Side Business Planning

[luckycricket123]

For those that run equestrian businesses in addition to a full time job, how did you decide how to structure your business in terms of legal structure and taxes?

My farm has been slowly becoming more of a business rather than an expensive hobby and I am wondering if I should create an LLC (or something) and how I should handle my taxes.

Right now, I’m running it as a sole proprietorship. I have the appropriate insurance set up for my equestrian activities, but I think as my side hustle grows, I would want to set up some structure to limit my personal liability and potentially offer some tax benefits as I am generating more farm income and working towards becoming profitable.

I’m not necessarily looking for advice specific to my situation from people here (although I’m always happy to listen to any suggestions or lessons learned) I think it would help to hire some sort of business consultant who is familiar with horse farms, but I don’t even know where to look. How have other people gotten started with this?

[Displaced_Yankee]

Not a lawyer…but a CPA.

Generally, an LLC is a legal entity. From a tax side: a sole proprietorship can be an LLC, a partnership can be an LLC or an S-Corp can be an LLC. An LLC does not change your tax reporting requirements but can provide a form of legal protection, separating YOU from your business. The important part is that the LLC and your personal stuff are separate. Separate insurance policies, separate bank accounts, no mixing of funds. Small businesses often get into trouble where their personal and business finances are intermixed and “pierce the corporate veil”. It may not sound like “corporate veil” applies to you…but that is the term that implies that your business operates separate from your personal finances (in layman’s terms)

On the tax side (my area):
You have a few reporting options

1. Sole proprietorship (Schedule C): Probably what you are doing now. Your business income is taxed at your ordinary tax rate + both sides of medicare and and social security tax (aka self employment tax) which is 15.3% on your business income only.
2. Partnership (Form 1065, provides a K1 to you): essentially the same as above, but if you had a partner on the LLC, you all split the income and you are only taxed on your portion of it.
3. S-Corp (Form 1120-S, provides a K1 to you): Income flows through to you at ordinary tax rates, NO self-employment tax. You are required to take a ‘reasonable’ salary as an employee. You pay the employee side of medicare and social security tax (7.65%), but the LLC pays the employers side (7.65%) and gets a tax deduction for that. Companies see the most benefit of converting to an S-Corp when their taxable net income is about $40K-$60K per year.

These are all generalizations. In the world of horses…the above 3 options should be eligible for the QBI deduction (20% off of biz income) and the self employed health insurance deduction (for ALL family members on the plan).

4. C-Corp (Form 1120): Net income is taxed at corporate rates. The company is responsible for all taxes and no income is taxed to you personally. You lose the QBI and SE health insurance deduction…which has been a huge help for many of my clients in the last few years.

As always…consult your own CPA and lawyer. I have tried to give you the general ideas!

[clanter]

we went C-Corp, it worked best for us at the time

We had a very good CPA and Attorney who knew farm/ranch tax laws

[luckycricket123]

@Displaced_Yankee

Separate insurance policies

Thank you for your detailed post! I own my farm and live on the property. My home insurance and farm insurance are one combined policy. Is this something I’ll need to separate?

[luckycricket123]

Would you mind sharing how you found your CPA and lawyer?

[clanter]

@luckycricket123

Would you mind sharing how you found your CPA and lawyer?

Not much help as they were clients of my company, I took care their homes and offices access systems, we all had interest in horses

I was doing a lot of access control work for various state and federal agencies on sensitive projects and prisons

[clanter]

@luckycricket123

Thank you for your detailed post! I own my farm and live on the property. My home insurance and farm insurance are one combined policy. Is this something I’ll need to separate?

We had separate policies as the C Corp leased to land and building from us. The business had its insurance and we had our homeowners for the dwelling.

There were very clear points of separation between what was business and what was personal.

We ran this for about decade, never had an issue with IRS

[Displaced_Yankee]

I am not an insurance person but I am going to guess yes. Unfortunately, I am not sure what that entails.

It may be a good time to sit down with your agent and figure out who, what and where is covered under your policies.

There are a few equine-specific insurance companies that may be able to help. I have worked with Blue Bridle Insurance for horse show insurance and they are excellent.

[FitToBeTied]

As people noted above their are multiple business entity formations you can use. The main thing I will emphasize is true separation of personal and business. Taxes are a main reason for this. secondary that most people don’t think about is insurance and law suits. It won’t matter what business entity formation you use if some can show that your personal and business are so intertwined as to really be one entity.

[luckycricket123]

Thank you to everyone who has replied! I do plan to follow up with an attorney and a CPA, but my current CPA is not very experienced with horses and farms, so I was hoping to ask a few more questions here as well.

I actually do use Blue Bridle as my insurance for home and farm. They have been very helpful so far with any questions I’ve had about my coverage so I will follow up with them directly about my home/business split. I know I am not the only personal who lives on their farm, so at least we shouldn’t have to reinvent the wheel to figure this out.

How do people handle horses that are mixed for personal and business use? I feel my sales horses are pretty cut and dry, but I have a few horses on the farm who either do not generate any income or do not generate enough to cover their expenses. I feel that if I used my LLC exclusively for sales horses, it might prevent issues with the IRS, but I would still worry about my liability if I was to be sued.

[clanter]

@luckycricket123

How do people handle horses that are mixed for personal and business use?

we boarded our personal horses at the C Corp as any other clients would, paid regular board rates … but of course we got that back because we had the costs built into the lease agreement which the farm paid monthly BUT we made sure to write that check each month paying the farm the board

[Displaced_Yankee]

@luckycricket123

How do people handle horses that are mixed for personal and business use?

Ah. This is where people get into trouble with the IRS. The IRS is suspicious of people expensing their large, expensive pets as a “farm” or “business” deduction. Think of a horse farm as IRS catnip.

@clanter has the truly cleanest solution where the personal horse is a client of the corporation and pays full rates for board, training, etc with receipts.

If you are not going that route, you should not deduct any farm expenses related to your personal horses. So if you have 10 horses on your farm and two of them are ‘personal’ horses you can only deduct 80% (8 biz horses/10 horses total) of your expenses such as feed, hay, mortgage interest, property taxes, general supplies, insurance, etc. You essentially can’t feed your personal horses and deduct that from your taxable income. Costs incurred on sales horses and boarded horses are 100% deductible…but the onus is on you to prove how much of your costs are related to your business income.

All of this relates to taxable income…not necessarily cash flow or book income. Feel free to PM if you run into more tax related questions!

[TheHunterKid90]

@Displaced_Yankee does a great job explaining this.

You need to be able to show profit in your business in the first 5 years. And keep in mind a horse business is a higher audit risk than other businesses. Too many people trying to write of their hobby.
I work for a breeder who is also an accountant. He has been audited 11 times in 32 years. The IRS wad dying to disprove that it was a legit business…fully convinced he was trying to write off his daughters hobby.