EQUINE HOBBY OR BUSINESS?
By Kristen Wilson, University of Maryland Extension
Many people involved within the horse industry often do not consider their small horse operation a business. They are surprised to learn that you do not have to own a large facility or have several years of experience to be considered an equine business. According to the Internal Revenue Service (IRS), if your main objective is to make a profit, then you are considered a legitimate business. Since most hobbyists usually hold down another job from which their significant income comes, and often try to offset the costs of their own horse expenses, the IRS will not consider them a real business.
Hobbyists can deduct their expenses up to the amount of income that was earned. However, when a profit motive exists, equine operations are able to deduct expenses greater than the income of the business. Since the IRS will be looking to see if you are a real business, there are several things that you must consider. Below are some important tips to keep in mind when running an equine business:
Have a business plan that you follow and keep accurate up-to-date records for finances, time, and equine activities.
As the business owner, it is important that you invest a significant amount of your time into the business and have a good understanding of the equine industry.
It is generally unfavorable if a substantial amount of income is coming from sources other than the equine business.
The IRS understands that things happen and your business may not make a profit each year. The general rule with the IRS is that you should show a profit 2 out of every 7 years with an equine business.
It is very important that you continually show that you are trying to make your business more successful. This can be done by cutting costs, updating and following your business plan, and by having good business management skills.
The business owner should continually improve their skills by keeping current with the horse industry and always looking for avenues to improve and expand their business mentality.
The IRS often looks at the owner’s own tax records and previous business ventures and track record. Therefore, it is important that your own record is clean.
Showing a profit whenever possible will help strengthen the fact that it is a profit motive driven business.
Having personal horses as pleasure at the facility is fine as long as you still show that your business has a profit motive and is not just trying to offset the costs of your hobby.
Keeping the items listed above in mind is important when considering whether or not you are a real equine business. As long as you can show that you do intend to make a profit, keep accurate and up-to-date records, and show that you do have a vested interest within your equine business then you should have no problem showing the IRS that you are truly a business and not just a hobby.
Tax Issues: American Horse Council
Personal Finance: eXtension