There is a sense among equine tax professionals and tax lawyers that as of recently, IRS has begun to audit more horse businesses than ever before, and that the IRS is allowing fewer deductions and losses for taxpayers who run horse businesses.
If your horse business is audited, your first call should be to your accountant, who can advise you how you should handle yourself and your paperwork during the audit. However, once your audit begins, there is often little your accountant or lawyer can do to influence the auditor’s decision about what is contained in your business records. Thus, it is highly important that you take steps in advance (beginning with the first day you start running your horse business) to stave off an audit, or at least end up with a “no change” audit (i.e. a finding by the auditor that you reported everything correctly).
Jim Hodges is a certified public accountant (CPA) in Dallas, Texas who has over 30 years of experience preparing returns for horse businesses and horse owners, and has assisted many horse owners with audits. Here are Jim’s top 5 tax tips for horse businesses:
1) Draft a business plan that describes how you plan on making a profit in your horse business.
2) Keep very good business records, including records of the time you spend on your horse activity.
3) Hire a good bookkeeper to keep your books and records for your horse business.
4) Do not commingle personal funds and funds used for the horse business. Use separate bank accounts and credit cards.
5) If you have large losses from your horse business one year, it is tempting to deduct only part of the losses so it is not as much of a “red flag” to the IRS. DO NOT DO THIS. For all expenses or deductions for your horse business, you should take an “all or nothing” approach.
**I (Alison) put together a sample business plan for horse businesses (for a fictional business), and it can be downloaded here. For more information on equine business plans, see this post.**
The sense I get from talking to many with their “ears to the tracks” on audits is that if you make a lot of money in your “day job”, you are likely to get audited, even if you are doing everything correctly. Similarly, if you write off large losses, you are likely to be audited, even if you did not do anything inappropriate. But as long as you are legitimately running your horse operation “like a business”, you are likely to survive an audit.
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