By Len Green
Ever since I have been writing this column for the TDN, I receive calls and emails asking a variety of questions about the Thoroughbred business. The ones that relate to very specific facts and circumstances, I answer directly. When the questions are applicable to a broader audience or have been asked multiple times, I feel it's best to provide the answers in this column.
Q: I remember my accountant telling me that if I went to the September Yearling Sales and bought yearlings to race, I could not take a tax deduction because the horses I purchased would not race until they were two years old (a year later). Is that still true?
A: No. Recent tax legislation now allows yearlings purchased with the intent to race to be eligible for an IRC §179 tax write off in the year purchased.
Q: I hired an agent to shortlist the upcoming yearling sales. I know the fee is traditionally 5%, but is that tax deductible?
A: From my experience, yes, the norm is 5% of the purchase price. Some owners also pay the agent per diem for travel, lodging and meals. If the agent is also the trainer, the fee may be adjusted because the trainer is ultimately going to campaign the horse. Regardless of how you pay the fee, it is tax deductible.
Q: I want to get started in the racing business. How expensive is it and how do I learn more about it before I spend a lot of money?
A: It is a great business but there definitely is a learning curve and it can be expensive. Also, this is, for the most part, an unregulated business so I encourage you to learn as much as you can before you invest large sums of money into it.
Some suggestions to learn more about the industry:
*There are organizations (i.e. TOBA, NYTHA, etc.) that hold periodic seminars. The seminars feature Question and Answer Sessions with trainers, owners, consignors, insurance people, etc. I have spoken at a number of these sessions and they are very informative.
*There are organizations like the Empire Racing Club in New York who, for a small initiation fee, give you intimate access to communicate with top trainers, owners and jockeys. They also have seminars throughout the year and regular newsletters.
*There are syndications and partnerships where you buy a percentage of a horse or a percentage of several horses.
Let us say you wanted to spend $100,000 to buy a horse at auction. In some partnerships, $100,000 could give you a 10% interest in four or five horses that the partnership bought for $800,000 ($800,000 x 10% = $80,000) plus have $20,000 applied to the upkeep of the horses. The mathematical chances of having a winner with four or five horses may be better than owning one horse. You also get the advantage of learning from the general partner and the other partners in the horse.
Q: I am in a horse partnership and my tax form (Form K-1) reflects a loss. My accountant says because I am a Limited Partner, I cannot deduct the losses until I show a profit from the horse operations. Is that correct?
A: Your accountant is correct if you are a Limited Partner and you are “not active,” then the loss is classified as either a Passive Loss which can only be used against Passive Gains or worse, it is a Hobby Loss which is not deductible at all!
Good news: If you can substantiate that you are active in the horse business, then the loss becomes an active loss and it can be deducted against all your other sources of income.
Q: In 2018 I had a loss of $600,000. I am married and my accountant told me if I had a similar loss in 2019, the loss was limited as to being tax deductible to $500,000. Is he right?
A: Entering 2019, that was the rule. Then COVID-19 came along and changed our lives. The 2020 CARES Act also changed the tax law to help taxpayers. One of the retroactive changes was that for 2019 and 2020, there is no longer a limitation on the amount of losses from an “active horse operation.” Also, in the CARES Act there is a provision that if your active horse operation creates a loss for 2019, that loss can now be carried back to a prior year and produce a tax refund for the year it is carried back to.
Q: I own a farm and I have several mares on the farm. I usually sell the foals. Due to travel restrictions of COVID-19, I will not be able to sell the foals. I needed money to operate so I applied for and received a PPP loan. I understand that in order to have the PPP loan forgiven, I would have to show I paid wages equal to 75% of the loan and the measuring period was until July 15, 2020. I had to lay off some of my help and my family is doing the work. It does not look like I am going to meet the wage requirements by July 15, 2020.
A: Good news: The CARES Act which contains the PPP loan and the forgiveness provisions has been changed once again. Now the percentage is 60% to spend on wages and 40% on utilities, rent, etc. Also, the measuring period has been changed from July 15, 2020 until December 31, 2020.
Q: I used to commute to my office, and I know that you cannot take a tax deduction for doing this commute. Currently I am working 100% from my home office. I want to buy or lease a new vehicle to use exclusively for business related activities (i.e. visiting suppliers, vendors, etc.) From a tax point of view, which way do I get more tax benefits this year?
A: The answer is, depending on the type of vehicle, you will likely receive a greater tax write off this year if you purchased the vehicle versus the monthly lease payments over that same time period.
Q: Our main business is consigning horses for sales. The majority of our income will now come from September through November. We hire a lot of part time people to assist us at the sales and these people now work for us every year. Each of these people would make less than $10,000. I did not apply for a PPP loan because I did not think I could qualify. Is there another government program that would work for me?
A: Yes, you could apply for the Employee Retention Credit. Eligible employers are allowed a credit against payroll taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee up to December 31, 2020. To be eligible, you must have gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019. Eligibility will end before December 31 if your gross receipts rebound to more than 80% of receipts for the same quarter in 2019.
Keep your questions coming to [email protected] and I will be happy to answer them for you.