April 9, 2009
As a small-time Quarter Horse breeder, I’m constantly worried this time of year.
Like many others in this industry, I take the expenses for my breeding operation off my taxes and pray each year I’ll have a profit to show. That hasn’t happened often and that makes me worry that the IRS will call me in for an audit.
According to Jennifer Foster of Foster Results LLC, equine businesses are notoriously poor record keepers and the IRS knows it. That puts agri-business at the head of the audit line. Of all the small businesses audited in the 2007 fiscal year, 27 percent were farming, ranching or horse operations.
Although there is no guarantee that you won’t ever be audited, there are ways to protect yourself. Jennifer offers these tips:
- Maintain accurate “accountant level” business records. Use accounting software to track your incoming and outgoing monies correctly or hire a bookkeeper who understands equine accounting.
- Consider hiring an experienced accountant with experience in your sector to help you with your taxes.
- Have a separate bank account for your horse business.
There are many things that can trigger an audit and IRS auditors are taught to look for specific clues. Here are a few of those flags:
- Failing to disclose all income because of the accompanying income tax benefits.
- Use of multiple bank accounts with reliance on the bank records for reporting purposes lends itself to misreporting due to exclusion of some records. Watch your transfers to/from savings, money market and investment accounts or certificates of deposit.
- Be careful reporting personal expenses with your business expenses. The IRS will find personal expenses most times in insurance, gasoline, interest, taxes, utilities and repairs.
- The IRS will also look at contract labor, cash payments to workers and lack of employment records.
- Another flag is bartering that might account for some sales. This can include trading or swapping of equipment or services for a percentage of ownership in the horse.
Jennifer encourages horse business owners to know the specifics of IRS rules and regulations. For example, geldings cannot be placed in service in a breeding operation except in working or “teasing” applications.
To read more about surviving an IRS audit, check out this story from the July 2008 issue of The American Quarter Horse Journal.
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