horses

The Business of Horses - Profit Motive

Profit motive according to the IRS is the intent to make money with your business venture within a reasonable time. And for some, they want to enhance their lives, gain independence, and have control over their future and to enjoy the horse and the lifestyle that accompanies that enjoyment.

For others, in the horse industry, they have a substantial primary income; lots of disposable funds and a tax bill that is 40 to 50% of their gross. So, having heard that you can lose lots of money with horses and deduct the expenses, they become involved in horses.

This way of reducing your tax bill is not recommended by me or any of the professionals, (attorneys, accountants, business advisers) I know, for the simple reason that sooner or later, the tax man will want to know how you lost so much money and are still in business. A prudent business owner will want to make a profit in a reasonable amount of time or sell the business venture to someone who thinks that they can make it go or more simply just close the doors.

To have a profit oriented motive does not mean that you can or have to accomplish that in the first year. In fact, you may not be able to accomplish it for a period of years. Depending on what part of the industry you enter, there will be a period of time in which you have to acquire a location to conduct your business, hire and train employees, build improvements, do research on market conditions relating to the business, etc. These items can be capitalized over a minimum period of 60 months.

A person that opens a boarding barn or becomes a trainer has a better chance of achieving a profit in a shorter period than a person who wants to build a breeding program involving a particular breed and bloodline achieves. One who opens a feed and tack store or becomes a farrier will be able to show a profit within a few months if they have done the initial steps to opening a business.

If you have done all the things that are necessary to opening a business and it is not going to make a profit for some time, you may want to consult with your accountant about filing a Form 5213 with the IRS at the end of your tax year. The rules are that the business cannot have been operating for more than three years. It will extend the time for a determination by the IRS as to whether your activity is a for-profit or not-for-profit business. This applies to breeding, racing, training or showing horses. The period is extended until the sixth year of the business in these cases. If your business is not any of the above, it will extend the determination until the fourth year of that activity. It will also extend the period that the IRS has to audit your operation as to whether it is a profit making business or not.

Some professionals consider that doing this may red flag your business at the IRS but in this time where the economy is in a state of turmoil, it may give you the needed time to start making a profit.

I would urge you not to waste the time gained in hoping that the enterprise will become profitable during that time. An owner should be looking at the changes that are occurring in the marketplace and developing a plan to counter the results of those changes.

I am particularly aware that some disciplines and horse business ventures are still making a profit even in a down economy. Additionally the horse population has expanded by 2 million in the last 10 years increasing the work force necessary to service that growth and the economy surrounding it.

If a business is nearing its third year of being in operation and the expenses are still way ahead of income, the owner should be looking at the business and analyzing what can be improved or changed to reach a profitable year more quickly. They should be looking for ways to increase their customer base, pare costs and overhead, and overhaul their advertising to respond to the current market.

Your location, (urban, suburban, or rural), choice of venture, (breeding, boarding, training, etc.), market conditions for your business in the region or area that your business is located in are factors to be reviewed with your board of advisors.

Market conditions differ greatly from one area to another. Registered working horses at one sale may be $2500 or less and five hundred miles away, the same horse will bring double or triple that price. Show horses are always in a state of flux depending on who is winning with what horse, changes in the breed association rules, (excessive white rule, one registered parent rule, how many ounces in the shoe, length of toe, use of aids (gimmicks), etc.) and the list goes on and on.

Marketing outside of the auction or show arena is important. You should not depend on one avenue of advertising to establish your training, boarding or breeding programs. One must have a realistic advertising budget that will entice the buying public to consider buying a horse from you, having you train a horse, boarding their horses with you or breeding to your stallion..

Your business should be guided towards being profitable from the very beginning. If the sole purpose of the business is to provide you with a way to pursue your favorite horse activity, you may want to reconsider whether you are a business or just a hobbyist looking for a way to deduct your horse expenses from your gross income. Before the IRS determines it for you.

M. R. Bain has been a horseman all his life and a professional trainer since 1955. He is an owner and breeder and has been employed as a breeding and stable manager. His intent on writing these articles is to educate horse people on how to operate a successful horse business. You may contact him at MRBAIN@msn.com with your questions and comments. Also, look for his upcoming book, The Business of Horses--Creating A Successful Horse Business

posted by fdwvsmrmxjmkq @ 7:34 PM