LLC, taxes, and A/O status

[Jeepgirl311]

Hi,

I have searched the forums to try to find this answer, but I’m still not sure I have all the info so thought I would ask myself.

I am considering buying a talented-but-green horse. My intent would be to put a year of training & showing on her and then sell, hopefully for more than I paid. :lol: At which point I would use the proceeds to buy another horse and do the same thing. My questions are:

1. If my intent from the beginning is to sell for a profit, does this count as a business and are the related expenses tax deductible?

2. If I am able to do that, does it affect my A/O status? My understanding is that ammys are allowed to sell and profit from the sale of their own horse, correct? What are the tax implications?

3. I was planning to form an LLC to be the official owner, mostly for liability protection but also in the hopes I could deduct expenses and this would allow me to keep this business separate from my personal finances. Does that make sense to do, and does it affect my A/O status?

I recognize that the answer to much of this is “check with your CPA” and I have - but she does not specialize in equestrian stuff, so I wanted to check with COTH and see what y’all have done/seen along these lines and then take that info back to her.

Thanks!

[Guilherme]

You become a business when you act like one. What you are describing might be business but also might be a hobby. The IRS has some publications that discuss the difference.

In a business you can deduct your business expenses against the business income and other income, subject to some limits. In a hobby you can can deduct expenses against income but ONLY to the extent of that income. Losses cannot be used to offset other income.

The answer to this question often lies in the details.

G.

[retiredhorse]

I don’t know about tax info but I’m pretty sure I’ve seen A/Os on their LLC/Inc. owned horses. And you can buy or sell your own horses and remain an ametuer, just don’t get paid/remunerated for swinging a leg over other people’s horses. You can always check with Usef too to be safe.

[Janet]

There is an IRS publication on Horse and Cattle “Hobby Farming”.

The old one I have is “IRC Section 183: Farm Hobby Losses with Cattle Operations and Horse Activities”.
I do not know if the current version has the same number.

[OneTwoMany]

@Jeepgirl311

Hi,

I have searched the forums to try to find this answer, but I’m still not sure I have all the info so thought I would ask myself.

I am considering buying a talented-but-green horse. My intent would be to put a year of training & showing on her and then sell, hopefully for more than I paid. :lol: At which point I would use the proceeds to buy another horse and do the same thing. My questions are:

1. If my intent from the beginning is to sell for a profit, does this count as a business and are the related expenses tax deductible?

2. If I am able to do that, does it affect my A/O status? My understanding is that ammys are allowed to sell and profit from the sale of their own horse, correct? What are the tax implications?

3. I was planning to form an LLC to be the official owner, mostly for liability protection but also in the hopes I could deduct expenses and this would allow me to keep this business separate from my personal finances. Does that make sense to do, and does it affect my A/O status?

I recognize that the answer to much of this is “check with your CPA” and I have - but she does not specialize in equestrian stuff, so I wanted to check with COTH and see what y’all have done/seen along these lines and then take that info back to her.

Thanks!

To answer #2, if you are training your own horses and selling them, that in and of itself doesn’t change your ammie status.

To answer #1 and #3 from the perspective of the IRS, you will need to show a certain amount of revenues and your business will need to be profitable a certain number of years. If you don’t meet these criteria, the activity may be classified as a hobby and the ability to deduct expenses will be limited. See the following link:

https://www.irs.gov/newsroom/business-or-hobby-answer-has-implications-for-deductions

[Palm_Beach]

1. If my intent from the beginning is to sell for a profit, does this count as a business and are the related expenses tax deductible? Yes.

2. If I am able to do that, does it affect my A/O status? My understanding is that ammys are allowed to sell and profit from the sale of their own horse, correct? Does not affect amateur status.

What are the tax implications? You should report the sale price and deduct allowable expenses. You file a schedule C if you are an LLC or if you decide to stay a sole proprietor.

3. I was planning to form an LLC to be the official owner, mostly for liability protection but also in the hopes I could deduct expenses and this would allow me to keep this business separate from my personal finances. You keep your business and personal finances separate by using separate bank accounts, credits cards, etc and doing meticulous bookkeeping. Unless you have a large lump sum to fund this endeavor, you will probably need an accountant to help you set up your bookkeeping and correctly document funds you put into your business accounts to pay business bills. Since all your expenses are up front and you will have no income until the horse is sold, you need to make sure your business bills get paid from your business accounts.

Does that make sense to do, and does it affect my A/O status? No, it does not make sense to do because it’s hard to find, purchase, train up, show and sell a horse and make a profit at the end. You will still be an amateur, but probably poorer for the experience.

[OneTwoMany]

@Palm Beach

1. If my intent from the beginning is to sell for a profit, does this count as a business and are the related expenses tax deductible? Yes.

Sorry to be a dissenter, but intent to earn a profit isn’t enough to convince the IRS you have a business versus a hobby. You need to meet other criteria as well. An LLC is a pass through vehicle and can be subject to more scrutiny if it is constantly losing money. Please take a look at the link I posted above.

Talk to your accountant. If you can pass the profit tests it might make sense to set up an LLC. If you cannot meet the profit tests, a C-Corp might be a better option.

[RockinHorse]

@Jeepgirl311

Hi,

I have searched the forums to try to find this answer, but I’m still not sure I have all the info so thought I would ask myself.

I am considering buying a talented-but-green horse. My intent would be to put a year of training & showing on her and then sell, hopefully for more than I paid. :lol: At which point I would use the proceeds to buy another horse and do the same thing. My questions are:

1. If my intent from the beginning is to sell for a profit, does this count as a business and are the related expenses tax deductible?

2. If I am able to do that, does it affect my A/O status? My understanding is that ammys are allowed to sell and profit from the sale of their own horse, correct? What are the tax implications?

3. I was planning to form an LLC to be the official owner, mostly for liability protection but also in the hopes I could deduct expenses and this would allow me to keep this business separate from my personal finances. Does that make sense to do, and does it affect my A/O status?

I recognize that the answer to much of this is “check with your CPA” and I have - but she does not specialize in equestrian stuff, so I wanted to check with COTH and see what y’all have done/seen along these lines and then take that info back to her.

Thanks!

From a business perspective, quick flips are where the money is made. If you are going to take one horse at a time for a year or more, I think you might have a hard time garnering occasional profitable years to convince the IRS you are a business.

[Palm_Beach]

@OneTwoMany

Sorry to be a dissenter, but intent to earn a profit isn’t enough to convince the IRS you have a business versus a hobby. You need to meet other criteria as well. An LLC is a pass through vehicle and can be subject to more scrutiny if it is constantly losing money. Please take a look at the link I posted above.

Talk to your accountant. If you can pass the profit tests it might make sense to set up an LLC. If you cannot meet the profit tests, a C-Corp might be a better option.

I realize my answer was simple, but she is not opening up a public business, she is buying one horse and trying to flip it. She is going to constantly lose money until she sells the horse. Hence my recommendation that she keep her finances separate and her books meticulous, and seek the help of an accountant.

[clanter]

just a note about the IRS… nothing they tell you or provide you in their pamphlets is enforceable

1. The IRS and the Tax Court have taken the position that taxpayers cannot rely on the guidance publications provided by the IRS… see page 438 of attached

2. The IRS takes the position that taxpayers cannot rely on oral advice that it provides (the last time I saw a report less than 50% of time was the answer provided by the IRS agent correct anyway) …see page 431 of attached

http://wisconsinlawreview.org/wp-con…uble-Final.pdf

We used a Tax attorney who was versed in Farm and Ranch law to set up our farm’s corporation… then consulted with a CPA who also knew Farm and Ranch law who we used to file the returns… we were never ever questioned for any thing on our returns… every dot was in place and every t was crossed

[OneTwoMany]

This is worth a read:

http://www.unclefed.com/SurviveIRS/MSSP/a1farmls.pdf

It instructs IRS auditors how to determine if a horse operation is a business run for profit or a “hobby farm”.

[OneTwoMany]

@RockinHorse

From a business perspective, quick flips are where the money is made. If you are going to take one horse at a time for a year or more, I think you might have a hard time garnering occasional profitable years to convince the IRS you are a business.

Completely agree with the above.

For the OP, this IRS publication is worth a read:

http://www.unclefed.com/SurviveIRS/MSSP/a1farmls.pdf

It instructs IRS auditors how to determine if a horse operation is a business run for profit or a “hobby farm”.

[ActNatural]

3 out of five years to show a profit is usually the standard. Horse “hobbies” get looked at hard.

Do you expect to make a profit on the horse after all is said and done? Purchase price, feed, training, etc etc etc? It that profit enough to be reportable?

If I were your CPA, I’d want to know numbers before I told you one way and another. Do you do your own taxes? The cost to set up an LLC and cost of extra expense to file your taxes might not be worth it. I’ll tell ya, a C corporate return will cost ya. Single member llc, not so much. Of course those expenses are deductible against income but how much income we talking here?

[ActNatural]

Another thought, keep track of your expenses and use them against the sale price of the horse when you sell. This is the matching principal. Matching expenses with income rather than showing several years of losses and then an income year. But honestly, unless you are buying real cheap horses and turning them for a huge profit, I’m not really sure doing the LLC, etc would be worth it.

[paw]

There are, as I recall, 9 factors in an IRS determination about whether such an undertaking counts as a business or is just a hobby.

From the case law, a lot rests on whether there’s another significant source of income other than the “business” - someone who is making (or married to someone making) a good income from another source has a much higher bar to overcome to be classed as a business than someone who is all in. It’s also important for the taxpayer to be treating the activity like a business (getting professional advice, cutting losses early on, and maximizing value as much as possible) - if, for example, you’re showing your horse yourself rather than having a professional show it, it likely counts more on the “hobby” side of the equation.

Having an LLC own the horse(s) may be useful for a variety of reasons, but the corporate entity is certainly not sufficient to defeat an IRS challenge.

[meupatdoes]

If OP is planning on doing this within one year then the expenses will go against the income in the same year, and if she makes a profit and declares income the IRS will have no problem recognizing its a business. However OP would pay ordinary income tax rate.

If she holds the horse for two years and capitalizes expenses in year one rather than deducting them as expenses, then she may get to pay capital gains rates. Capital gains rates are lower than ordinary ratrs so it woulf be worth having a planning discussion to see what expenses can be capitalized in the end, etc.

OP should consult w a small busines lawyer who specializes in tax to properly form her entity and do the tax planning.

[Jeepgirl311]

Thank you all so much for all your knowledge and advice! I am going to take this to my CPA and sit down with her and have a long discussion. I appreciate your time!

[MissAriel]

@Palm Beach

Does that make sense to do, and does it affect my A/O status? No, it does not make sense to do because it’s hard to find, purchase, train up, show and sell a horse and make a profit at the end. You will still be an amateur, but probably poorer for the experience.

I don’t know about the tax or legal implications, but this was my thought too.

[Displaced_Yankee]

@Jeepgirl311

Thank you all so much for all your knowledge and advice! I am going to take this to my CPA and sit down with her and have a long discussion. I appreciate your time!

Please report back and let us know what she says. I don’t think this is the first time this has been asked it would be good to get some solid answers.

[PNWjumper]

I have been doing what you are describing for many years.

I ran it as a hobby as long as I was only taking on one sales horse and had a full time non-horsey job. When I left Corporate America and upped the sales horses to 4 (plus everyone in the former “personal pool”) I turned it into an LLC and now run it as a business.

I would be lost without my very-familiar-with-horse-businesses CPA. Oh, who am I kidding? I am lost even WITH my horse-experienced CPA. Fortunately, he’s got it under control!

You can expect to get your amateur status protested with insane regularity. No one seems to understand that selling horses YOU OWN does not challenge that status. Also, seemingly no understanding that creating an LLC also does not challenge an ammy/AO status.

But yes, talk to your CPA. If yours is not familiar with horse businesses, I would find someone who is.