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The Manner in Which the Taxpayer Carries on the Activity - Record Keeping

Is the business carried on in a business-like manner? First a separate business checking account should be maintained. This illustrates to the IRS you are serious about having a business. You will need a properly registered business name to obtain a checking account. A registered name also helps with your brand identity including web-page design and it is protected for the long term. Pick a business name that is web ready. Check whether a domain name (or web address) is available. You can do this using the WHOIS database of domain names.  If it is available, be sure to claim it right away. This guide explains how to register a domain name.  Next register your trade name. Registering your business name involves a process known as registering a “Doing Business As (DBA)” name or trade name. Registering your “Doing Business As” name is simply the process of letting your state government know that you are doing business as a name other than your personal name. If you are operating under your own name, then you can skip the process. Learn about the requirements in your state and how to file in this Registering Your Doing Business As Name guide.

Second you must keep good records. Record keeping is one of those items that is a necessity. Records include everything from a receipt for a shovel to a record of income for the business. One should also keep track of horses and their uses. I keep all receipts for any products I purchase for the farm. For example if I go to Theisans and purchase a halter and lead rope and I also purchase dog and cat food I would only record the halter and lead rope expense. The reason for this is 1) Honesty and 2) When I was audited the IRS goes through every receipt to see if the totals match up to the expenses one records for the year. The other day my electric fence unit went out and it was less then 30 days old. I contacted the company and they told me to take it back to the store if I had the receipt. I could not find the receipt but I knew I kept all receipts and it had to be somewhere. Finally I remembered I had purchased a tire that day and a warranty for fixing flat tires but I had to keep the original receipt with it. I looked in my glove compartment and there was the receipt for the electric fencer.

There are many ways to keep records.  You can write them in a ledger or use a computer program. I personally use Quicken for Home and Business to record my purchases. I can use “split” and record a purchase from a receipt that has both business and non-business purchases. QuickBooks is a good program as well as Horsemen’s Income  Record Keeping System. One could also use Excel. I actually transfer my horse business purchases and income to excel at the end of the year to match up receipts and add cash purchases before I meet with my accountant. My late husband did not record his purchases and kept receipts in piles all over the place. I would have to go through each receipt and record the purchase at the end of the year in Excel. I could also match the date, location and mileage using Excel. For example let’s say I had a purchase at Lowe’s for fence posts. I could post next to it 20 miles (10 miles each way). At the end of the year I would add my mileage plus add any other mileage for the business such as attending a show or sale.

Remember The Manner in Which the Taxpayer Carries on the Activity is extremely important if the IRS decides to audit your business.


The Manner in Which the Taxpayer Carries on the Activity - Business Activities

Besides records of income and expenses, they should be kept on what your business is about. Important records to keep tract of are records of events which affect your current or future income. For example deaths of horses, slipped foals, drought, disease or anything else that required unusual expenditures. My husband and I would breed 2 to 4 mares per year to excellent stallions. In one year we had a mare have a foal in the pasture while we were at work. We never found the foal (only part of an amniotic sac) – we think coyotes got the foal. That was a big loss because the stallion became infertile so we could not breed back to him. Another year the veterinary school could not get our mares bred. We used fresh and/or frozen semen and for some reason only 2 out of 4 mares conceived, even with multiple breedings. Both of these incidents resulted in lostincome and in the latter case high breeding expenses.

One should also keep records of business activities such as the date of events, location and programs your horses were used in. This is especially true to demonstrate how you market your horses. Any showing, racing, driving event can be a type of marketing your horse(s). If they win that is even better. Medical records should also be kept. Medical records can include deworming, vaccinations, emergency care, and farrier work. All of these records can be used in an audit to demonstrate how you manage your business and what if any unusual circumstance had a role in the profit margin.

Another record or summary to keep is if you make changes in your operational methods including adopting new techniques or abandoning unprofitable methods. For example over the Horse Businessyears marketing of my business has gone from print to web-based. For boarding I also use craigslist which is free. In fact some magazines have gone out of business since I started. Record when and if you use social media or a web-page. Another change may be how grain is fed. I use to get bulk grain but have since gone to 50 lb. bags. The primary reason is the 50 lb. bags were approximately the same price and in my case when I owned and also leased a barn it was easier to work with the bagged feed.

Remember the goal of a business is to make a profit. If you are audited, the auditor will typically know nothing about horses and it is your job to describe your business as thoroughly as possible.