the taxpayer’s history of income or losses with respect to the activity
the amount of occasional profits, if any, which are earned the financial status of the taxpayer elements of personal pleasure or recreation
Clearly, navigating all this can be challenging, espe- cially without expert advice. Tax attorneys have observed that: taxpayers who represent themselves before the Tax
Court rarely prevail. taxpayers who try to “handle” their own audit often
inadvertently make damaging statements to IRS agents. taxpayers who don’t treat their horse operations like
a real business, don’t keep books and records, don’t have a written business plan and don’t keep a business checking account, are less likely to beat a “hobby loss” examination than those who are businesslike in their approach. mucking stalls, getting dirty and doing barn chores
in bad weather goes a long way toward proving to the IRS and Tax Court that you are “working,” not “playing.” taxpayers who do not have a lot of disposable in-
come have a better argument that their horses are not simply an expensive hobby.
As you evaluate your operation, consider a few points.
Does your business: have a business license? carry a business or commercial loan? use letterhead and business cards? generate monthly or quarterly profit/loss statements? have a written business plan and budget? operate as its own entity (corporation, limited liability company or partnership)?
carry its own tax identification number? collect appropriate sales tax? carry commercial liability insurance? keep an inventory of business assets/property? carry insurance on those assets/property?
Your accountant may be the best person to help you
evaluate whether your horse expenses qualify as busi- ness expense deductions and whether claiming those deductions is going to make you vulnerable to an audit. However, if your accountant doesn’t understand the horse industry and is merely taking you at your word, you may want to either consult with another accountant
“From the IRS’ point of view, you should have only one goal: making a profit so you can pay more taxes.”
or with a tax attorney who has experience with the horse industry and “hobby loss” audits.
WHAT YOU NEED TO DO TODAY This is a good time of year to sit down and do certain key things that will help in the event of a future audit. Guidelines include: Analyze the past year’s income and expenses. I don’t mean just glance at the numbers. If you are audited, the IRS will be looking to see if you analyzed these numbers in a meaningful way that allows you to implement changes to your program in order to reduce expenses and increase income. How much money did you spend in each expense category and why? If you are operating at a loss, is there a way to cut back expenses by doing some things differ- ently? It’s not enough to know how much you are spend- ing—in this case you also need to think about whether you can be spending less. Calculate what you are spending on a per-horse ba-
sis. If you have more than one horse, it is very important that you have a firm grasp on what you are spending per horse, per year. This figure can be specific to each horse, or it can be an average (based on the total costs divided by the total number of horses). Preferably, you do both. Re-assess asset values. You do not need to get a full-
blown appraisal of every horse every year, but you should get an opinion of value every year. If you have done the previous guideline above, you should also be able to docu- ment your “cost basis” in every horse you own. In other
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