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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.

  1. Do you have a business plan?
  2. Do you keep accurate records including records of the time you spend on your horse activity?
  3. Do you market the business?
  4. Are new techniques used in the operation?
  5. 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 Student Field Trip to Prairie Meadows Racetrackhorse 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.


The Expertise of the Taxpayer or His/Her Advisors

The second criteria used by the IRS to determine if you have a business are The Expertise of the Taxpayer or His Advisors. I have a PhD in Animal Nutrition with emphasis in horse Master Equine Managers Evaluating Hayresearch. 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?


Time and Effort Devoted to the Business Activity

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:

  1. If the taxpayer spends >500 hours on the activity/yr. = substantial participation. 500 hrs. is equivalent to 9.6 hrs./wk.
  2. If the taxpayer spends less than 500 but greater than 100 hours may also = substantial participation provided certain “other circumstances” exist.
  3. Participates for more than 100 hours and participation is not less than the participation of any other individual
  4. Materially participated in the activity for any 5 years in the preceding 10 years
  5. Personal Service Activity and has materially participated for any 3 year period

Women with horseHours 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.