The Manner in Which the Taxpayer Carries on the Activity - Business Plans
The IRS will evaluate if you carry out your horse business as businesslike What does this mean? Listed below are questions to ask yourself.
- Do you have a business plan?
- Do you keep accurate records including records of the time you spend on your horse activity?
- Do you market the business?
- Are new techniques used in the operation?
- Are unprofitable strategies abandoned?
The business plan is essential. I was audited after the first year of setting up my horse business as a business. The first thing I did was call an accountant that knew something about 
horse business’s. In fact the accountant went to the audit with me. I had used a company that set the business up on a Schedule C for small businesses. Setting my business up as a schedule C was one of the problems the accountant stated. The business should of been set up on a schedule F for agriculture. The auditor knew nothing about a horse business. We had to show them the business plan as well as explain the business plan. My late husband was excellent at explaining the business plan.
The business plan is a working tool that provides a road map for an auditor, bank, creditor or others in the horse industry. Business plans should provide a vision and mission statement. The plan should explain the key elements of your business as well as the current status of the business. Plans should describe your current and future goals. List the management structure of the business including the number of employees. Business plans should define your service or product – what is unique about your business, what differentiates it from others in the market, and why will people use your service or product. The plan should define your market – who do you sell your service/products to and how big is your market. In the audit my husband actually discussed the reining and cutting industry so that the auditor became familiar with the horse industry. Plans should list who your competition is and why a customer will choose your business. Business plans should include a marketing plan that describes what outlets you plan to use as well as what it will cost. Financial data is very important. What are your financial projections for the next year, three years, and five years. What do you need to accomplish your projections – money, time, personnel and equipment? A business plan should include income and expense projections, cash flow projections and provide a balance sheet. Last of all the plan should be regularly updated in case you need to change directions in your business.
research. So for me it is easy to defend my expertise in horse knowledge. However, I am not an accountant so I use the expertise of my tax accountant, who is knowledgeable about horse businesses. No one knows everything about a business. Therefore one should strive to learn! For your business did you consult with experts in the field or what is your knowledge in the field? Did you consult with professional breeders or trainers to start your business? Did you work in a tack shop followed by opening one of your own? Did you attend farrier school? Even if you have been in the business for years continuing to engage with professionals to learn is a plus in terms of the IRS. This means attending courses on aspects of the horse industry. Another area they will take into consideration is any magazines you subscribe to or books you read. Keep accurate notes and/or documentation on programs you attend and printed material you use to learn more about the horse industry. It is not only the horse industry to learn about; how to run a business is important. How do you evaluate the profit margin of your business? Have you sought advice from experts on profits, expenses, cash flow projects etc.? Do you evaluate your business and make necessary changes to make it more profitable? I use Quicken and Excel to keep tract of my income and expenses. I can easily show what items cost and what income I obtain from the business. Next what are your bloodlines and the potential of that bloodline in the industry? When we were audited, Rich, my husband went through each horse’s pedigree and discussed the horse’s purpose in the business. Finally if you use consultants did you make changes based on their advice, are these changes implemented or ignored?
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.