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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.


What Defines a Horse Business?

I have owned horses for a long time. When my late husband and I got married we decided to combine our horse interests and use the horses as a business. First we wrote a business plan that we could use to guide us in the business. The business plan was a benefit when we were audited the first year. A business plan is only a guide to follow as you develop your business. The most important question to determine if you are a business: Are you in the business for profit? If the answer is yes then you may be qualified as a business. However there are 9 factors the IRS uses to determine if you have a business. The nine factors are:

1) the manner in which the taxpayer carries on the activityPeggy and Eric
2) the expertise of the taxpayer or the use of advisers
3) the time and effort expended by the taxpayer in carrying on the activity
4) the expectation that the assets used in the activity may appreciate in value
5) the success of the taxpayer in carrying on other similar or dissimilar activities
6) the taxpayer’s history of income or losses with respect to the activity
7) the amount of occasional profits
8) the financial status of the taxpayer
9) the elements of personal pleasure or recreation involved in the activity
Not one of these factors is decisive. You would be required to pass on a majority of the factors. The factors are also not exclusive as the government could look at other factors that are not on the list.