Business Deductions
These are items or services used in the normal course of doing business, that are ordinary and necessary.  Some expenses are deductible in the same year they were paid, like feed, shavings, horse show entries, veterinary and farrier charges, small tools, wages or contract labor.  Other purchases  like tractors, horses, saddles and trailers cannot be deducted in the same year they were paid. These costs are expensed or  "depreciated" a little each year, over a period of between 3 and 39 years.  Generally, any item costing $500 or more, that will have a useful life of more than a year, becomes a depreciable item or "asset". When you sell an asset, you must "recapture", or add back in, the depreciation amount you've been allowed.  That means that the deduction for depreciation you've taken are really "loans" of deductions that the IRS allows.  When you sell the item, the IRS wants a repayment of the loan.  That's the main reason I tell most of my clients to use an asset, like a manure spreader, until it falls to pieces, so you never sell or have to "recapture", and effectively lose the deductions you've been "loaned". 
 

Deductions of Typical Horse Related Items

      3 Year Property Depreciation

 
     5 Year Property Depreciation

 
     7 Year Property Depreciation

   
    10 Year Property Depreciation

     15 Year Property Depreciation

 
     20 Year Property Depreciation

 
     27.5 Year Property Depreciation

 
     30 Year Property Depreciation

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Building Barns
I often wondered why everyone in Texas had a building for this, and a building for that, as we all tended to put everything under one roof where I come from.  When I started preparing taxes for clients, I discovered the reason… a single purpose agricultural building can be depreciated in only 10 years, where a multi-purpose building must be depreciated over 20 years.  Big difference!  Build  a separate barn for hay, another one for tractors and equipment, a separate structure for your round pen and one for your show or race horses. 

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Buying Horses
Purchase a horse for breeding, working or showing purposes that is at least two years and one day old, if you want to depreciate it's value in only 3 years.  Weanlings, yearlings and horses that are two years of age or younger, must be depreciated over a 7 year period.  You can generally justify the expense of showing this horse if you are careful.  You must balance how much showing is acceptable, as there is a fine line between showing a horse to increase it's value and the subsequent value of its offspring and simply showing for many years just for fun.  It's wiser to show a horse for a few years and then either sell it, or if it is a mare, put her into your brood mare band and buy another horse, or show one you've raised.  Your deductions many all be "disallowed" if you insist on showing the same horse year after year. Remember, you can depreciate up to $20,000 for year 2000 taxes at one time on most item(s) purchased, under the Section 179 Depreciation rules.  Ask your tax specialist about the specifics.  There are several other options for purchasing horses, including a lease purchase and like-kind exchange, but I don't have the time to discuss those options at this point.

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Selling Horses
If you "hold" or keep a horse for breeding purposes and then decide to sell it, after keeping it for at least one day over 24 months, any profit you earn is taxed only as ordinary income and is not subject to the much higher "SE" or "Self-Employment" tax. This affects any horses you buy or raise.  Always set the horses you purchase up on depreciation, so you get the deduction, even though they are prorated over a period of time.  If you sell a horse for less than you paid for it, you should end up with a loss, which is also beneficial in most situations.  You can't depreciate, or write off animals that you have raised.  You can write off the breeding fee you paid to get your mare bred, in the year the expense was paid, and the feed, blacksmith, veterinary and horse show fees you spend on behalf of this horse, but not a purchase price, since it was never purchased. You can not allot a fair market value on an animal you have raised, and set it up on depreciation.  You cannot not give a horse you've raised to a bonified charitable organization and write anything off on your tax return, as you have no "cost" in this animal.  You've been writing off expenses for its food and care, but you never paid for the horse, so, it has no "cost" or "basis".  There are several other options for selling horses, including a lease purchase and like-kind exchange that we'll discuss in the future.

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Paying for Independent Contractors
What are 1099 Misc. Forms and are they important?  When you hire a veterinarian, trainer, blacksmith, photographer, plumber or electrician, who is not incorporated, and pay them $600 or more in one year for their "services", you must, by law, send each person a federal form "1099 Misc.".  You do not have to send a 1099 Misc. to vendors who sell hay, or grain as you are buying a product, not a "service".   The IRS can disallow your deductions for amounts you've paid for these services and fine you up to $100 for each 1099 Misc. you did not send.  These services are performed by independent contractors.

What are Independent Contractors?  An individual who contracts to complete a specific job, at the times you both agree upon, and with equipment that they own is a self-employed person, or independent contractor.  Veterinarians, plumbers, electricians, fence painters and professional photographers, are considered Independent Contractors, unless they are incorporated.  If you pay one of them over $600 in a calendar year, you must send them a Form 1099 Miscellaneous, if you intend to deduct the amounts as legitimate business expenses.  If you hire someone to do a specific job, like paint the fence, and pay them over $600, you must send them a 1099 Misc. form.  Independent contractors pay their own self-employment taxes, which saves you money.  You can provide material, but no tools, or these people will be considered "employees" and you must withhold and match taxes.
 

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