100% Bonus Depreciation for Horse Businesses through December 31, 2011

Forbes.com featured a story this week, entitled “Tax Deductions for Yearling Thoroughbreds”, that may be of interest to many horse businesses. To read the article, click here. Many Thoroughbred racing industry experts are quoted in the article, including Kentucky equine lawyer Joel B. Turner, whose guest post was featured on the Equine Law Blog this Tuesday.

The focus of the Forbes article is the applicability and effect of the 100% bonus depreciation feature of the Tax Relief Act of 2010, and its potential tax benefits to qualified horse businesses. As the Forbes article suggests, some race horse operations who buy yearlings in 2011 may be able to deduct 100% of the yearling’s purchase price in 2011. 

Before the bonus depreciation feature of the Act became effective on September 9, 2010, the percentage of depreciable basis allowed as bonus depreciation on qualified property was only 50%. This 50% depreciation percentage will apply again in 2012.

The potential tax savings offered by the Act for the 2011 tax year are significant for qualified horse businesses. Walt Robertson, Keeneland’s vice president of sales, indicated in the Forbes article that the Act may have positively affected sales activity at the Keeneland 2011 September Yearling Sale. 

It is important to note that the Act does not refer to specifically Thoroughbreds, yearlings, race horses, horses or livestock. The Act provides 100% bonus depreciation for all “qualified property”. In general, “qualified property” is tangible personal property and equipment purchased for use in a business operation, as long as certain conditions are met. For horse businesses, qualified property could arguably include horses, trailers, trucks, tractors, ATVs, and other horse/farm equipment.  Among the conditions that must be met are the following:

1) the horse / equipment’s original use must begin with the taxpayer (i.e. horses that have not begun training; new equipment); and

2) the horse / equipment must be placed in service after September 8, 2010 and before January 1, 2012.

As many of the experts quoted in the Forbes article indicate, the Act does not provide an “easy write-off”. For starters, taxpayers wishing to avail themselves of the 100% bonus depreciation must be able to prove that they are in the “horse business” and that the property was purchased for said business. This element may pose difficulties to taxpayers who have not shown a profit in their horse business for many years. Further, purchasers of fractional interests in racing syndicates are generally considered “passive investors”, and therefore may not see any tax savings through application of the Act.

There are other considerations that come into play to determine whether the 100% depreciation is available, such as whether the taxpayer borrowed money to purchase the horse/equipment through an LLC or other entity. 

Horse businesses who purchased or will purchase new horses or equipment in 2011 should consult a CPA or attorney who has expertise in the equine industry to determine the possible applicability of the Act to their newly-acquired property.

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Comments (4) Read through and enter the discussion with the form at the end
Paul Husband - October 20, 2011 5:12 PM

The American Horse Council Tax Bulletin recently had an article about 100% depreciation applied to horse purchases.

As long as the buyer can place the purchased property in service during 2011, 100% Bonus Depreciation is a tremendously beneficial provision of tax law for horse business owners.

Dessa Bergquist - October 21, 2011 10:59 AM

Is "Placed into service" for a horse considered to be at time the horse starts training or time the horse begins racing or competing?

Alison Rowe - October 21, 2011 3:06 PM

Thanks for the reminder, Paul! I just updated my membership info today with the AHC and found your bulletin on the 100% bonus depreciation. Great information.

Paul Husband - October 21, 2011 3:55 PM

I am pasting below an excerpt from the article that I wrote and published in the American Horse Council Tax Bulletin. I address the issue of "place in service" in it. I would add that while I continue to believe that the better view is that training by a pinhooker would not constitute placing a horse in service, there is no case law or IRS written advice which supports that interpretation. An IRS auditor could take a contrary view. Therefore, a buyer is safer by buying a yearling - or other horse that has not previously been trained or used for show or breeding.

Excerpt:

"Horses which have not previously been used are eligible. The term “original use” means the first use to which the property is put. Therefore any horse that has never raced, been shown or bred is eligible. However, “original use” means first use of any kind. For example, a 3 year old filly which has raced, but not been bred, would not be eligible for 100% Bonus Depreciation if purchased off the track for breeding use. Any change in use will cause property to be ineligible for 100% Bonus Depreciation. If a horse has been used as a racehorse and is then sold as a show horse, even though the use as a show horse is a first use as a show horse, the previous use as a racehorse will disqualify that horse from 100% Bonus Depreciation.

The “placed in service” requirement is fairly obvious for assets like a new truck or farm equipment. However, the IRS has not ruled specifically concerning when a horse has been “placed in service”. There may be a fine distinction between first use for “new property” and a horse being placed in service for depreciation purposes. For decades, all leading authorities have opined, and in practice, the IRS has agreed, that placing a racehorse or show horse in training constitutes placing the horse “in service” for purposes of depreciation. However, if a breeder or even a pinhooker places a two year-old racehorse into race training before a 2 year olds in training sale, this training will presumably not constitute a use that will disqualify a horse from being “new” property, to be originally used by a buyer. The distinction may be that the breeder or pinhooker is merely preparing the horse for its first use after sale, while the buyer is taking action for the purpose of using the horse as a racehorse. There is also law which holds that an asset merely being ready and available for its intended use constitutes being placed in service. The better view is that training as preparation for sale by a breeder or pinhooker does not disqualify a horse from eligibility for 100% Bonus Depreciation. This view implements the intent of Congress to stimulate purchases of property for initial use in business. Any contrary view would be contrary to Congressional intent."
© B. Paul Husband 2011

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