angle-left Horse Business Audits: How to be Prepared

Horse Business Audits: How to be Prepared

Protect your horse-breeding business in the event of an IRS audit.

three chestnut broodmares and one sorrel foal in a field of green grass (Credit: Austria Arnold)

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If you run a horse-breeding operation, or any type of horse operation, you may be deducting equine expenses on your taxes. Make sure your business stands up to the scrutiny of the IRS if you are ever audited.

What Triggered the Audit

“Most IRS auditors feel you are getting into the horse business for a tax shelter – to get a loophole to write off all your income from another job,” says Billy Peterson, certified financial planner.

The reason for the IRS audit is most likely to determine whether your operation is a legitimate business or a hobby.

Any business will have a detailed plan that gives realistic expense and profit projections. A horse operation – no matter whether it is set up for boarding, breeding, racing or showing – must have the same.

“You have to have things laid out. It doesn’t have to be a 20-page document," he says. "You can have a two-or three-page business plan that says here’s how you intend to make a profit.”

Make sure you separate your business records from your personal records.

“From my experience, if you have a separate entity, name and tax ID number, all of those things are going to reduce your odds of having an audit,” Peterson says. “A lot of people make the mistake that they have their one checking account they use for everything in their personal life, and they just use that for their operation. And that’s a mistake.”

A big mistake, adds Carolyn Miller, certified public accountant.

“The IRS really frowns on mingling your personal funds with business funds,” she says. “That is a big tick against you. You should have a business account, too. I also recommend getting a business credit card.”

What to Expect During the Audit

The auditor might have a telephone conference with you before the meeting. Peterson says your accountant needs to be a part of this conversation, too. The auditor is going to ask pointed questions about your operation, such as:

  • Why have you chosen these people to work with your horses?
  • Have you relied on any experts or advisers?
  • Describe how active you are in the day-to-day operation.

“You’re going to have to lay out 'Here’s why I did this and why I did that,'” Peterson says. “'Here’s my reasoning.' 'Here’s why I’ve bred these mares to these stallions.'”

Be courteous to the auditor at all times, even if he or she seems impolite or unreasonable.

“I find if you’re well-prepared and come in with everything they want, it really helps turn the tide in your favor,” Miller says.

What to Bring to the Audit

“Good record keeping is essential,” Peterson says. “Every year, you should have a new set of records. Keep everything separate – breeding fees, vet bills, training bills, sale expenses and transportation expenses. If you are audited, they will want hard-copy proof. In addition, keep well-maintained computer records for your own information.”

The more organized you are, the better you are going to look to the auditor. During the meeting, the auditor will ask for your business plan.

“I tell my clients not to use a business plan as just a static document. It should evolve over time,” Miller says. “At the end of the year, do some synopsis. That way, if audited, you can show that you were keeping track of your expenses and making changes as needed, no matter if it was a bad economy or a mare slipping a foal. Showing that is going to go in your favor: This person is acting in a businesslike manner.”