We are still on Rule 1 of the 9 the IRS used to determine if your horse business is a business or hobby. The Manner in Which the Taxpayer Carries on the Activity is the most important rule of the 9 and is composed of a number of items. As described previously record keeping is a necessity. If you do online banking and do not receive paper copies make sure you print off a copy for your records. You have to keep receipts for 7 years. It is costly and difficult to go back and obtain copies from a bank or entity if a printed copy was not kept.
What additional items pertain to the manner in which the taxpayer carries on the activity?
- Are you involved in your industry – do you attend seminars, meetings, subscribe to trade journals, have memberships in your industry? In my case it is unique in that I am the extension specialist, however, I do list webinars and keep a record of those. I also keep a record of clinics I attend.
- Do you use advertising? Advertising/marketing is a must for a business. It also shows that you are trying to obtain clients. Keep a record of all advertising and copies of any newspaper ads or paper based ads. I have switched to primarily Horse Boarding and use Craigslist for advertising. Although it is free it is a good way to find local clients. –
- Do you keep a balance sheet showing what profit you expected and what you earned? A balance sheet is a must when it comes to having a business. This goes back to keeping records of income and expenses as discussed in previous blogs. My expectation for my boarding business has fell short this fall. Part of the reason is the distance to Ames, IA and part could be due to my working on the stalls and arena to try to get them ready for boarders.
- Are you involved in your industry? Being involved means attending seminars, breed or discipline meetings, serving on boards, subscribing to trade journals, etc. Again keep a record of everything you do pertaining to your horse business
- Have you made changes in operating methods, adopted new techniques or abandoned unprofitable methods? My husband and I use to breed 3 to 4 mares per year to quality stallions and then sell the offspring. This has become more difficult as the horse industry has so many unwanted horses. We started boarding horses 4 years ago to help with the business. Now my business is mainly boarding. I am planning to breed 2 mares in 2013.
- Lastly do you keep records of your horses and horse activities? You should keep detailed notes on business activities which includes medical records, dates and location of events you attend, performance records of your horses, etc.
As described record keeping of all business activities is a must for a horse business. Records should be kept for at least 7 years which is the time that the IRS can ask for your records.