Hobby or Business?
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Some considerations for your horse business, from an IRS perspective
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Hobby or Business?
- 1. Hobby or Business? ANSC 236 Equine Business Mgt. Spring 2010 Elaine Long Bailey
- 25. My contact info: Elaine Long Bailey [email_address] Good luck!!
Notas do Editor
- How did each of you get your start in the horse industry? Was it by a hobby? A business pursuit? Are you a horse BUSINESSperson? How do you tell?
- What are “horse interests?” Board a horse or two (open stalls in barn) Ride a horse/train it for someone Resell hay Feed sales Haul horses to shows, etc. Revenue: source of money flowing in. “ . . . a particular item or source of income.” [www.dictionary.com] Hobby Loss Rule Limitations: can only write off expenses up to amount of income (some limits and rules apply). Cannot use losses from hobby to offset income from other activities.
- Well organized, complete records Separate records and accounts for business and personal pursuits. Happenstance record keeping process (cigar box and scraps of paper vs. organized folders) Business calendar Altered (improved) methods of doing business to move business “into the black,” to show progression toward becoming an established and profitable business.
- WHAT are your activities in the operation? Riding only? Chores? Records?
- Remember: cannot use “hobby” losses to offset other income.
- IRS rule for typical business: profit 2 years out of 5 What other catastrophic circumstances? Large increase in feed costs (drought); loss of sales revenues (death of horses); high veterinary costs to treat disease; lack of ability to race (disease problems); quarantine of horses due to disease (inability to compete or show horses to clients, etc.); accident, disease, theft, natural disaster, economic downturn, etc.
- Looking at news reports . . . Sometimes successful business people are hired from one business arena to another, purely because of their track record for improving a business’s economic position or profit position. WHAT are you doing to improve your business’s position and earning potential? HOW are you going about improving your “bottom line?” Can you SHOW this through your actions? Taking a class may be part of the plan to improve your business success. We’ll return to this concern in a moment. (#6 below)
- Certifications to make you more CAPABLE or RECOGNIZED in your abilities. American Riding Instructors Association is ARIA Certified Horsemanship Association Must document ways you seek to improve and expand your knowledge and skills. Just registering for a class is not enough. Follow-through is imperative!
- Did previous business ventures fail? Did they succeed? Why?
- What is a speculative venture? Using capital to make money for the sake of making money, rather than for the sake of building a successful business. Frequently, speculators are “quick-in and quick-out” types of people.
- IRS typically separates real estate investment from horse investment for analysis of the business’s assets. What are “appreciated assets?” Items that you own that increase in value, due to adding value. Appreciate assets by adding VALUE. Value can be show or racing performance, performance of offspring, increased utility of animal (ride, drive, etc.) What is another example of adding value? Buy foals, train, resell. Interesting case study in text: Hoyle v. Commissioner, T. C. Memo 1994-594 (real estate entered evaluation).
- The IRS does not just “go away” if you are selected for audit.
- Create profit when feasible: sell horse and lease it back (stallion example) Reduce expenses by prepaying them Increase sales of horses (buy back in another more profitable year) Lessen depreciation expense (don’t purchase depreciable property if possible)
- Why is it that we would figure out what type of business structure we will have? 1. Show intent to profit 2. Protect personal assets
- “ Tax shelter” farms: does the person materially participate in the farm? Or is it just their “toy?” Material participation: individual participates in farm regularly, continuously, and substantially. If no material participation, passive losses deductible only to the extent of passive income.
- “ Silent partner” concept. May provide funding, but makes no decisions. MANY scenarios as to how they are set up.
- Note that Jockey Club, other entities have rules about partnerships. American Racing Manual Rules of Racing Register partnership through Jockey Club or Clerk of Course Fees paid by partnership for EACH horse for partnership to race.
- Certificate of Disclosure: incorporating body of state know if any of the incorporators convicted of felonies or involved in bankruptcies. Statutory agent: who “speaks” for the corporation?
- “ Security” means own a piece of the horse and sale of interests for profit.