Having a horse is a huge investment and one that comes with a lot of responsibilities. Not only do you have to provide food, shelter, and regular veterinary care for your horse, but you also have to pay taxes on your property where the horse is kept. It’s no wonder most people think that owning horses is only for the wealthy!
But even if you’re not a millionaire, you can still enjoy the benefits of horse ownership by planning your taxes carefully and recruiting the help of a CPA or tax lawyer. That way, you can maximize your deductions and minimize your tax liability, and maybe even get a tax break for owning horses!
In this article, we’ll discuss four tax planning tips specifically for equestrians.
Keep Flawless Records
This means tracking every penny you spend on your horse, as well as every penny you make from your horse-related activities. If you’re ever audited by the IRS, you’ll want to be able to produce documentation for every deduction you claim.
If you want to claim your horse as an investment, for example, you’ll need to be able to show that you’ve made a profit on the animal at least two out of the past seven years—-this profit can come from a variety of activities, such as prize money, riding lessons, and so on.
Being able to prove that you’re “in it to win it” with your horse to the IRS is the most crucial step in getting your horse-related deductions approved. If you can’t prove this, the IRS will treat your horse as a personal hobby, and you won’t be able to deduct any of your expenses.
Invest in Horse-Related Property and Equipment
If you’re serious about owning horses, you may want to consider scouting for a horse property investment to make. This can be anything from horse farms to ranches, and even just vacant land that you can use for riding trails or building a stable.
The key here is to make sure the property is used exclusively for business purposes. If you start using the property for personal reasons, you may no longer be able to claim it as a deduction. Just remember that the maximum amount you can deduct will be based on the fair market value of the property—-no more or less.
By the same token, horse-related equipment such as tractors, manure spreaders, and trailers can also be written off as business expenses. Just make sure you keep track of how much you spend on these items, as the IRS has specific rules about how much you can deduct in this category.
Consider Forming a Limited Liability Corporation (LLC)
Starting an LLC has a few key benefits from a tax perspective. First, LLCs are pass-through entities, meaning that the business itself is not taxed on its profits. Instead, the owners of the LLC are taxed on their share of the profits through their personal income taxes. This can be a significant advantage if your LLC is profitable, as it allows you to avoid paying corporate taxes.
Another benefit of LLCs is that they offer some legal protection for your assets. If the LLC is sued, your assets are typically shielded from seizure. This gives you more leeway to take risks with your business without putting your assets at risk.
You can form an LLC by yourself if you’re comfortable doing the paperwork, but you may want to seek the help of a lawyer to ensure a seamless process, especially with boring but necessary tasks like filing articles of organization and appointing a registered agent.
Look Into Charitable Contributions
One great way to reduce your tax bill is to donate money to charity. Not only will you be helping a good cause, but you’ll also be able to deduct the donation from your income taxes. You may give money, securities, or other assets as a gift. You can also donate a horse to a charity, with resulting deductions based on:
- Fair market value
- Subtractions for anything you received in exchange for donating your horse to a specific charity, such as gifts, vouchers, or the like
- The type of charity you donate your horse to can also make a difference in terms of the deduction you receive.
If donating your horse isn’t something you’re prepared to do, you can consider charitable remainder trusts (CRUTs) instead. CRUTs are tax-deferred accounts, similar to an IRA, that incentivize charitable donations by offering income smoothing and tax deferral benefits.
There are three types of CRUTs: Standard, Net Income with Make-up CRUT (NIMCRUT), and Flip CRUT. All three types entitle you to get paid a set percentage of your trust’s value each year, whether the trust grows or shrinks. But for equestrians, we particularly suggest the NIMCRUT.
The NIMCRUT is designed to give you a fixed percentage of the trust’s assets each year, but there’s a “make-up” provision in case the trust’s income falls short, which ensures that any shortfall is made up in future years. So by ensuring that your trust will always fall short by minimizing its income, you can keep growing your assets in a tax-free bubble—-to be burst only when you need it.
Once the NIMCRUT term ends, the remaining funds will have to be donated to a qualified charity. You can’t receive the funds back, but you will have the satisfaction of knowing that your horse is helping a good cause.
These are just four of the many tax planning tips that equestrians can use to reduce their tax burden. Be sure to speak with a tax advisor to learn more about how you can take advantage of these and other strategies. And remember, tax planning is an ongoing process—-not something you should only think about once a year. By taking action now, you can save yourself a lot of money (and headaches) down the road.
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