By Len Green
We are pleased to report we received a number of favorable responses to our first question and answer column. We also received several new questions which we are addressing at this time.
From a tax point of view, what should we do if the horses we bought to pinhook can now not be sold?
As a result of the threat of COVID-19, many pinhookers are having second thoughts.
Our normal transaction was to buy yearlings in 2019 for resale at the 2-year-old sales in March and April 2020. For tax purposes, most of us treat the purchases as inventory and would not usually take a tax deduction on our 2019 tax returns.
When Keeneland announced it would cancel its 2-year-old in training sale, Fasig-Tipton followed suit with the decision to cancel the Apr. 1 Gulfstream select 2-year-old in training sale. OBS has also adjusted its schedule.
With these auctions now off the calendar and the continued uncertainty of the virus which has no expiration date, many consignors are changing their sale strategies.
What Alternatives Are Available
- Some could move their horses to later sales like OBS–if they're allowed to go ahead. The problem is whether the economy is going to rebound for these auctions where there will be over 1,000 horses to sell.
- Some are trying to sell their horse privately.
- Some will make the decision that the market doesn't represent fair market value and decide to race the horses.
If you choose to race the horses, you may be in a position to receive some tax benefits that you could realize on your 2019 tax return.
Check with your tax advisor or contact us for a discussion on whether you qualify for a tax deduction in 2019.
I plan on buying a 2-year-old at one of the Florida sales, when sales resume or continue. What are the rules as far as Florida sales tax?
The general rule is that there is a 6% sales tax that applies to the purchase of a horse. However, there are some exceptions:
- No sales tax is due when the sale is by the original breeder; or
- If the purchaser delivers the horse to a licensed common carrier and the common carrier delivers the horse to a location outside the State of Florida, the sale is not subject to Florida sales tax.
Should I insure some or all of my horses and if the answer is yes, what criteria do more successful owners use to decide on the coverage?
The general rule is it depends on the owner. I can, however, give you some general guidelines that a large number of owners use.
- They do not insure the horses until they reach a certain value.
- They have a deductible—that is they self-insure up to a certain percentage. In our case, we use 20%;
- Constantly review your coverage. For example:
a. If a horse wins, places or shows in a graded stakes race, the value of the horse increases and you should increase
the insurance coverage;
b. Insurance companies will usually only pay you based on the value of the last race. An example would be you
purchase and insure a horse for $100,000 but it ends up
running in a $50,000 claiming race, you would only get
$50,000 if the horse dies.
If I am a trainer and I am racing in New York State, are there special rules covering wages and overtime that the Department of Labor (DOL) is asserting?
We have all read about the fact that Kiaran McLaughlin is leaving the training ranks and becoming a jockey agent. We also see that Gary Contessa, after 35 years of training, is leaving the ranks. They are just two examples of how DOL audits have affected trainers' businesses.
For most businesses, compliance with the DOL rules on wages and overtime is comparably simple–there are time clocks or similar devices and making the process of how many hours the employee has worked easier.
We also know that for grooms, hot walkers and similar personnel who live and work at the tracks, there is no simple way to ascertain the number of hours that they worked. It is very easy for a groom or hot walker to get in at 4 am and finish their chores by 10 or 11 am. In many cases, those people are also hanging around the track, especially if a horse they are involved with is racing. In many cases, the DOL says they are there all day and working and assess the trainers for those hours as if they represent working hours.
Suggestions to Trainers:
- Adopt some type of approved record keeping protocol to avoid problems, especially with the DOL.
- Prepare schedules that reflect when your grooms or hot walkers work overtime and then tie them into when those horses raced.
- Examine how you are reflecting stakes bonus payments when they are paid to grooms and hot walkers.
Since we have been involved in a number of these examinations along with attorneys who specialize in this area, our recommendation to trainers is to examine their books and records and come up with a game plan in case the DOL investigates them.
Have a question? Email [email protected].