Accounting for tax season starts as soon as we ring in the new year, and getting taxes started right can save headaches and frustrations as the April deadline nears. One of the biggest questions that faces owners of horses is whether or not the care for their equine companions counts as a business, which gives them plenty of additional deductions, or a hobby.
IRS tax law considers nine key components when judging the status of a business, and not all of them are immediately clear. Making the mark on just a few of these key elements can mean the difference between paying hefty personal taxes or getting a deduction that benefits you and your stable.
#1: Running the Stable Like a Business
Even if you’ve already determined your business type and filed with the secretary of state, the IRS can determine you’re not running a business if your methods don’t meet established practices. These practices include having set schedules for everyone who works with the horses, as well as payroll and accounting for each employee. Even if all other employees are volunteering, just having a separate checking account for stable business goes a long way towards this determination.
#2: Experience of the Owner and Hands
If you have years of experience as a stablehand, horse breeder or as an otherwise established expert in the field, you have little to worry about here. If you’re a relatively new owner, then your advisors, your stable hands and veterinary contacts, can help tip the scales in your favor. They can attest that even if you don’t know something, you know how to get the answer your business needs.
#3: Amount of Time and Energy Invested
Keeping horses is a labor of love, and we put a lot of ourselves into it. For most horse owners who are very hands-on with their stables, this will be an easy test to pass. Those who only visit the stables occasionally but still spend ample time marketing, promoting or scheduling horse activities can still meet this requirement.
#4: Expectations of Increased Value
Most business owners understand the importance of frugal living and sticking to a budget, but the IRS wants to see how the investments you have made will pay off over time. Whether that means expenses for training tied to better times at the track or stable improvements endorsed by licensed veterinarians, showing how the goods and services you purchase directly result in an increase of the value helps establish your horse care as a business instead of a hobby.
#5: Success History of the Owner
The IRS looks into the history of the business owner to determine what experience he or she may have running companies. If you’ve run other companies before, whether or not they were successful, that experience can help bolster your case as a business owner. If you have a history of failing to meet on-time tax payments in other businesses, you may have to answer as to why you expect different results this time.
#6: Reports of Income and Losses
Paperwork is paramount when it comes time to deal with tax officials. Keep all of the reports of money flowing into the stable as well as expenses close at hand. Even if you didn’t make any money this year, having these reports available for inspection can be a big factor in whether or not your business is suddenly considered a hobby by the IRS.
#7: Reports of Profits, If Any
The most important factor in determining if a stable is a business or a hobby is whether or not it is run with an expectation of profits. If you can prove profitability, that’s a key anchor in your case. Even if you weren’t profitable, showing that you put in the legwork to try to gain profitability can be crucial to your case.
#8: Owner’s Additional Sources of Income
This test is to verify if you have plenty of money incoming and are only running the stable as a pastime or even as a tax write-off. If you’re using losses at the stable to offset other business income, or if your stable income is far less than your wages from another employer, it could spell trouble for your case. This doesn’t mean that you have to go hungry if your business isn’t profitable, but it does mean that you should be able to account for your time and energy investment in the stables as well as any other jobs you have.
#9: Pleasure and Recreational Use
The final test is perhaps the trickiest for many horse owners. We love our furry friends as though they were family, and the IRS doesn’t hold this against us. It’s perfectly fine to love your work, too, but make sure that the official you work with understands that the exercise and care you show your equine companion is also part of the day-to-day training and investment you have with the business. This is one of the bigger hurdles for horse owners, but it’s easily overcome if you’ve met many of the other eight requirements.
Remember that your business doesn’t have to pass each element with flying colors. The IRS official overseeing your filing will make the final determination based on the whole of the information provided, not just the individual parts. For a look at how these cases have played out over time, check out this list of business filings and results from the University of Vermont. As always, if you’re unsure, seek out a knowledgeable and experienced tax advisor.