By Len Green
A popular joke in the world of horse racing is, “it's easy to become a millionaire– just start out a billionaire!” However, it is obviously not that simple.
The Green Group has been working in the equine industry for over 30 years, advising people on how to successfully navigate this complicated business.
With years of experience working with many successful people in the horse industry, we have been fortunate enough to learn a thing or two.
In this article, we will focus in on general business and new tax updates.
The great thing about working with owners in the thoroughbred industry is that the majority of them already have a proven background as a successful business professional in some form or another.
To do so, they probably had a game plan that was similar to the following:
1. They saw an existing problem and figured out a way to solve it better, faster and/or less expensively.
2. They formed a team that included individuals with specific knowledge and/or contacts in that industry.
3. They outworked their competitors.
4. They monitored the trends in the industry as well as what their competitors were doing.
5. They thought “outside the box” and took calculated risks.
6. They continued to reinvent themselves.
7. They took advantage of all the special tax deductions accessible to them and paid the least amount of taxes allowable.
And yet, a large majority of people who lose money in the horse business do not follow the above.
Here, we'll focus on our strong point: #7.
New Tax Updates
First, you should ensure your accountant is aware of the various new tax updates.
1. If your horse operation is profitable, you may be eligible to reduce the income by 20%.
Under the same recent Tax Act, this new 20% Qualified Business Income (QBI) deduction is designed to extend tax relief to small business owners such as sole proprietors, shareholders of S Corporations, members of LLCs, and partners in partnerships, as the original proposed Tax Law changes only provided tax cuts to larger C Corporations.
QBI is the net amount of qualified items of income, gain, deduction, and loss from any effectively connected U.S. trade or business. REIT dividends and income from publicly traded partnerships qualify, though wages and portfolio items do not count.
This new QBI deduction allows business owners to deduct up to 20% of business income, subject to these limitations:
a. The deduction cannot exceed 20% of a taxpayer's taxable income exclusive of capital gains.
b. Income from specified service businesses (health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, or where a reputation is a principal asset) qualifies only when the owner's taxable income is less than $315,000 for a married couple or $157,500 for all others (then subject to a phase-out over the next $100,000/$50,000).
c. For non-specified service businesses, if an owner's taxable income exceeds the $315,000/$157,500 thresholds, then the QBI deduction is the lesser of 20% of QBI or the greater of (i) 50% of W-2 wages paid or (ii) 25% of W-2 wages plus 2.5% of the original cost of owned property.
2. The three-year depreciation for racehorses that expired in 2017, not allowing for a three-year write-off in 2018, has changed. You may now find it worthwhile to amend your 2018 tax return.
3. You should have someone take a look at any assets acquired in 2018, new or used, barns, fences, equipment, etc., to see whether you have maximized your depreciation and expense write-offs.
In many cases you can now write off qualified assets in one year!
4. Did you purchase any broodmares in foal? Are you maximizing the special deductions there?
I hope you found some of the information we have acquired throughout the years insightful and useful to your thoroughbred business. If you have any questions, please feel free to reach out to The Green Group to speak with us.