What are the tax implication of owning a racehorse? Initial investment a business expense or is it considered a capital gain/loss upon eventually selling the horse? What about purses and expenses? I live in Pennsylvania, USA. Thanks
Talk to your accountant. There are different ways to set up investment vehicles. Depending on your tax bracket and your expectation of a loss or a gain in the venture, one arrangement might be preferred over another.
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Income gets taxed. You can depreciate horses. You need to talk to an accountant about your specific state regulations, but federal is the same for everyone. Sorry you are in PA. 
As other have said discus with your accountant/tax advisor. But DO NOT use just any accountant. Find one that is very well versed in racehorse tax law. Ask for references, how many other racing/breeding people they work for. Other wise you will be paying to educate themselves. And this side of the tax law is not something the average accountant can learn in a matter of weeks, months.
Some/a lot of people set up a small LLC (pass through) business. Easy to do in PA and does not require paying an attorney to do. The Pa Gov website provides the forms to fill out. Registration cost was around $100 when I set up in PA 15 years ago.
Obviously Fed tax laws apply in every state. State tax law varies from state to state when it comes to horses, horse farms etc. PA is not very “generous” when it comes to business deductions/expenseing
New tax law enacted allows for 100% deprecation for purchase of yearlings, breeding stock etc.
Most racehorse owners are looked at as “hobby” ownership. So “hobby loss” rules and regs kick in. The IRS has very strict guidelines that define who/what is a “hobby” and what is a business. Those that claim/say it is their business have to prove it. Document how much time is devoted to the business each week, what their back ground and expertise is in the business. Like any well run business who do they use as their adviser/s, accountant, legal etc. Which is why the majority if not all of the big racing stables have full time Racing managers. Smaller operations can and do have a Racing Manager on retainer. Something I have done in the past. The “retainer” is based on the size and scope of the operation.
Any accountant worth writing a check to will know all of he above off the top of their head. They should NOT have to look it up, lol. When setting up your racing “business” and before getting together with an accountant. Have a basic list of how you are going to go about things. The amount of capital you plan on putting up. Short and long term goals. etc.
Unless you are very well versed. Using an adviser/Bloodstock that has been in the business for YEARS is usually always worth their fee. Esp if you plan on making a significant “investment”. I use the word “investment” loosely. Anybody that pitches racehorse ownership as an “investment opportunity” IMO should be kept at arms length. Yes, money can be made, serious, life style changing money can be made. Just about everybody in racing is looking for the pot of gold at the end of the rainbow. Very few find it, lol.
When people/clients have said to me “I want to invest in some racehorses” I back the conversation up very quickly. Change the word from invest to spend to money on racehorses. IMO the whole point of getting in the sport is to have fun. Win-loose or draw. At the end of the year/day hope to break even or close to. If handled correctly you should have had fun even if you lost money. People look at buying a boat as an investment. Do not rely on a trainer as your sole adviser. Their job is to train horses and be part of your team.
I have seen a lot of very wealthy people get into the sport/business thinking based on the success they have had in their business world. There is not reason why they can’t do the same in this “business” on their own. They end up paying for a VERY expensive education. It never ceases to amaze me.
Full disclosure. I have been an adviser/Bloodstock agent for many years. Like any “advisers” regardless of the widget there are good one and there are not so good ones and then there are ones who are more interested in lining their own pockets. There is no regulatory/oversight, licencing before a person can hang up a shingle. In this business “wisdom” comes with age and experience. Take any derogatory comments of someone, agent, adviser, trainer with a grain of salt. It’s the “nature of the beast” to knock others in hopes of getting your business. IME the vast majority of “mud” people sling at others is fill with half truths or has little to no “truth” when the full story is known.
This is the link to one of the industry’s “business” organisations. NTRA (National Thoroughbred Racing Association) Tax Center. Gives an overview of horse tax law.
I’d look for an accountant with experience in the equine field. 
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