As a material participant in the horse industry, just staying afloat is a major concern. Imagine on top of your day to day stresses, now the IRS has come to audit your equine business. What would you do? Who would you turn to?
The answers to these questions are the keys to a successful outcome, as the relationship between tax advisers and taxpayers is paramount in any IRS audit.
The most common audit in the equine industry is a Section 183(b) audit, better known as the "Hobby Loss" audit. Operating your business day to day is hard enough work, but Section 183b is a “dark horse” obstacle for unsuspecting businesses. Under this section of the tax code, the IRS has the power to categorize a business as a "hobby." If this determination is made the IRS reserves, and will enforce, their right to reject a taxpayer's expenses attained in the course of running a business.
What does this mean if this were to happen to you today?
For some owners it means the business would cease operations due to an overbearing tax bill.
What Type of Activity Constitutes a "Hobby Loss?
You may be asking yourself, how exactly can the IRS make the determination that your legitimately run business is a "hobby?" The answer is not simple, especially in the equine industry where the Hobby Loss Rules have their own subset of parameters. A general rule many advisers follow: If a business fails to show a profit at least two years within a five year period, the IRS will undoubtedly win their case. This decision results in a substantial tax bill that will follow. However, an experienced adviser within the industry knows that the tax code allows a business owner to extend the five year period to seven years which will assist you in protecting your business and your investments.
What Do They Look For?
The IRS objectively conducts a nine point test to determine if a business is operating with the motive of generating a profit. It is your tax advisers duty to establish these nine points to put you in a better position while defending you against the IRS. These nine points are:
- The manner in which the taxpayer carried on the activity,
- The expertise of the taxpayer or his or her advisers,
- The time and effort expended by the taxpayer in carrying on the activity,
- The expectation that the assets used in the activity may appreciate in value,
- The success of the taxpayer in carrying on other similar or dissimilar activities,
- The taxpayer’s history of income or loss with respect to the activity,
- The amount of occasional profits, if any, which are earned,
- The financial status of the taxpayer, and
- Elements of personal pleasure or recreation.
Don't let your equine business become a night "mare" Let our dedicated niche staff assist you. We offer a former IRS agent and a staff with over 40 years experience in the business to assist you and guide you in the proper direction.