Industry Considers Implications of New Tax Bill

While there is little doubt that the expansive new tax bill, which cleared Congress early Wednesday morning, has the potential to bring about positive changes for owners and breeders in the Thoroughbred industry, the extent of the impact remains to be determined. With a number of angles to consider, National Thoroughbred Racing Association CEO Alex Waldrop spoke with the TDN Thursday afternoon and stressed that the bill will impact each individual differently, depending on the structure and scope of their involvement in the industry.

First and foremost, Waldrop observed that an increase in bonus depreciation, which allows for full first-year deductions on the purchases of yearlings, breeding stock and farm equipment, from 50% to 100% should provide an immediate boost to many industry participants. The bonus depreciation rate will be locked in at 100% through 2022.

“The bonus depreciation provision is probably the most significant development,” Waldrop said. “Unfortunately, it's not permanent, but it does provide significant benefit for both new and used property put in service by farms and owners. It provides the single most important benefit to owners, trainers, tracks and breeding farms. We've had bonus depreciation before. It's been phased out, but this re-establishes it for the next five years.”

In addition to the ability of farms and owners to utilize bonus depreciation, Waldrop said he believes it provides an ancillary benefit in encouraging a more healthy bloodstock trade.

“It facilitates ownership of breeding stock,” Waldrop asserted. “It means people are going to buy because they can depreciate the full cost of the yearling in the first year they put it into service. It's usually the 2-year-old year, so it makes breeding stock more valuable.”

While portions of the new tax bill undoubtedly have the potential to bring positive gains to the breeding industry, Waldrop said the NTRA's work is not done.

“We're still working on the three-year depreciation of racehorses,” Waldrop said. “In some cases, for taxpayers, it's better to write off over three years [rather than all at once]. We've convinced the Senate to put three-year depreciation in an extender bill. This is an opportunity to see if we can re-establish the three-year depreciation option for owners.”

If passed, such a provision could potentially be utilized retroactively to 2017, according to Waldrop.

Taken as a whole, Waldrop said that the passage of the tax bill will require a change in thinking as the industry moves forward–specifically for many ownership groups, which qualify as “pass-through entities.”

“The treatment for pass-through entities is going to need to be scrutinized very carefully by all sorts of industry participants,” Waldrop added. “Sole proprietorships, partnerships, limited liability corporations and S corporations. I would urge anyone in a pass-through entity to seek advice and planning immediately to make sure they're taking advantage of it. It's a bit of a change.”

Not all changes included in the bill represented positives for the industry, however.

“They eliminated like-kind exchanges for horses and equipment,” Waldrop said, adding that, in the absence of a like-kind exchange provision, many owners will be forced to either sell their horses in the short-term and realize ordinary income or hold the horses over a two-year period.

“The other issue we wanted to address was the two-year holding period for capital gain treatment for horses,” he continued. “The ability to utilize the like-kind exchange rules was helpful because of the two-year holding period.”

Waldrop said farm owners must also confront a limitation on the deductibility of business interest expenses in some instances. While there is a provision that allows farm businesses to not be subject to the limitation, property must be depreciated over a longer period in order to qualify.