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Are You Operating an Equine Business or a Hobby?

Let’s Talk About That

One segment in the UPHA interactive webinar series LET’S TALK ABOUT THAT featured Jen Shah of Dean Dorton, a leading Kentucky-based regional accounting firm, presenting: “Are You Ready for Taxes? Let’s Talk About That.” Sponsored by Equidae Insurance, Ms. Shah’s presentation shared accounting and tax advice for horse and farm owners.

Within this blog, we’ll be sharing Ms. Shah’s discussion of how to determine whether an equine operation is business or a hobby. We’ll join the conversation now….

The ‘hobby’ versus ‘business’ distinction for equine operations is important for determining how taxes are filed. If your business is deemed to be a hobby, you must pick up all the income, but are not able to deduct your expenses. The new tax law from late 2017 eliminated any deductibility of these expenses through 2025.

So, how do you know if you are operating as a business or a hobby?

The IRS regulations list nine factors for determining whether an activity is a business versus a hobby. Essentially, these nine factors focus on whether you are operating with the intent to make a profit (if so, as a business).

Depreciation is a fancy term for how you deduct the purchase price of an asset. If I buy a horse for $100,000 when can I report that $100,000 expense for tax purposes? Most horses qualify for a “seven-year depreciation life,” which is really over an eight-year period because you normally get a half year depreciation in the year of purchase and a half year depreciation in the final year.

There is also the “three-year depreciation life” for horses that are more than 12 years old when placed in service. A “five-year depreciation life” is used for cattle and for new, but not used, farm equipment. 15 years of depreciation can be used for land improvements such as roads and underground utilities, and 20 years of depreciation are available for barns. The IRS has tables that provides the tools for you to calculate any depreciation.

1. How the operator carries on the activity. How is the entity handled? Do you separate your horse activity from your other personal activities? The business operator can establish this by maintaining separate personal and business bank accounts, keeping separate records and books, and treating horse operations as they’ve approached other profitable operational entities in the past.
2. The operator’s expertise. What is the expertise of you and your advisors? What team have you surrounded yourself with and are you willing to follow their advice? A business operator should have extensive knowledge of his or her profession or activity, showing that he or she has studied accepted business methods and sought advice from experts.
3. The operator’s time and effort in carrying out the activity. How much time and effort are expended by you within the activity? Are you devoting a significant amount of time to your horse or farm endeavor? Devoting much of your personal time and effort to the business may indicate that you entered and continue it with the actual and honest objective of making a profit.
4. An expectation that assets used in an activity may appreciate in value. Is your expectation that your assets will appreciate over time? If you have horses, or if you're using your farm in connection with your horse venture -- even if you don't realize a profit right away -- do you expect that business to appreciate over a period and have some economic gains?
5. The operator’s success in other activities. Have you been successful in other similar or dissimilar activities? Have you taken a business or another entity that was not profitable and turned it into a profitable venture? How does that experience translate into running your horse operations?
6. The operator’s history of income or losses from the activity. Look at your history of losses or income with the activity. If you generate losses over several years, the IRS may be concerned that this looks more like a hobby. A long series of losses warrants consideration while sustained earnings indicate a for-profit activity.
7. The amount of occasional profits, if any, which are earned. If you don't make a profit, it doesn't automatically mean that your venture is a hobby. Rules apply that if you show a taxable profit for two out of seven years, then the IRS has the burden of proving that you are a hobby. If you do not report a profit in two out of seven years, then you must go through these nine factors if you're audited by the IRS, and you have the burden of proving that you are a business and not a hobby. It is also helpful to track results by horse to potentially show profitability on specific horses, even if not overall profitable.
8. The operator’s financial status. This is where the IRS looks to see if you rely on the income. So, if you're a trainer or a farm owner who is also breeding, and this is your full-time job and you rely on it for your livelihood, that leans more towards business.
9. Whether the activity provides recreation or involves “personal motives.” The last and ninth factor relates to elements of personal pleasure or recreation. Obviously, we all enjoy being around horses, but this factor focuses on whether you are primarily keeping the horses for your own personal enjoyment or if you are trying to maximize profit potential (for example, by showing the horses to increase the value for sale).

When you look at the nine factors, no single factor is determinative, and all the facts and circumstances must be considered.

Based on our experience, the most impactful items are maintaining quality books and records, surrounding yourself with a good advisory team (and following their advice), and generating a business plan that shows a potential for profit (and tweaking it as you go to address what is working and what is not working).

A simple example of an equine business activity is running a boarding and training operation with the intent to make a profit. Alternatively, if I compete and enter my horse in shows and win prize money from time to time, that may or may not be a business. Often times, if I'm just riding and the prize money doesn't come close to covering the cost of the horse, that probably leans more towards a hobby. However, if I am riding and entering that horse in competitions with the intent of increasing the horse’s value, and I am willing to sell that horse at the peak of its career -- for maximum value -- that may lean more towards business.

What are some best practices if you plan to operate as a business versus a hobby? Keep your horse operation separate from your other personal activity – perhaps establish a separate legal entity but at minimum use a specific bank account for just your horse activity. Look at developing a business plan. I know it's difficult to estimate income but look at the expenses -- what it might cost and what the profit potential could be at some point in the future. Do consult with people who are knowledgeable about how to make money in the industry.

I recommend you discuss your specific situation with your advisors to evaluate whether your horse operations may be considered a business or a hobby depending on your fact pattern.

Jen Shah is Tax Director at Dean Dorton and leader of the accounting firm’s Equine Industry Team. She provides tax and operational planning to a variety of equine industry participants including breeding and boarding farms, veterinary firms, and many associations. Ms. Shah’s credentials are extensive, and she is a much sought-after speaker and panelist at numerous events including the Thoroughbred Owner Conference, the Consignors and Commercial Breeders Association, as well as the University of Kentucky’s National Conference on Equine law.

The one-hour tax webinar “Are You Ready for Taxes? Let’s Talk About That,” featuring Ms. Shah and sponsored by Equidae Insurance, is now available on-demand to UPHA members through their website: https://www.uphaonline.com/. We encourage UPHA members to visit this website and access a library of Equidae -sponsored webinars with topics ranging from retirement planning to structuring a business to insurance hot topics. For non-UPHA members, stay tuned to this page as we bring some of these topics to you.

The views, information, or opinions expressed in this blog are solely those of Ms. Shah, and do not necessarily represent those of Equidae Insurance.

For more information about equine or farm insurance, or if you have a topic you’d like to see covered in our blog, please contact us directly at: Equidae Insurance, Inc. 608 Virginia Street East, Suite 302 Charleston, WV 25301 p. (304) 346-1198 f. (304) 345-3535

Stacey Halloran, Agent
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