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