What Expenses Are Tax Deductible for a U.S. Horse Business?
Expenses can be deducted if they are ordinary and necessary. Ordinary means that someone else who has a business like yours would likely have a similar expense. Necessary means that you needed to spend this money in order to operate your business.
In general, business expenses are deductible if they are costs you wouldn't have had if you didn't have your business. In other words, if you would have had this expense, even if you didn't have your business, it's probably not deductible. What is ordinary and necessary is relative to each industry. Fees paid to a farrier would be an example of an ordinary and necessary expense for a riding stable but not for an electrician.
In order to be deductible, you must also be able to substantiate the expense with documentation.
When an expense is deductible depends on the accounting method of your business. If the business owner uses the cash method of accounting, the expense is deductible in the tax year in which it is paid. If the accrual method is used, the expense is deductible in the tax year in which it is incurred. Many equine-based businesses use the cash method of accounting.
Typical Farm business expenses may include:
* Accounting, legal and bookkeeping fees (including the portion of your tax return preparation fee that includes your business return)
* Advertising and promotion
* Bank service charges
* Breeding fees paid in the business of breeding and raising horses
* Broodmare rental
* Car and truck expenses. You can either use the standard mileage rate method or the business percentage of the actual auto expenses you had (gas, insurance, repairs, lease payments, car depreciation, etc.) Don't forget the miles you drive on errands such as picking up supplies and going to the post office.
* Contract labor, including subcontractors and consultants. It's best to list these expenses on your return in the category of expenses covered rather than listing them as 'independent contractors'.
* Computer supplies
* Depreciation on business equipment and vehicles
* Dues to trade organizations
* Education, including seminars and conferences that increase your knowledge and skills. You can't deduct the cost of education that prepares you for a new line of work.
* Employee pensions and benefit programs
* Entertainment and business meals (these are 50% deductible)
* Farrier, veterinary and related therapies expense
* Feed and shavings
* Gifts to business associates or clients (up to $25 per person per year is deductible)
* Home office expenses, if you qualify
* Insurance including liability, workers compensation, and other business-related insurance.
* Interest on indebtedness related to your horse business – e.g. mortgage, farm loan, equipment loans
* Licenses and fees
* Magazines, videos, DVDs and books that you need for your business
* Postage, delivery, and freight costs
* Printing, copying, and fax charges
* Rental of equipment and property used in your business
* Repair and maintenance- costs that keep the property in operating condition and do not appreciably extend the life of the property or materially add to its value
* Small furnishings and equipment
* Supplies for your barn and office
* Taxes – property, excise, employer portion of payroll taxes
* Telephone (you can deduct long distance business calls made from home even if you don't qualify for an office-in-home. Monthly service charges are deductible only if you have more than one phone line in your home.)
* Trailering of horses to shows, veterinary appointments, etc.
* Training of horses to prepare them for sale or show
* Travel for business purposes, including costs to go to seminars and conferences. Deductible travel costs include hotels, airfare, taxis, car rentals, parking, tolls, tips, and so on. These expenses are 100% deductible. Travel meals are only 50% deductible.
* Uniforms or special work clothing required by your job and not suitable for everyday use (e.g. breeches, riding boots and helmets) can be deducted. If you can deduct the cost, you can also deduct the cost of upkeep, including laundry and dry-cleaning bills.
* Wages paid to employees
This list is not all inclusive of the types of business expenses that are deductible.
Limitations on the deductibility of the expenses may exist related to hobby activities, related party transactions and at risk activities. Please consult your tax return preparer for more information.
By Carol Gordon, CPA