Strict Record Keeping and Expectation of Profit
Allows Losses to Be Deducted
By Adam M. Trenk
W
ell, it is tax season. The dreaded yet inevitable time
of year when we have to contemplate forking over
some of our hard earned money to Uncle Sam. If
you are a loyal reader of AZ in the Saddle, then you or
someone close you likely makes their living in the horse
business, and you know how hard it can be to turn a profit
in our industry today. With the expense of breeding and
training horses, rising with the cost of feed and fuel, it is
ever more important to take whatever measures you can
to deduct expenses and minimize your tax exposure. So
long as you have the expectation of a profit in your equine
business and clearly document your labors in an effort to
demonstrate that expectation, the IRS may allow you to
deduct losses from your taxable income even if the horse
business is not your sole source of earnings.
According to Section 183 of the Internal Revenue Code,
losses may not be deducted for tax purposes unless
there is an expectation of making a profit. Tax courts
have confirmed that substantial losses may be deducted,
even if there is another primary source of revenue,
provided that among other things records are well kept
and demonstrate a true expectation of making a profit.
Blackwell v. Commissioner of Internal Revenue, T.C.
Memo. 2011-188, 2011 No. 29287-09 WL 3444327 (U.S.
Tax Ct.). This is great news for those in the industry who
have sources of income in addition to their professional
equestrian pursuits.
Treasury Regulation 1.183-2 sets out nine separate factors
the IRS may consider in making a determination that (A)
your business activity has an expectation of profit and you
will be able to right off your losses OR (B) your costs are
not tax deductible because they relate to a hobby or other
not for profit activity. These nine factors are as follows:
1. Manner in which the taxpayer carries on the
activity: Operating in a businesslike manner is extremely
important. This means having written contracts for all
transactions and following protocol. Having a business
plan is a good place to start. Documenting efforts to
adjust unprofitable practices will also w