Concentration is the key to your economic results.
The Business of Making Money with Horses
By
Don Blazer
Copyright
© 2002
Lesson
Nine
Horsemen get tax benefits
Once
you make a lot of money with horses, you’ll have to look for ways to shelter
and invest your money. You don’t want to
be in a higher tax bracket without having a way to protect your new wealth.
With
half of all income over $50,000 per year going for federal income tax, the
average person must take advantage of the methods by which the Internal Revenue
Service (
Horsemen
are especially lucky, and should investigate the tax benefits available. Instead of considering horse ownership as a
pleasurable past time, look upon it as a business pursuit. While the pleasure is always there, all that
is necessary to have your cake and eat it too is the intent or expectation of
making a profit.
Some
of the prerequisites, of course, are that the horse operation be treated as a
legitimate business. Enlisting
professional help, keeping proper records and handling the books as in any
other business are basic. Establishing
plans, goals, and budgets will help prove the business intent and profit
motive.
The
Another
important assistance offered to horsemen by the
For
instance, the useful life of breeding stock is considered to be 16 years. However, you know of many mares and stallions
which go on much longer. Something
Royal, dam of Secretariat, was 18 years old when she foaled
him. She had her final foal at age
25. Count Fleet was 20 when he sired his
last foals.
Because
of these guidelines, a person in the horse business can often recover the full
cost of horses through depreciation, and still have the profit-producing horse
for many years.
An
example: instead of buying young mares
with potential to resell, invest in older proven mares for tax advantages.
By
taking advantage of the tax laws, you can depreciate the full purchase price of
the mare over the minimum holding period of 24 months. Therefore, a 14-year-old mare in foal will
have her cost recovered in tax deduction in two years, and the owner will still
have the foal (maybe two) and the mare.
CHART A
----------------Useful Life----------------
|
|
|
COLTS & FILLIES |
GELDINGS |
STALLIONS & |
|
|
|
|
|
BROODMARES |
|
|
1 year |
5 years |
6 years |
|
|
|
2 years |
4 years |
5 years |
|
|
|
3 years |
3 years |
4 years |
10 years |
|
|
4 years |
2 years |
3 years |
10 years |
|
|
5 years |
24 months |
24 months |
10 years |
|
|
6 years |
24 months |
24 months |
10 years |
|
|
7 years |
|
|
9 years |
|
|
8 years |
|
|
8 years |
|
|
9 years |
|
|
7 years |
|
|
10 years |
|
|
6 years |
|
|
11 years |
|
|
5 years |
|
|
12 years |
|
|
4 years |
|
|
13 years |
|
|
3 years |
|
|
14 years |
|
|
24 months |
|
|
Older |
|
|
24 months |
Chart
depreciation for horses—shows the total investment in your horse can be fully
recovered through depreciation. The
method to use must be determined by individual circumstances. As some methods can be very complicated, a
tax accountant familiar with the horse business should be consulted. The methods to ask about include straight
line, declining balance, and sum of the years digits.
Careful
consideration of your particular position should be made before choosing any
method other than straight line. Once
the selection of a method is made, it becomes very difficult to change. Permission must be obtained from the
The
following charts outline some examples of depreciation on weanlings, unbroken
yearlings, and mares. (Note: the
yearlings, except geldings, do not qualify for additional first year
depreciation, and the mares do not qualify for sum of the years digits,
declining balance or additional first year if 11-years-old, or older. Check each year to make sure there are no
changes in these rules.)
CHART B
14-YEAR-OLD BROODMARE OR STALLION
2-YEAR USEFUL
|
|
|
STRAIGHT |
|
|
First Year |
$10,000 |
|
|
Second Year |
$10,000 |
|
|
|
|
|
|
Total cost fully recovered |
$20,000 |
In
the case of a yearling or a race horse taken out of training before he or she is
fully depreciated, then converted to breeding purposes, the remaining undepreciated value would be depreciated over the useful
“breeding” life.
CHART C
SIX-YEAR-OLD BROODMARE OR STALLION
10 YEAR USEFUL
Straight
line with additional first year depreciation.
|
|
|
DEPRECIATION |
SINGLE,
CORP., |
JOINT RETURN |
|
|
|
|
PARTNER
RETURN |
|
|
|
First Year |
$2,000 |
*$3,800 |
**$5,600 |
|
|
Second Year |
2,000 |
1,800 |
1,600 |
|
|
Years Three |
|
|
|
|
|
through 10 |
$2,000 each year |
$1,800
each year |
$1,600 each year |
|
|
|
|
|
|
|
|
|
$20,000 |
$20,000 |
$20,000 |
*First year additional depreciation
computation limited to $10,000 of investment.
**First year additional depreciation limited
to $20,000 of investment.
Tax
laws are constantly changing, so keep in mind it is important to be aware of
updates. The American Horse Council, in
Washington D. C., has conducted tax workshops, and in the past, has published valuable
reference material on taxes and the horseman.
CHART D
YEARLING
DEPRECIATION
COST
$20,000
5
YEAR USEFUL
|
|
|
STRAIGHT |
SUM OF YEARS |
DOUBLE
DECLINING |
|
|
|
|
DIGITS |
BALANCE |
|
|
First Year |
$4,000 |
$6,667 |
$8,000 |
|
|
Second Year |
$4,000 |
$5,333 |
$4,800 |
|
|
Third Year |
$4,000 |
$4,000 |
$2,880 |
|
|
Fourth Year |
$4,000 |
$2,667 |
$1,728 |
|
|
Fifth Year |
$4,000 |
$1,333 |
$2,592 |
|
|
|
|
|
|
|
|
|
$20,000 |
$20,000 |
$20,000 |
If
you conduct your horse business as a business, you’ll gain many tax advantages
simply from legitimate business expenses.
Business
motor vehicles are a good example. If you
have a car which you use for both business and pleasure, the business cost of
operations and repairs is deductible.
But if you have two cars, make one of them a business truck, then all
the operational costs are a legitimate expense, and you have no problem with
the division of expenses. The cost of a
motor vehicle bought for use in your business must actually be capitalized, but
if you lease a truck, all the cost is deductible. The same applies to a horse trailer.
Tools,
machinery and equipment are deductible business expenses provide they are
short-lived, wear out, or are thrown away within one year.
Memberships,
dues to horse organizations, subscriptions to horse magazines and technical
books on horses (such as this one, and our monthly Make Money Newsletter) are
deductible expenses.
You
may also deduct amounts spent for your own education in your trade, business or
profession, along with certain related travel, including meals and
lodging. To qualify, you must show the
education maintains or improves the skills required in your business. But then we all know no one ever stops
learning about horses.
Some
personal expenses become deductible once you establish that horses are your
business.
If
you rent a large home and property and have a gardener to mow the lawn, you
have to deductions. But if you have
horses on the property, a portion of the rent is now deductible. If the gardener is contracted instead as a
groom, you have another deductible expense.
If
you set aside a room in the ho use for an office, you can take another portion
of the rent as a deduction, along with a portion of the light bill, heat and
telephone bills, and the cost of desks, tables, chairs, paper, inc, adding
machines, etc.
The
catch, however, is that you must be able to show all business expenses were ordinary and necessary and
directly connected with the operation of your business.
Depreciation
and the reduction of taxable income by the simple addition of legitimate
business expenses are two of the main ways a horseman can benefit from tax
laws.
A
horseman can also “shelter” income by investing in horses, especially race
horses.
But
you must be careful.
Most
so-called tax shelters are sold on the basis of deliberately having a loss in
one operation to offset income from another.
That’s dishonest and not legal.
Uncle
Sam is a nice guy, and he says If you want to be
partners with him in a business, that’s okay with him. He says if you make money, then you share
fifty-fifty. (Tax shelters are really
only good for high tax bracket people—50 per cent rate.) But if you lose money, then Uncle Sam will
pay for half the loss, provided you have other income from which to deduct the
loss.
Now
that’s very fair of Uncle Sam. Tax
shelters should be just as fair.
But
most tax shelters are designed to keep from paying Uncle Sam his share when
winning, and making him pay for losses, even when you actually benefit in some
way. And that’s not right.
Usually
the shelter is set up to load a lot of expense with little or no income into
the first two or three years of operation.
Then as the startup costs are gradually absorbed, and the operation
becomes profitable, the shelter promoter sells the investor out, paying taxes
at a long term capital gain rate instead of at ordinary income rates. The investor then puts the proceeds of the
sellout into a new shelter and the pyramid goes on.
In
any case, unless it is downright fraud, Uncle Sam is supposed to get paid
sometime. He doesn’t mind tax
minimizing, in fact, it’s encouraged.
But tax evasion is illegal.
You
cannot make money legitimately by losing money.
If you attempt to do so, you violate the first rule of the
There
are legitimate ways to avoid tax consequences, defer, and/or minimize
taxes. But they all involve eventual
gain, not losses.
The
Individual Retirement Accounts (IRAs) are a good example. With an investment in one you can avoid
paying tax on current interest income, and on a limited amount of other income
you invest. When you do withdraw the
investment, it will then be income to you, and you will have to pay the taxes
you deferred when you invested. However,
the tax rate should then be considerably lower, due to your age and the
probable absence of other income. Such
accounts combine avoidance, deferment and minimizing—a good deal.
So
look closely at any shelter offered you, even an investment in horses. There is bound to be a day of reckoning, one
way or another. There is no free lunch!
The
two mainstays of legitimate operations are depreciation and interest on
borrowed money. Both are allowable
deductions, and a major factor in cash flow.
Depreciation gives you an expense item without using any cash, and
borrowing for the operation gives you a larger capital base without the input
of your own cash.
A
good legal operation is investment in race horses.
The
potential for profit—big, big, profit—is there.
The intention to make money is there, and there is no question racing
horses is a business.
Suppose
you borrow $19,000 at 12 per cent simple interest, put up $1,000 of your own
money, and buy a 2-year-old race horse, a filly. To qualify for recovery property with a
present class life of three years, a race horse must be two years old, or older,
when placed in service. It doesn’t
matter what the previous owner did tax wise; the filly is new to you, so you’re
entitled to recover the full cost.
Timing
can be important, as the mere placing in service qualifies for a full year of
depreciation, even if it should be on the last day of the year.
However,
that’s a judgment call you’ll have to make depending on racing opportunities in
your area.
For
the purposes of the upcoming example, we’ll just use the full years of her three,
four and five-year-olds.
Earnings
are also very important, but I’ll not clutter up the example by speculating on
them. The filly is bound to earn some
money—you bought a race horse, not a slow horse, and you know how to read a
catalog. Earnings can be eliminated
without affecting the example.
A
very simple basic three-year chart illustrates what can be achieved without
resorting to anything illegal or questionable.
The
chart assumes no change in her racing ability, broodmare potential, or any
unforeseen accidents, circumstances, or tax law changes.
The
figures, of course, are not actual. They could, and undoubtedly would, vary. The figures only demonstrate the
possibilities of the leverage from depreciation and borrowing.
No
earnings are assumed.
TAX SHELTERS
|
|
FIRST
YEAR |
|
|
|
DEDUCTIBLE
EXPENSES |
|
|
|
$ 5,000 Maintenance |
$ 1,000
Down Payment |
|
|
$ 5,000 Depreciation |
$ 5,000
Maintenance |
|
|
$ 2,280 Interest on Loan |
$ 6,350
Principle Paid |
|
|
|
$ 2,280
Loan Interest |
|
|
$12,280 Total Deductible |
$14,630 Cash Out |
|
|
Resulting in………………… |
($
6,140) Tax Savings |
|
|
|
$ 8,490 Cash Outlay |
|
|
|
|
|
|
SECOND
YEAR |
|
|
|
$ 5,000 Maintenance |
$ 5,000 Maintenance |
|
|
$ 7,600 Depreciation |
$ 6,350 Principal Paid |
|
|
$ 1,518 Interest on Loan |
$ 1,518 Loan Interest |
|
|
$14,118 Total Deductible |
$12,868 Gross Cash Outlay |
|
|
resulting in……………………. |
($ 7,059) Tax Savings |
|
|
|
$ 5,809 Cash Outlay |
|
|
|
|
|
|
THIRD
YEAR |
|
|
|
$ 5,000 Maintenance |
$ 5,000 Maintenance |
|
|
$ 7,400 Depreciation |
$ 6,300 Principal Paid |
|
|
$ 756
Interest on Loan |
$ 756
Loan Interest |
|
|
$13,156 Total Deductible |
$12,056 Cash Out |
|
|
resulting in……………………. |
($ 6,578) Tax Savings |
|
|
|
$ 5,478 Cash Outlay |
While
no earnings have been assumed, the average earnings for a Quarter Horse of the
caliber purchased at the example level are approximately $15,000 per year. Assuming earnings of that amount, you would
still en dup owning the horse without it costing you a cent for the
investment. (Earnings of $45,000, less
expenses of $39,554, equals a gain of $5,446, less tax liability of $2,723,
equals a net gain of $2,723.)
Of
course, the horse might turn out to be really great, earning hundreds of
thousands, and then you’ll have a new tax problem.
The
purpose of all this is to point out you don’t need
some questionable tax shelter when there are sound investment opportunities
available.
Go
for a profit, not a loss. And if you
make it, be happy to see Uncle Sam gets his share.
Now
go do it!
You
can make a lot of money with your own horse business.
We
gain great knowledge by reading, but we learn best by doing. Once you have spent your money on a horse, you
will learn quickly all the things you missed before purchasing. You may violate a rule you have read, but you will seldom violate
the rule again if it is your money on the line.
Making
mistakes is part of the process, and it is only by failure that you will
eventually succeed. You never accomplish
anything untried.
You
have the ability within to achieve anything you can conceive. If you love horses and working with them, and
you choose to make them your business, then dedicate yourself to the tasks and
you will release your creative power and turn your dreams into reality.
You
have special talents, and when you use those talents, you accomplish things
easily. Apply your unique talents to
making money with horses, and you will discover Success Is Easy.