I am horse enthusiast that has been working my job too much (good paying job to support my horse hobby and toning down the overtime) and am focusing on my horse riding and got a question on if there is a way to make my hobby in a side business for the sole purpose of tax deductions to help offset my horse expenses. Is it possible if I buy a horse, train it, show it, and sell it within x years that it be considered a business? Doing something like a car and doing trade ins after x years. People I work with go on about an LLC and have been skeptical if there is a way to make my serious hobby a tax deduction.
Talk to your CPA for the answer.
The internet can only share their own experience. It may or may not be relevant to your personal situation. Everyone is their own universe of life, income and tax factors that can affect the answer, and thatâs why you need the best local expert.
In your situation, I would come up with two or three business scenarios that you think are the most likely options you would choose. Do you earn income by teaching lessons, training other peopleâs horses, selling horses for yourself and/or other owners, some combination? Throughout the year, or seasonally?
With your expected expenses. Do you own your place of business, or are you leasing stalls and space. That kind of thing.
What kind of losses do you anticipate? Lessons not covering the expenses. Horse going permanently lame, must find a lifetime solution that doesnât cover the costs invested. Etc.
Line out each business scenario separately, with an expected ânormalâ year of activity, show your anticipated profit or loss. Tell the CPA that you are just considering options and none are the final answer for you, at this point.
If this business would be on your property, or someone elseâs, is a major factor in the tax accounting and also in the cash flow. That is a fundamental thing to outline for the CPA. If you own the location of your business, include all information on when you bought it, what you paid for it, what are the mortgage details, do you live on it, are any other commercial activities going on (hay production for sale, leasing, etc.), all the things re property that you own.
Good luck with a successful outcome! 
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Talk to a tax person and listen! They will know the details of keeping a business legal. They will know the details of accounting on what is or is not allowed in your State and with the IRS.
I donât think training and selling one horse at a time, possibly spreading it over more than a year before selling, could be called a business. BUT I am not a tax person, just my knowledge watching a self-employed husband run his business for many years. He hired his accounting work done thru a service, Simplified, Inc. Maybe they have branches in your area. Trying to save money doing it yourself doesnât seem to work well even using computer programs. As husband said, âI go to an expert when needed. Dr for illness, tax person for business financials.â
Our Simplified person attended work programs yearly to learn all the new tax laws and changes being put in place for the coming year. She could advise him on what changes he needed to take advantage of or quit doing. Buy new tools now that can be depreciated, old ones are depreciated out. Resell if still usable. How much inventory to keep on hand. They went thru his customer list to weed out unprofitable customers. He was spending too much driving time for the money he got, losing money not working, so he was not turning a profit.
A consultation on taxes will give you the correct information, true facts you wiIl need for this potential business. Not going with heresay advice, about setting up as a one or two horse training operation. Great advice above!
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If your business really is a glorified hobby, the tax department will eventually catch on after a few years of losses and audit you.
There are lots of little part time (or full time!) money earners around horses, but they all involve doing something other than ride your own horse for fun.
Some require training and skill, like farrier, body worker, nutritionist, clipping, braiding. Some require professional level riding ability like coaching and training horses. Some involve a cash outlay like selling a niche product, being a rep or distributor for a supplement or setting up a drop ship saddle pad and halter online store. But these are all jobs in the end, and will take time away from riding so no real win over working overtime at a proper job in especially if you get time and a half!
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One thing to keep in mind is that a job is a job - that is, you have to work at it, to be a job. A side business is the same thing, itâs a job. Youâll have to do time management to demonstrate your effort, and actually do work and show outcomes. Itâs work.
Iâm curious as to why you put quotes around âside businessâ in your title. That doesnât look as if you are considering it to be a real business. Thatâs a problem, because the IRS is all over people claiming they have a business when they are not operating it like a business.
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This.
Definitely talk to an actual tax person because unless things have changed, horses as a tax write-off is a major red flag to the IRS, especially if theyâre geldings and youâre writing off tack and show expenses. In fact, I believe itâs no longer allowed unless your equestrian endeavors are your profession or a major source of income. Otherwise thereâd be countless horsewomen forming LLCs and configuring tax write-offs.
I used to write off my horses and showing expenses while I had a career in the horse industry. After about a decade of doing that, I was strongly advised by my tax accountant to stop because he felt it was only a matter of time before the IRS cracked down. About the same time, my trainer friend was audited and it was a major headache for her and her husband. She had to justify and account for everything, especially since the costs of maintaining her own sale horses were comingled with her clientsâ horses. It was a mess. So I figured that was my sign! 
So please, before considering this further, get real face to face advice.
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Actual CPA here, horse person and have many horse industry clients. Disclaimer: only a professional who is familiar with YOUR situation can properly advise you.
But generally speaking: what you are describing is tax evasion.
For any business, but particularly one running a consecutive loss OR is in horses, you must prove to the IRS that you have a profit motive and you are conducting your business in a way that supports that (such as charging market rates for services, etc). And there are standards and precedents for this. The IRS sets a high bar for horse businesses and board and showing are HOT expenses to claim. You may be hit with an accuracy related penaltyâŠon top of the tax you would have owed.
There is no tax deduction for trading in your car every 3 years.
A lot of my clients (even non horsey) who are earning W2 wages ask me âHow can I reduce my taxes?â For the general non-business owning person, these are the general options:
- make less money
- max out your retirement options at work (401k etc)
- max out your HSA contribution if qualified
- deductible IRA contribution if qualified
- contribute to a 529 plan/college savings account (state level, state dependent)
- capital loss harvesting (see item 1)
Donât get me wrongâŠI love my horse clientsâŠbut it is a high risk area to be involved in.
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Like Displaced Yankee posted - you have to have a business plan and be able to prove a profit motive. That means you cannot co-mingle your âbusinessâ expenses and your personal ones and most people do not really have the self-discipline to do this and support separate checking accounts and business records. You do not have to actually show a profit but, if audited, you need to show why you thought you were going to be profitable and the steps you are taking to reverse your losses. The bookkeeping might show you that your hobby is a major money drain and help you look at it from a business perspective though, and that is not a bad thing.
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Displaced_Yankee has it right - what youâre talking about is called the âhobby lossâ issue in equine law. Hereâs a reasonable overview: https://www.eqgroup.com/library/irs1/. Itâs very hard (though probably not strictly impossible) to write off an operation where you only have one horse and you also have another source of income.
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First, Displae Yankee is right.
Second
A- The IRS has very specific rules about âhobby lossesâ and horse related buinesses. They have (or used to have) a whole booklet on farmnig income, which has sections focused on horse related activities, and what you have to do to show that it is a business and not a hobby. Iâd suggest you find and read that booklet (probably available on line).
B. When you trade in a car, you usually selll it for less than you bougght it for (though there are some exceptions for âcollectiblesâ). With a horse, it is quite possible to buy a yong horse, train it, and sell it for more than you bought it for. But the expenses might exceed that profit. So it isnât really analogous. If you buy a house and have to sell it at a loss (as many people did in the housing/financial crisis) you donât generally get to deduct that loss. And, if you sell the house at a profit, you donât get to deduct all the expenses for the years you had the house.
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Another thing to be careful of is the IRS going so far as to classify a âbusinessâ as an attempt to defraud the tax system. I honestly donât know what can trigger that, but itâs something to be aware of and ask the CPA about.
The other side is buying, training, and selling at a profit, and not reporting the profit correctly. Something else that can trigger the IRS.
The tax laws around horses donât always seem fair. But they are what they are. It can end up being more costly not to follow them.
Thanks for the insights. Still will ask a tax specialist but had the feeling that it isnât really a viable option. Iâll probably have to have enough money set a aside in fixed income investments to cover the second horse. My current horse is 25 y.o. but still going amazingly strong. Focused on getting a second horse next year and when my current one is retired then I might continue with two horses. Hoping that with two horses there was a way to figure out some sort of business.
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Not an accountant but my first thought was a comment my brother made when I rented his Airbnb - he had not had it up on the site all year because he was away and was glad I (through my insurance) was renting it because it would then show money coming in to offset all the money he put into it (and wrote off on taxes) the year before.
His comment was something like you need to show profit every once in a whileâŠI think depending on the business, if you show a loss in your first year or sometimes have a year at a loss that isnât a big deal but a loss two or three years in a row then a little bit coming in but no real profit over those years of losses is a red flag.
I have heard something similar,that you need to show a profit 2 years out of 5. But I now think that what really counts is that you have a serious plan and intention to make a profit in te long run. For instance, Amazon (the company) lost money for the first 10 years, but nobody questions that Amazon is a business, not a hobby.
I agree, I think no profit is a red flag but not a show stopper. There is also the difference between income but no profit and no income. Amazon probably had some incorme and could show warehouses, employees, some customers etc.
My brotherâs Airbnb would just show âextra house on the property that had upgradesâ. Not exactly the same⊠Now, having actual customers (renters) helps the scenario. When I rented it, they were looking at a full year of no rentals so having one (especially one that was there for 2 months) looks good for the IRS
I think selling one horse every couple of years would be the same scenario - just money spent on hay, feed, shows, etc. and no customers would be a big red flag.
Well if you lose 100k, 105k and 75k and then you have a 5k profit the next year, the IRS is not going to be convinced this is not a hobby loss. Unless you start to have a profit every year. I never specialized in tax but nerd that I am - I would read the tax cases in The Journal of Accountancy if they concerned farms and horse farms especially. Some pretty aggressive tax positions if I say so myself, on the part of the taxpayer in these instances. And a friendâs wealthy sister that was playing the boarding game and trying to write off all of her personal horsesâ, expenses got a visit from the IRS. It was very stressful and she got hit with a large tax bill. I canât believe her CPAâs let her do this, but maybe she was going to do what she was going to do. Still if you want to play with this red flag you need to read the regs and read some tax cases to see where other people got in trouble with the IRS before you jump in.
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Are you talking about selling âaâ (1-2 or 3) horse(s) probably one at a time vs the numbers that it takes to be a business??? Whereâs your buy market and your sell market?
Thereâs a 7 (?IIRC) factor test as to whether your âside hustleâ is an actual business or a hobby according to the IRS. Factors include (but are not limited to) whether youâve got a business plan, if there are multiple horses, if you co-mingle funds, and if you have another source of income thatâs primary. Please consult an equine lawyer or tax attorney - there are lots of instructive cases out there (spoiler: most times itâs considered a hobby, not a deductable buisness).
For anyone who is serious about starting a business of this kind â I am shocked when people co-mingle funds, using their personal bank accounts as business accounts. Not sure what they expect, plus it makes bookkeeping more difficult, imo.
If anyone does want to set up a business, spend a little money in banking fees to do it properly. That is a big clue to the IRS that it is a business, not something else. Open a business checking account and keep all business funds into it separately. Think about keeping excess funds in a business money market account or whatever your bank offers.
Often you can do this in the same bank as your personal accounts. But if you need to do it at a different bank, that is still better than co-mingling.
Incurring some not-so-exorbitant extra fees to do things in a business-like way, especially in setting it up, is a major help to substantiate that this is a business. And, spending the time to administer the business financially and otherwise separately from oneâs personal life also demonstrates the intent to keep this a business.
If that seems like âtoo much work and unnecessary feesâ â then maybe it isnât a business.
Businesses require administrative work and time. Businesses have their own administrative expenses. If someone does not want to spend the time and funds on that â it may not be a business.
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I know a few people who have turned their hobby into a business, successfully. Two have even sold their âhobbyâ business for a nice profit! And by that point were frankly relieved to have it off their hands.
I know also one or two who could have made their hobby into a business, but have chosen not too, for good reasons.
When a hobby becomes a business, it can change the nature of oneâs interaction with it. It can become work, not so much a hobby any more. With pressure to perform, to meet deadlines, to accomplish specific things. And much of the hobby-ness of relaxation and diversion may not be so enjoyable any more.
Thinking about the change on your life and your participation in the hobby business can help decide if this is really something someone wants to do. If it will truly be worth it, financially, and in oneâs life.
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