What to Know About Tax Audits for Horse Businesses

by Alexa Gohn

In the United States, horses are part of a billion-dollar industry. From boarding facilities to veterinarians to saddle makers, there are many types of businesses and activities that contribute to the industry.

Regardless of the type of horse business, though, the IRS does allow owners to report receipts from their activities as business income. This also means that you can deduct business expenses as well as take depreciation deductions on horse-related business assets. 

Whether you've been involved in the horse industry for decades or you just opened your first business, here's everything you need to know about tax audits.

What to Keep in Mind Before You Start Deducting Equine Expenses 

The IRS tends to scrutinize horse businesses, questioning whether an enterprise is an actual business or simply a hobby. No matter what type of horse-related business you operate, one important factor to keep in mind before you start deducting your equine expenses is that the IRS will require you to show intent for profit. 

Even if your business is not currently profitable, you'll still have to show a business plan that details your intent to make a profit or what you'll change about your business to begin making money. 

Be Prepared and Proactive for an IRS Audit 

Because your horse business could be seen as a red flag by the IRS, there are a few different ways to prepare and be proactive if the IRS decides to audit your business. Whether you sell supplements or operate a breeding farm, you need to be able to show both your expenses and profit projections. 

To ensure your business is prepared to clearly communicate to the IRS that it's legitimate instead of just a hobby, you may want to consider: 

  • Working with a team of tax experts who understand the horse industry and tax laws. 
  • Allowing these tax experts to look over your tax returns. 
  • Researching what the IRS will take into account during a pre-audit analysis. 

Be Ready to Also Respond to the IRS' “9 Points” for Intent to Run a Business

As a horse business owner, you need to be able to meet requirements for the IRS' “9 Points” for Intent to Run a Business, which involves detailed documentation. 

These points pertain to: 

  1. The manner in which you carry out the activity: Be sure that you can show information each year for the specific way you carry out your horse business. Along with including updated yearly business plans, you need to be able to show your financial and time-tracking spreadsheets. Make note of income, transactions and price lists. Any contracts, regardless of whether they've been fulfilled yet, should be included as well. 
  2. The expertise of either the taxpayer and/or the advisors: Horse business owners should also take into consideration their own expertise as well as that of any advisors they use. First, consider your equine as well as tax education and expertise. Do you believe you are qualified to keep accurate records and respond to the IRS' points or would it be beneficial to work with a professional such as a CPA? Also, if your equestrian business follows the advice of any equine professionals, such as a trainer or veterinarian, keep detailed documentation on that as well. 
  3. The time and effort involved in the activity: Make sure you can accurately note how much time and effort you put into your horse business. Timesheets can help differentiate it from a recreational activity and establish it as a legitimate business. For example, a couple of hours of infrequent work done on the weekends will look different to the IRS compared to detailed daily tracking. 
  4. The expectation that the assets will increase in value: The IRS also wants to see that you expect your horse business assets to increase in value over time. Of course, some of your assets will depreciate, but the IRS does expect to see that assets like livestock or land will increase. Asset tracking helps with showing your business's profit motive as well as expected improvement and growth.
  5. The success the taxpayer has in similar and dissimilar activities: Similar to showing profits, you need to be able to list any successes you've had in similar and differing activities. If your business is currently not experiencing a profit, be sure you can describe why not in detail. 
  6. The history of the taxpayer's income or losses: Keep track of both profits and losses incurred with your business. Because the equine industry can have varying startup times, the IRS does give taxpayers a bit of room compared to other types of businesses, giving them up to seven years to make two years of profit.  
  7. The amount of profits: All profits, whether from a horse show or hauling a horse off property, should be noted. Keep in mind that the IRS does have specific rules for amateurs, preventing them from teaching or accepting compensation for any horses they don't own.
  8. The taxpayer's financial status: If you have a horse business, the IRS wants to see your financial status. These records help demonstrate that it's actually your business versus a hobby you engage in alongside your full-time job. 
  9. The elements of recreation and personal pleasure involved in the activity: Keep in mind that the actions must not appear to be performed solely for recreation or personal pleasure. The horse industry involves hours of hard work, requiring passion to be able to keep your business going full-time year after year. Be sure you can show time doing work like mucking stalls and caring for tack alongside more enjoyable activities like riding. 

Find the Equestrian Products and Information You Need to Love the Ride at Horse Tack Co

Whether you're a hobby rider or a horse business owner, Horse Tack Co offers a broad range of the English and Western products you need to do your best work. Along with our array of apparel, tack and training equipment, we encourage you to also check out our blog, where we regularly post articles covering everything from riding tips to equine care essentials.

Have any questions? Our team of knowledgeable experts is always within reach. Just give us a call at 866-624-8225 or fill out our contact form and we'll get back to you. 

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