A newsletter by Carolyn Miller, CPA
2436 FM3164 Gainesville, TX, (903) 429-0095
http://www.equinecpa.net
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Equibiz - bringing to you the latest income tax developments, tax
tips and software news related to the horse industry.
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Happy New Year to All
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TAX NOTES
Changes for 2001:
Mileage Rate:
The standard mileage rate for 2001 is 34.5 cents a mile for all business
miles.
This is an increase of 2 cents a mile over the 2000 rate of 32.5 cents a
mile.
The IRS cites increased fuel costs as the motivation for the increase.
Lower Capital Gains Tax.
The maximum rate of 20% (10% for individuals in the 15% taxbracket)
long-term rates still apply for assets held more than 12 months (24 months
for horses held for draft, breeding or sporting purposes). However
a new
lower rate of 18% (8% for individuals in the 15% tax bracket) now applies
for assets held more than five years. If your not in the 15% bracket
, the 5
year holding period and reduced rate only apply to assets acquired after
Dec. 31, 2000. If you are in the 15% bracket, you may makea special
election
to treat pre Jan 01, 2001 property as acquired on Jan 01,2001 and be eligible
for
the new five-year holding period. In order to make this election you
must treat the
asset as if you sold it on Jan 01, 2001 at it's fair market value,and therefore
pay the
capital-gains tax on the profit from sale. Unfortunately if the value
of the asset has
decreased, you're not allowed to recognize your loss.
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Q & A
This is your space to ask Carolyn questions on equine income taxes, equine
software
or general equine business questions. Carolyn may be contacted at the above
address,
or by email: carolyn@rocknberry.com.
All readers questions will be answered directly, and
those of most interest to readers in general will published in this column.
Q. . Like-Kind Exchange Tax Law
I Purchased an AQHA 2-year old reiningprospect, leaving her with the
trainer for resale.
Her purchase price was 11K. She is priced at 30 to 40K currently.When she
sells, can I
do a like- kind exchange, thus not having topay capital gains on the profit?.
A. You can do a like kind exchange with horses held for breeding purposes,
show horses
and racehorses, but not for horses held for resale.A horse held for resale
is a horse that
you are not depreciating butis held primarily for sale to customers in the
ordinary course
of the trade orbusiness. To qualify as a like kind exchange you need
to trade her for another
mare or mares. A gelding or stud would not be considered a like kind
exchange. Also, the
mare should be another performance or breeding horse, trading a reining show
horse for a
race horse may not be considered a like kind exchange by the IRS. If a horse
owner trades
a horse for another horse plus cash in a like-kind exchange, the cash
portion of the
transaction is taxable.eg. Assume that the mare in the question
above was held for showing
purposes and was not held primarily for resale. If the owner trades
her for another reining
mare and $20,000 in cash, only the $20,000 in cash will be
taxable. If he later sells the mare
he took ontrade, the mare's tax basis will be the $11,000 he paid for the
original mare.
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On the Web...
Do you ever feel like you havebeen surfing forever, but still haven't found
what you're looking
for? Here are some links that may make yoursurfing a little more
productive.
One of the most useful search sites for horse related information is
http://www.haynet.net.
Here you will find thousands (at last count they had over fourteen thousand)
of links to just
about every kind of equine site imaginable. The site is laid out so
that you search by category,
and then sub-category until you find what you are looking for, or you can
use their search
feature listed at the bottom of their home page.
Another website worthwhile visiting is:
http://www.clipclop.com. Along
with news articles,
classified ads, a shopping mall and other various features, clipclop.com
has a very good
"Ask the Expert" section. In this section you can ask questions and
have them answered
by an equine professional. Categories within "Ask the Expert"; are
health, where you can
ask a vet, dentist, equine chiropractor, natural horse vet, farrier and a
nutritionist your equine
health questions; training, where you can ask a trainer specializing in your
discipline a question;
legal, an attorney will answer your equine law questions; and accounting,
a CPA (yours truly)
will answer your accounting and tax questions. They even have an equine
appraiser who will
give you an estimate of the value of your horse!
If you are looking for equine software, check out my webpage:
http://www.equinecpa.net/horsesoft/software.html,
where I have reviewed several equine and
accounting software packages. You may also purchase software
at this site, at very competitive
prices!
Have a Web Site You'd Like to Share? Feel free to email me website
addresses that you'd like
to share with other readers, but please, only websites with content related
to equine business,
small business or taxation.
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Important Dates to Remember:
By January 31: Deadline for 1099's, File form 943, Complete W2's, File form 940
By February 28: File forms 1099 with form 1096,File forms W2 with W3
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In the Courts:
Quarter Horse Breeder Winsin Tax Court: (Strickland & Strickland t v.
Commissioner,
T.C. Memo2000-309, (Judge Colvin)
One of the more recent equine cases to come through the courts, is one in
which I had a personal
interest; I acted as an expert witnesson behalf of my clients in this
case. Happily, the judge decided
in favor of the taxpayer!
The IRS audited the taxpayers' 1995 & 1996 tax returns, and disallowed
the losses from the horse
activity ruling that the activity was not operated with the intention of
making a profit. The taxpayers
took the IRS to tax court. The petitioners, a husband and wife, started a
Quarterhorse breeding,
showing and selling operation in 1993, on their 88 acres in Morgantown,
Indiana They enlarged
their old barn, built a new barn and arena as well as an office. The petitioners
consulted with their
CPA for help setting up records, sought advice from successful breeders about
which bloodlines to
acquire for their horse activity.In 1995, to help generate more income, the
petitionerss also started
boarding horses seeking the help of an attorney to prepare the boarding
contract. During the years
in question the wife worked full time on the farm, and her daughter also
spent considerable time
working on the farm.At the end of 1995 they had 11 horses, and at the end
of 1996, 12. They
had considerable success in 1995 showing their Quarter Pony, Colorful Conclusion
campaigning
her to a reserve national champion title.
The petitioners had the following income and expenses from their horse activity
for the years
in question:
| 1995 | 1996 | |
| Income: | 2,611 | 13,275 |
| Expenses: | ||
| Depreciation | 12,790 | 14,036 |
| Other | 20,819 | 29,189 |
| Total Expenses | 33,609 | 43,225 |
| Net Loss | (30,998) | (29,950) |
The IRS argued that the taxpayers:
- Records were not adequate because they did not keep them for each horse,
- Did not have a detailed written budget or written business plan,
- Did not investigate the profit potential of their horse activity before they started it,
- Were more interested in providing horses for their daughter, than in making a profit
-
Failure to own a stallion was inconsistent with their business plan and
restricted their ability
to make a profit.
Judge Colven's conclusion was that the petitioners operated their horse activity
in a business-like
manner. They had the expertise to conduct a profitable horseactivity.
They spent a substantial
amount of time on their horse activity, including taking care of other people's
horses. He found that
the petitioners kept complete and accurate records on their personal computer,
and that the
petitioners did have a business plan and pursued it consistently, even though
it was not in writing.
He ruled that the petitioners understood the profit potential of the horse
activity, and that it was
not necessary to conduct a formal marketing study to have a profit
objective. He also disagreed
that the petitioner's failure to own a stallion restricted their ability
to make a profit
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Copyright 2001 Carolyn Miller, CPA
