February 20, 2009
Protect your horse-breeding business in the event of an IRS audit.
Even though it’s the same time every year, tax season seems to always sneak up on us. If you run a breeding operation, or any type of horse operation, you may be deducting equine expenses on your taxes. Make sure your business stands up to the scrutiny of the IRS if you are ever (gulp) audited.
What Triggered the Audit
“Most IRS auditors feel you are getting into the horse business for a tax shelter – to get a loophole to write off all your income from another job,” says Billy Peterson, certified financial planner.
The reason for the IRS audit is most likely to determine whether your operation is a legitimate business or a hobby.
Don’t forget: AQHA’s Stallion Breeding Reports must be postmarked by November 30 of the breeding season to be considered on time. Customers who file on Member Services can add and change to their report all year without having to pay or submit until the deadline. Think of it as a free computer organization program!
Any business will have a detailed plan that gives realistic expense and profit projections. A horse operation – no matter whether it is set up for boarding, breeding, racing or showing – must have the same.
“You have to have things laid out. It doesn’t have to be a 20-page document. You can have a two-or three-page business plan that says here’s how you intend to make a profit.”
And make sure you separate your business records from your personal records.
“From my experience, if you have a separate entity, name and tax ID number, all of those things are going to reduce your odds of having an audit,” Billy says. “A lot of people make the mistake that they have their one checking account they use for everything in their personal life, and they just use that for their operation. And that’s a mistake.”
A big mistake, adds Carolyn Miller, certified public accountant.
“The IRS really frowns on mingling your personal funds with business funds,” she says. “That is a big tick against you. You should have a business account, too. I also recommend getting a business credit card.”
What to Expect
The auditor might have a telephone conference with you before the meeting. Billy encourages your accountant to be a part of this conversation also.
The auditor is going to ask pointed questions about your operation, such as:
- Why have you chosen these people to work with your horses?
- Have you relied on any experts or advisers?
- Describe how active you are in the day-to-day operation.
“You’re going to have to lay out here’s why I did this and why I did that,” Billy says. “Here’s my reasoning. Here’s why I’ve bred these mares to these stallions.”
Your business can benefit from filing AQHA’s Stallion Breeding Report on Member Services. You’ll gain access to past reports without having to pay AQHA for a copy.
Be courteous to the auditor at all times, even if he seems impolite or unreasonable.
“I find if you’re well-prepared and come in with everything they want, it really helps turn the tide in your favor,” Carolyn says.
What to Bring
“Good recordkeeping is essential,” Billy says. “Every year, you should have a new set of records. Keep everything separate – breeding fees, vet bills, training bills, sale expenses and transportation expenses. If you are audited, they will want hard-copy proof. In addition, keep well-maintained computer records for your own information.”
The more organized you are, the better you are going to look to the auditor.
During the meeting, the auditor will ask for your business plan.
“I tell my clients not to use a business plan as just a static document. It should evolve over time,” Carolyn says. “At the end of the year, do some synopsis. That way, if audited, you can show that you were keeping track of your expenses and making changes as needed, no matter if it was a bad economy or a mare slipping a foal. Showing that is going to go in your favor: This person is acting in a businesslike manner.”