Roger
Roger, this question is way too complicated to answer without discussing with you personally. If you are a client of our firm, call me and I will disucss with you to see if there is a possibility that your horse business is actually a trade of business or just a hobby. If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.
To give you an idea of what we would be looking at to determine if you have a trade or business or a hobby, here are the questions that we would be reviewing:
- Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
- Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit.
- Do you depend on income from the activity? If so, your activity is likely considered a business.
- Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
- Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
- Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
- Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
- Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.
Note that if your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.
It is a pleasure serving you.
Larry Kopsa CPA
