A Horse, of Course with Don Blazer

Save some money!

Don't pay so much in taxes!

Uncle Sam is a nice guy, and he doesn't mind tax minimizing. In fact, it's encouraged. (Tax evasion-which is illegal-is entirely different than tax minimizing-which for horse owners is relatively easy.)

Depreciation and the reduction of taxable income by the addition of legitimate business expenses are two of the main ways horsemen can benefit from tax laws. A horseman can also "shelter" income by investing in horses, especially race horses.

But let's start at the beginning.

In order to take advantage of the tax laws you have to change your horse ownership from a pleasurable past time to a business pursuit. Now while the pleasure of owning horses is always there, all that is necessary to have your cake and eat it too is the intent or expectation of making a profit. (I know that you know I have written plenty about making money with horses.)

Among the prerequisites, of course, is that your horse operation be treated as a legitimate business. You must keep proper accounting records, and you should establish plans, goals and budgets. Get things organized and get it in writing; it helps prove your business intent and profit motive.

The Internal Revenue Service has made it easy to meet the first requirement. You only have to show a profit in any two of seven consecutive years to establish a profit motive. In some cases, even that requirement can be waived, provided you do have a legitimate business, profit intentions and the reasonable possibility of attaining your goals.

Another important assistance offered to horsemen is the useful life expectancy table for race horses, broodmares and stallions at stud. These guidelines are quite liberal, and with any luck at all, the odds are definitely in your favor. For instance, the useful life of breeding stock is considered 16 years; but you know many mares and stallions go on much longer.

Because of the guidelines, a person in the horse business can often recover the full cost of the horse through depreciation and still have the profit-producing horse for many years. Investing in an older proven mare, for example, can produce both tax advantages and profits. You can depreciate the full purchase price of a 14-year-old mare in 24 months, enjoy the tax savings, then still have the mare and maybe one or more foals to sell for profit.

Depreciation can get complicated depending on individual circumstances, so it is a good idea to enlist the help of a tax accountant-another way to show you are actually in the horse business.

Of course, paying the tax accountant is another way of adding additional expenses to your business operation, reducing the taxable income and minimizing the amount owed.

Trucks and horse trailers are also good business expenses as they are necessary to conduct business. If you buy a truck, it must actually be capitalized, but if you lease it, all the cost is deductible. The same applies to a horse trailer.

Memberships, dues to horse organizations, subscriptions to horse magazines and the cost of technical books are deductible expenses. You may also deduct what you spend for your own education, such as college course fees, along with related travel expenses, including meals and lodging. You must be able to show the education maintains or improves the skills required in your business, but then, no one ever stops learning about horses.

Investing in race horses is a good tax shelter, but be careful. You cannot make money legitimately by losing money, as some tax shelters plan to do. Such practices violate the first rule of the IRS: there must be a profit motive.

The two mainstays of legitimate race horse operations are depreciation and interest on borrowed money. Both are allowable deductions and a major factor in cash flow. Depreciation gives you an expense item without using any cash, and borrowing for the operation gives you a larger capital base without the input of your own cash.

A single race horse can help reduce taxable income, or he can provide plenty of new income. In any case, a race horse is compatible with another horse operation and can be a lot of fun.

If you want to save a little money this April 15, make Uncle Sam your business partner, he doesn't mind sharing the costs of your horse business as long as you treat him fairly.

Each month you'll find a new column on our web site. We hope you'll enjoy it, and maybe e-mail us with questions or suggestions for other columns. A Horse, Of Course is a weekly column syndicated by Success Is Easy. If you like the column, call your local newspaper, or local horse publication and ask them to subscribe by contacting Success Is Easy, 7119 East Shea Blvd. Suite 109-271, Scottsdale, AZ 85254