Breeding as a Business vs. Hobby when you work outside the horse industry

[TrotTrotPumpkn]

So I am really on the fence about this. I have a call into my CPA, so don’t worry that I’m asking the internet for tax advice, but basically I am thinking about amping up my breeding to two mares now (eventually 3), and it is “for profit”–not for personal keeper babies or something along those lines.

I’m just wondering what tipped others in or out of breeding as a business vs. breeding as a hobby breeder? I will always make more money in my primary job (I think that is a safe assumption).

I would like to personally ride/show one of the mares, even though she is currently with a professional…not sure if that matters either? I could do embryo transfers. The other mare is strictly a broodmare.

Just looking for your thoughts on this matter.

[Kerole]

I’m not sure if US tax law are even remotely the same as here, so this may not be relevant.

I run the horses and farm as a business so I can write off earnings/taxes from our other entities against it. I make sure that the horses/farm only earn a modest amount of money (not hard to do!!). If you already have a decent earning day job I’m not sure what the benefit would be to making your breeding into a business? If you breed to sell does that automatically make you a business?

[TrotTrotPumpkn]

[QUOTE=Kerole;7576826]
If you already have a decent earning day job I’m not sure what the benefit would be to making your breeding into a business? If you breed to sell does that automatically make you a business?[/QUOTE]

Benefit is writing off the business expenses. Cost of breeding, feeding broodmare, stud fee, for example. Negative would be paying taxes on the sale of foals (I imagine).

It’s not really clear to me how the IRS wouldn’t want tax on the sale of the foal, but then you should get to deduct the business expense. I know the rule of thumb is show profit 2 out of 7 years, but there is more to it than that…I don’t really get when you do or don’t “need” to be an official business I guess.

[huntcup]

My experience: A primary job outside of horses typically won’t allow you the time it requires to run a breeding operation.

You can breed the absolute best but people seem to forget the necessity of networking and contacts to get the offspring sold.

Best off to leave it to those who can devote their full time and energy.

Much like farming, if you can do it on a grand scale you can do fine. I haven’t found a pro-forma where breeding 2-3 broodmares a year are profitable as a stand alone.

But we all go at it from different angles.

[MuskokaLakesConnemaras]

I work full time off the farm and have a small connemara breeding program. We maintain farm status by virtue of the breeding (used to be chickens, beef and firewood). I also can write a lot off and have made modest profit enough to keep them happy too.
Talk to an accountant. Honestly, I don’t know how people breed WITHOUT a full time job elsewhere!

[camohn]

I have an off farm job. Certainly could not pay the mortgage off the horses! We have both breeding and recreational horses. I am just careful to keep the recreational and business horses separate. Hubbys polo ponies are not a business expense, breeding stock is. If only half the horses are a business expense,I write off 50% off the expenses.

[omare]

A large part of your decision is going to be what your accountant says needs to be done to make it a business that will withstand IRS scrutiny.There is lots of information and cases out there on that, which I am sure your accountant will point you to–and importantly how much it might cost you if you claim as a business and it is found to be a hobby. That is scary. Really I would read lots of tax cases on the issue in addtion to what the accountant says–as you are the one that will be left witha possible tax bill and/or audit to survive.
(And even hobby profits are taxed.)

Otherwise, twice the mares will be twice the possible joy and heartbreak. That is not a business decision.

[Canterbury_Court]

Be aware that the IRS is targeting horse and cattle breeders. They now (due to an 8/13 Tax Court ruling) require that the breeding business make a profit separate form any other horse related business or increase in value of the property you keep the animals on.
Read their training manual - it’s scary.
http://www.unclefed.com/SurviveIRS/MSSP/a1farmls.pdf

[New_Horizons]

Great share Canterbury! I was going to suggest the OP (and anyone else doing this as a business) check out that manual. It has lots of helpful information.

Muskoka, I’m with you. I have a full-time job off the farm but spend almost all of my time at home consumed by the horse business. I think it is a handful of people who can turn a profit solely breeding (without an outside job). And Huntcup is right, networking, marketing, etc. takes up a huge amount of time, though I disagree that one should leave it up to the full-timers.

The advantage certainly lie in the deductions of expenses, but you then have to keep excellent records, have a business plan that you update regularly, etc., so again, very time consuming.

I don’t even have time to ride for pleasure anymore, but I wouldn’t give up the horse business for anything. Though I have to say that during this past “winter from hell” we had, I did question myself on more than one occassion!

[MysticOakRanch]

Talk to your accountant, but I can give you a quick overview. You will pay taxes on the sales of foals whether you are running a business or NOT! It is either hobby income or business income. The biggest difference (besides the actual IRS tax forms you use) will be on what you can deduct. As a business, you must have intent to earn a PROFIT (not just income). One of the IRS “safe harbors” is showing profit in 2 of 7 years - it is not required, but it does show you have a viable business. As a business you can write off many expenses (including depreciation of breeding stock, fencing, etc) that you can’t write off as a hobby.

For profit means you have a realistic goal of having income greater then expenses - not just that you are selling foals.

And, although this is much more complicated then I can discuss here, when running a hobby, you also have to consider AMT (alternative minimum taxes) - you may not be able to write off ANY expenses depending on this calculation. You may just have to declare the income from sales with no offsets.

OTOH - if you are not running a genuine business, you really can’t justify it as a business. And odds are, with 2 broodmares, you aren’t going to be able to show profit. You need to pencil out a business plan with realistic budget (including not just direct costs like feed and vet bills, but allocated cost such as depreciation of barn, fencing, etc) and see if you have a viable business. If you are audited, this is something you will need.

There are also State requirements to consider - I am in California, and as a business that SELLS, I have to get a resale license and file sales tax reports - and yes, horses are subject to sales tax which eats another 8% out of every in-state sale I make. This is a Cali requirement - it varies depending on where you live.

And you can have a job - but if you start paying employees to do all or part of your work, then there is even more documentation required to show you are an active participant (unless you incorporate and are not the “sole proprietor”). Most of us work at least part time outside the home to pay for our own groceries! Until you get into the really big breeders (like Rolling Stone or Hilltop or Iron Springs), you’ll find most breeders working “real jobs” too.

It is a hard business - to be honest, most breeders are underwriting the rest of the horse world - the riders, trainers, vets, etc. If I knew then what I know now…

[camohn]

In short: keep all receipts and have an accountant do your taxes

[MysticOakRanch]

[QUOTE=camohn;7582305]
In short: keep all receipts and have an accountant do your taxes[/QUOTE]

hahaha - this is the best advice!

[Daventry]

[QUOTE=Canterbury Court;7578717]
Be aware that the IRS is targeting horse and cattle breeders. They now (due to an 8/13 Tax Court ruling) require that the breeding business make a profit separate form any other horse related business or increase in value of the property you keep the animals on.
Read their training manual - it’s scary.
http://www.unclefed.com/SurviveIRS/MSSP/a1farmls.pdf[/QUOTE]

Here is an interesting court case that just ended between the IRS and a horse breeder. http://www.journalofaccountancy.com/News/20149948.htm

[PiedmontSporthorses]

Does anyone have a business plan they would be willing to share or a link / lead to one? I’m starting to prepare one for myself.

[TrotTrotPumpkn]

What great responses! The other thing the CPA mentioned that I didn’t see in these awesome threads (may have missed it) was self employment tax for the business side.

[bornfreenowexpensive]

[QUOTE=TrotTrotPumpkn;7576880]
Benefit is writing off the business expenses. Cost of breeding, feeding broodmare, stud fee, for example. Negative would be paying taxes on the sale of foals (I imagine).

It’s not really clear to me how the IRS wouldn’t want tax on the sale of the foal, but then you should get to deduct the business expense. I know the rule of thumb is show profit 2 out of 7 years, but there is more to it than that…I don’t really get when you do or don’t “need” to be an official business I guess.[/QUOTE]

Talk to your CPA…that rule of thumb is just a safe harbor. You can run at a loss every year. The issue is whether you are actively involved in the business such that you can right off the losses from the breeding business with your other ordinary income.

If it is just a hobby…you can only write off hobby expense from hobby income…so not your other business.

I do run a breeding business and training barn…I’m actively involved with both (40hours a week at least)…but because I have another high pressured job, I do have to pay a lot of people to help me. That is fine…my horse business makes decent money but also costs me a ton. The issue is proving that it is a business…and not just a hobby.

There is no tax law that requires it to be a successful business–but of course that is everyone’s aim! In my business plan, it is to make a profit…but I have a more long range plan rather than just sales for the foals each year. Some a bred to sell fast, and others are intended to sell after they have been trained for a much higher profit. I don’t live on my farm (so it is clearly a seperate business). I do hope that my farm business will earn a profit but it will take a few years to get to that point just because of the HUGE cost in initially starting, the time it takes to get the horses grown…and all the other crap. It is a risky business…I find the risk similar to starting a resturant.