The time & effort expended by horsemen varies from operation to operation. One person may work with horses full-time while others work with horses part-time. I work full-time and work at my barn part-time. I do most of the feeding, fix fence, clean stalls, etc. It is easy for me to defend my time & effort in the business. Some owners hire competent individuals to manage the business. The amount of time devoted to a horse business is a factor the IRS uses to determine if the operation is a business. Neither case above by itself has more or less impact in the determination of a profit motive. A taxpayer is materially active if they meet one of following:
- If the taxpayer spends >500 hours on the activity/yr. = substantial participation. 500 hrs. is equivalent to 9.6 hrs./wk.
- If the taxpayer spends less than 500 but greater than 100 hours may also = substantial participation provided certain “other circumstances” exist.
- Participates for more than 100 hours and participation is not less than the participation of any other individual
- Materially participated in the activity for any 5 years in the preceding 10 years
- Personal Service Activity and has materially participated for any 3 year period
Hours spent by a husband and wife can be combined to accommodate these requirements. Activities of others (family members and employees) will not automatically be attributed to the horse owner. If the taxpayer spends less than 100 hours/yr. does not equal participation in the business.
The kind of activities that a taxpayer should be able to document during each year may include the following: consulting with advisers or other experts in the industry; speaking with vendors on the phone or in person; attending horse races, sales or shows; attending horse shows, horse sales, or races; meeting with a trainer and watching a horse being worked; implanting and revising business plans; keeping records or maintaining financial data; grooming horses; riding or driving horses; maintaining a property and performing the many additional tasks required for a horse business. It is imperative that records be kept to reflect the number of hours involved and the number must be 100 or more hours per year.