't need that expense in a certain year.

Bonus depreciation is for federal purposes. Each state makes their own decision as to whether to follow federal guidelines, so it could be that your state, like Kentucky and New York, does not recognize it. Research the state in which you operate your business to determine whether you must recalculate the depreciation for state purposes, but this is a huge benefit for federal purposes through 2022. For example, if I spent $100,000 and I placed that horse in service during 2020, I can expense the entire $100,000 purchase price. Now, to claim the bonus depreciation or any depreciation, the horse MUST be placed in service.

For tax purposes, what does “placed in service” mean? If you have a sport horse or a racing prospect, “placed in service” is when the horse begins training or when the horse begins competing or racing. For breeding stock, “placed in service” is when the horse is available for breeding.

Most horses do qualify for this 100% bonus depreciation, but there are some key exceptions: horses that have been previously owned by you, horses used predominantly outside of the US, horses purchased from related parties, or horses received via inheritance or gift. If you have a foal that you purchased, that's not yet training, then that foal wouldn't yet be eligible to be placed in service for tax purposes. You would have to wait until that timeframe, and then you can claim the 100% bonus if it’s still available.

Other items that DO qualify for this 100% bonus depreciation in the year of purchase are equipment, fencing, land improvements and barns. So, it's very helpful on purchases for farms that are business operations. Often times, we work with a client who is purchasing a farm to make sure that they get an appraisal that allocates the purchase price -- or we have some other reasonable method of allocating the purchase price -- to these depreciable items that can be written off 100% in the year of purchase if the farm is used for business operations.

Prior to making any decisions based on the above discussion regarding business tax incentives, please first discuss your specific situation with your advisors to determine if you may benefit.

Jen Shah is Tax Director at Dean Dorton and leader of the accounting firm’s Equine Industry Team. She provides tax and operational planning to a variety of equine industry participants including breeding and boarding farms, veterinary firms, and many associations. Ms. Shah’s credentials are extensive, and she is a much sought-after speaker and panelist at numerous events including the Thoroughbred Owner Conference, the Consignors and Commercial Breeders Association, as well as the University of Kentucky’s National Conference on Equine law.

The one-hour tax webinar “Are You Ready for Taxes? Let’s Talk About That,” featuring Ms. Shah and sponsored by Equidae Insurance, is now available on-demand to UPHA members through their website: https://www.uphaonline.com/. We encourage UPHA members to visit this website and access a library of Equidae -sponsored webinars with topics ranging from retirement planning to structuring a business to insurance hot topics. For non-UPHA members, stay tuned to this page as we bring some of these topics to you.

The views, information, or opinions expressed in this blog are solely those of Ms. Shah, and do not necessarily represent those of Equidae Insurance.

For more information about insuring your horse, or if you have a topic you’d like to see covered in our blog, please contact us directly at: Equidae Insurance, Inc. 608 Virginia Street East, Suite 302 Charleston, WV 25301 p. (304) 346-1198 f. (304) 345-3535

Stacey Halloran, Agent
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