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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Owners of world-class Thoroughbreds and their trainers now have one more rule to comply with and will face liability for non-compliance. The Breeder’s Cup has announced that the administration of Lasix will be prohibited for 2 year-olds at Breeder’s Cup races in 2012, and all race-day drugs will be banned for all Breeder’s Cup races in 2013.

Breeder’s Cup has not yet named the host site for the 2012 Breeder’s Cup, but the organization is considering Belmont Park, Churchill Downs, and Santa Anita Park.

Lasix is a drug used to treat bleeding in the lungs. Some people believe the drug enhances performance because studies have shown that horses who are administered Lasix on race day outperform horses who do not receive the drug.

More than 90% of all North American race horses receive a race-day injection of Lasix, and it is exceedingly rare here to see a horse taken off the drug while racing. However, no other racing jurisdiction outside of North America allows the use of race day drugs.

Most horses who come from overseas jurisdictions to run the Breeder’s Cup are administered Lasix on race day, which is believed to “level the playing field” in races where North American horses are also entered.

Some believe that the move by Breeder’s Cup will spur other racing jurisdictions to implement similar race day drug bans. U.S. Rep. Tom Udall of New Mexico issued a statement praising the move.

One thing is clear…unless other North American tracks and events also ban Lasix on race day for the 2012 season, the new Breeder’s Cup Lasix ban might present complications for handicappers who will have to take into consideration the impact of taking a horse off Lasix after a horse has been racing and training on the drug.

Get the full story from the Blood-Horse here, and from ESPN here.

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