| I have said many times that if you are a breeder, you | | | | bring in $5000 plus $1000 in mare care. Sales bring in |
| need to be a business. One of the reasons is that a | | | | $5000. So my gross income is $11,000. My outlay in |
| business can deduct the expenses of raising horses | | | | expenses is $12,600 for the year. So I am in the hole, |
| including feed, vet care, stud fees, marketing costs, | | | | and the IRS is going to lay this one aside and want |
| training fees and all the other necessary expenses of | | | | more documentation on whether I am a business or a |
| raising and selling your horses. The most important | | | | hobby. |
| reason though is that you can buy and depreciate your | | | | Using the MACRS (Modified Accelerated Cost |
| stallion and mares over a period of time. And that is | | | | Recovery System) depreciation schedule, I can lower |
| why even in a down market, you can make a profit | | | | my costs and increase my net profit. The stallion can |
| even if it is marginal. | | | | depreciated over seven years utilizing the MACRS |
| Horses that are used for breeding or racing can be | | | | depreciation tables so his first year's depreciation is |
| depreciated over 3 to 7 years depending on their age | | | | 14.29% of his purchase price, or $4,287. The fourteen |
| when put into service. If they are a horse that you | | | | year old mare can be depreciated over three years. |
| have raised and then decide to breed, you can only | | | | Her purchase price was $10,000 and her first year |
| deduct the expenses of the horse. If you buy super | | | | depreciation in 33.33% or $3,333. The others can be |
| stallion or mare, you can deduct, not only the expenses | | | | depreciated over a seven year period including the |
| associated with their care, but also depreciate the cost | | | | two-year old with one exception. The yearling gelding |
| of the animal and improve the bottom line of your | | | | can only be expensed; he can not be depreciated |
| business. | | | | unless I make a race horse out of him because he is |
| Depreciation is a deduction from expenses that lowers | | | | not capable of reproducing. |
| those expenses and increases the gross profit of your | | | | As you can see, I have turned my loss into a profitable |
| operation. To illustrate this, I am going to give you an | | | | year, at least on paper and I can keep the IRS and the |
| example. It may or may not work in your particular | | | | banker happy. That is why I urge you to be a business. |
| case and you need to consult with a qualified | | | | Let me share with you the percentages that you can |
| accountant to verify if it does. | | | | depreciate each year and the age limits of the horse. |
| Having done some research and finding that a certain | | | | Three year depreciation is applied to horses that are |
| bloodline or discipline is doing very well on the national | | | | 12 years of age or older when they are put into |
| scene and there being an absence of that particular | | | | service unless they are a racehorse. Then they can |
| bloodline or discipline in my area, I decide to introduce it | | | | be two and over. The rate of depreciation is set at |
| to my region. I attend sales that feature stock of those | | | | this. First year is 33.33%; second year is 44.45%; third |
| bloodlines and end up purchasing a proven stallion and | | | | year is 14.81% and fourth year is 7.41%. |
| several producing mares as well as one or two | | | | Seven year depreciation applies to horses that are a |
| younger horses that I believe to have the potential of | | | | least two years of age when they are put into service |
| being superior horses. | | | | unless they are racehorses. Racehorses have to be |
| The stallion is 10 years old, has produced some foals | | | | under two. The seven year schedule is: First year, |
| that have gone on to a certain amount of fame and | | | | 14.29%; 2nd year, 24.99%; 3rd year, 17.49%; 4th year, |
| returned some money to their owners. His purchase | | | | 12.49%; 5th year, 8.93%; 6th year, 8.92%; 7th year, |
| price is $30,000. Of the mares that I have purchased | | | | 8.93%; 8th year, 4.46%. |
| and all of which are bred; one is 14 years old and the | | | | It does not matter that someone else may have |
| dam of offspring that have accumulated many points | | | | depreciated the horse before you bought it. When you |
| in their field; one is eight years old and her offspring are | | | | buy that animal, you can start to depreciate the horse |
| just starting out and one is a five year old bred to a | | | | again at the cost that you bought it for. And down the |
| World Champion. Of the two young horses, one is a | | | | road, you can resell the horse and start over with a |
| yearling and one is a two year old. The yearling is a | | | | new horse(s). |
| gelding and the two year old is a started mare by the | | | | An important point to remember. If you sell a horse |
| stallion I purchased. | | | | that you have depreciated for more that the |
| Since I have mortgaged everything I own in order to | | | | depreciated value, you must use it to recover the |
| assemble this group, I want to make a profit as soon | | | | depreciation. In other words, the true selling price is |
| as possible and keep the IRS at bay. And this is how I | | | | what it sold for plus the depreciation and that must be |
| am going to accomplish this. | | | | reported as income. And as such is subjected to |
| My expenses for the year is $1800 per horse and that | | | | taxation. You should consult with a qualified accountant |
| includes feed, farrier, vet, advertising and a share of | | | | and tax authority before starting any business venture |
| the mortgage, lights, water, electricity, etc. The stallion is | | | | to be sure that you are doing it right. |
| used on my mares and he breeds 10 outside mares | | | | Another point to consider. If you manage to produce a |
| for $500 apiece plus mare care. The mares produce | | | | super individual, think about syndicating or at least |
| three foals that sell for a little money but not as well as | | | | create a partnership for that horse, so you can |
| I expected. The W/C sired colt goes for $2500 but the | | | | expense and depreciate that horse. You will spread |
| others only gross $2500 for the two. | | | | the costs among several people as well as the liability. |
| My income looks like this for the year. Breeding fees | | | | |