How Tax Law Applies to Your Equestrian Business

Being a good business owner in the horse farming industry means that you meet your responsibilities to everyone–from your horses to your customers and employees, down to the government, all your duties must be fulfilled. As a horse farm business owner, understanding how the tax law work in your industry is important know-how.

Regardless of whether you’re breeding and selling or simply keeping a horse farm as a hobby, it’s important to be aware of the federal tax laws applicable. From the purchase to storage, to the use and reselling of horses, there are relevant laws that breeders and farmers should know.

Generally, taxation in the equine industry may vary from state to state. The important part, however, is how sales and use taxes, as well as property taxes, usually apply to different transactions in your equine business. To get your tax affairs in order, here’s how the tax law applies to your horse farm business:

Horse Farm Business vs Hobby

The entire equine industry is composed of horse grooming professionals, jockeys, farriers, and even veterinarians that offer care. Also, those who breed and trade horses, those who sell and distribute horse feed or tack, those who administer horse racing and breeding associations are all included.

Taxpayers who generate income from horse-related activities are obliged to report to the Internal Revenue Services (IRS), as well as deductions for business expenses and apply for tax exemptions whenever applicable.

One important distinction is between horse businesses and hobbies. Usually, if you incur losses from horse-related activities, these are reported as deductions from your other income like salary or other investments. If this happens often, the revenue service might think that this is actually a hobby. In theory, you should not subsidize your hobbies or try to recover losses from them through tax deductions.

To help you distinguish between a business and a hobby, the IRS has nine-point criteria in determining which is which. It is also important to note that the burden of proof lies with the taxpayer. This is especially challenging when you’ve had rough spots and see unprofitable years. Also, formally establishing your horse farm business as a separate commercial entity is a good practice and may help you.

Sales and Use Tax for Horses

Sales tax is often imposed on the retail sale of any eligible tangible personal property, with the rate varying per state. Some states even impose a similar tax on leases of such properties. This is imposed on the buyer but is collected and remitted by the seller. For starters, selling horses is subject to sales tax, although there are a number of exemptions to this.

Depending on where you conduct your business, the sale of horses for specific purposes like breeding, racing, or with the intent of reselling them. There are even states that exempt sales tax on horses that are delivered to another state.

On the other hand, use tax usually comes together with the sales tax and is primarily imposed on the usage, storage, and consumption of the eligible tangible property. It usually comes where no sales tax was paid and is remitted to the state where the property was stored, used, or consumed.

Similarly, horses may be exempted from use tax based on a number of reasons. For example, “temporary” use of a horse is not taxed in certain states, or a horse purchased before it was used in a state preceding the establishment of a commercial domicile or residence in the state. Meanwhile, some states impose a use tax on horses based on the purchase price or the fair market value at the time of being subject to the tax, usually decided between which is higher or lower or following a specific price cap.

Filing Taxes for your Horse Farm Business

If you’re looking to file your taxes for your horse farm business, it would be wise to start identifying the rules and the rates that apply for your specific case. Compared to a common-law employee or any other type of self-employment, maintaining an equine business requires sophisticated tax planning to ensure you don’t miss any filing, as well as tax breaks that could’ve been deducted.

As a business entity, your horse farm could receive reduced income taxes, depending on the form of your business. As a general rule, C corporations receive a corporate income tax rate reduced by 21%. Additionally, the Tax Cuts and Jobs Act of 2017 also removes the corporate Alternative Minimum Tax. Meanwhile, S corporations, as well as sole proprietorships and partnerships, received 20% off from their business income.

Aside from keeping all your transaction receipts, you might also want to assess deductions applicable for your business. This includes capital improvements and depreciation on the horses you keep. In December 2019, a key provision extends the three-year tax depreciation for racehorses. This law allows taxpayers to depreciate racehorses that are no older than 24 months, on a three-year schedule.

Conclusion

Understanding the exact reach of the tax law in your horse farming business is tricky and will definitely take time. However, the aspects listed above are some of the most common and most critical applications every business owner in the equine industry should have. With the right planning and due diligence, you will be able to pay the right taxes and enjoy the tax benefits you’re entitled to.

Article written by Sophia Young Content Studio