Tax Benefits for Horse Owners Continue into 2010

By Alex Waldrop, President and CEO of the NTRA  

Two tax incentives that greatly benefited the horse industry are set to expire at the end of the year...but there's still time to take advantage of them if you're thinking of an equipment purchase in 2009. Another tax benefit - just for horse purchases - continues for several more years. 

Those expiring soon are a pair of tax benefits Congress allowed in back-to-back Economic Stimulus bills.  Bonus depreciation and an increase in the expensing allowance offer buyers a tremendous opportunity to write off a substantial portion of the cost of a horse, or other depreciable qualifying property like farm equipment, in the year purchased. Although a third consecutive Stimulus bill in 2010 appears unlikely, Iowa Sen. Charles Grassley has introduced legislation that would extend bonus depreciation.  Stay tuned on whether this eventually will become law.

The good news is that buyers and breeders will continue to benefit from the faster depreciation schedule of young racehorses, a measure included in the five-year Farm Bill that became law on January 1, 2009.  The NTRA's legislative team helped secure passage of the bill, which had bi-partisan support from Senators Mitch McConnell and Jim Bunning of Kentucky and Arkansas Senator Blanche Lincoln, among others. It took five years of lobbying, but the outcome was worth the wait.

The tax code now reflects current racing practices, where most horses are retired before age five. Since depreciation is used to offset income generated by an asset over its useful life (the expected period of time, in years, that a depreciating asset is productive), it made little sense for any racehorse to be on a 7-year schedule because most typically are not still on the track earning purse money for their owner.

An important consideration for this new measure is the definition of a young racehorse.  The Internal Revenue Service defines a young racehorse as one less than 24 months old when "placed in service."  A horse is generally deemed to be placed in service when it begins training.  Those over 24 months old when purchased and put into training already were on a 3-year schedule.  Now all racehorses, regardless of age when purchased and put into training, are depreciated on that schedule.

All of this means that buyers looking to purchase yearlings or younger two-year-olds, and ultimately race them, are in a far better tax position than they were prior to the most recent Farm Bill.  Combine this with lower bloodstock prices and it may be the best time in recent memory to get out there and buy. 

It's important to note that horses purchased for re-sale (pinhooked) are considered inventory and are not eligible to be depreciated.

For those of you involved in horse ownership as a passive investor, you are eligible to write off a portion of a horse's depreciation.  I encourage you to consult with a tax professional regarding your situation.

There remain many questions about the bloodstock market as we approach 2010:  Have we seen the bottom?  Will buyer demand increase?  Only time can answer those questions.  But we know for sure that tax laws now better reflect economic reality in our business.

What are your plans for 2010?  And, what other tax incentives would interest you?

Recent Posts

More Blogs