Small Business Stimulus Bill
The horse industry will benefit from the small-business stimulus bill signed into law earlier this week.
The American Quarter Horse Journal - On September 27, 2010, President Barack Obama signed into law the Small Business Jobs and Credit Act of 2010. which is intended to help small businesses and create new jobs. The bill continues the bigger write-off for horses and other property purchased and placed in service by a horse business that were originally included in earlier stimulus bills, according to the American Horse Council, of which AQHA is a member.
The first incentive allows an owner who purchases a horse or other business property used in a horse business and places it in service in 2010 or 2011 to expense up to $500,000 of the cost. This so-called “Section 179” expensing allowance applies to horses, farm equipment and most other depreciable property. Once total purchases of horses and other eligible property reach $2 million, the expense allowance goes down $1 for each dollar spent over $2 million. Without the bill, the expensing allowance would have been $250,000 in 2010 and gone down to $25,000 for successive years.
“Let’s assume a horse business purchases $750,000 of depreciable property in 2010, including $650,000 for horses, and places it all in service. That business can write off $500,000 on its 2010 tax return and depreciate the balance,” explained Jay Hickey, AHC president.
This provision will benefit any business involved in the horse industry that purchases and places depreciable property in service in 2010 or 2011.
The second incentive reinstates the 50 percent first-year bonus depreciation for horses and most other depreciable property purchased and placed in service during 2010. The bonus depreciation option expired at the end of 2009. This benefit applies to any property that has a depreciable life of 20 years or less. Also, the property must be new, meaning that the original use of the horse or other property must commence with the taxpayer. For a horse to be eligible, it cannot have been used for any purpose before it is purchased.
“The tax benefits in this bill are great for any horse business that has or is planning on making major purchases,” Hickey said. “The expensing and bonus depreciation provisions can be used together in 2010.
“For example, let’s assume an owner pays $1 million for a colt to be used for racing and $100,000 for other depreciable property, bringing total purchases to $1.1 million in 2010. If the colt had never been raced or used for any other purpose before the purchase and is placed into service, the owner would be able to expense $500,000, deduct another $300,000 of bonus depreciation (50 percent of the $600,000 remaining balance), and take regular depreciation on the $300,000 balance.
“We hope the horse industry will take full advantage of these two tax benefits while they last,” Hickey said.
From the American Horse Council:
Benefits in the Economic Stimulus Act for Horse Industry
President Barack Obama has signed the Economic Stimulus Act into law. The bill is intended to provide a jump-start to the U.S. economy.
“The new law contains two important tax incentives that would allow a much bigger write-off for horses and other depreciable property purchased and placed in service during 2009,” said Jay Hickey, President of the American Horse Council. “These provisions expired at the end of 2008, but their reinstatement should provide an additional incentive for people to purchase horses for racing, showing and breeding as part of their business activities.”
The first incentive continues the so-called $250,000 Section 179 expensing allowance for horses purchased and placed in service in 2009. This allowance also applies to farm equipment and most other property with a depreciable life of less than 20 years. Once total purchases of horses and other eligible depreciable property reach $800,000, the expense allowance goes down one dollar for each dollar spent on eligible property over $800,000.
“The horse industry almost lost the Section 179 expense deduction in 1996. The House of Representatives passed legislation taking this deduction away from the horse industry,” said Hickey. “But we were able to convince the Senate to remove this restriction before passing the final bill and the deduction was preserved. It was worth $17,500 then. Over the years it has been increased and will be $250,000 for 2009. That is a real benefit to horse owners.”
To illustrate the expensing allowance, assume a horse business purchases $750,000 of depreciable property in 2009, including $650,000 for horses. That business can write off $250,000 on its 2009 tax return and depreciate the balance. If instead, purchases were $900,000, the expense allowance would go down by $100,000.
In addition, bonus depreciation has also been reinstated for 2009 in the new Stimulus Bill. This second incentive allows a horse owner to take first-year bonus depreciation equal to 50% of the cost of horses and most other depreciable property purchased and placed in service during 2009. It does not apply to property that has a depreciation life of over 20 years.
As was the case last year and in 2003 and 2004 when bonus depreciation was first instituted, the property must be new, meaning that the original use of the horse or other property must begin with the purchaser for the property to be eligible. “Original use” means the first use to which the property is put, whether or not that use corresponds to the use of the property by the purchaser. “There is no limit on the amount of bonus depreciation that can be taken, as there is with the expense deduction,” noted Hickey.
To illustrate bonus depreciation, assume that in 2009 a business pays $500,000 for a colt to be used for racing and $50,000 for other depreciable property, bringing total purchases to $550,000. The young colt had never been raced or used for any other purpose before the purchase. The business would be able to expense $250,000, deduct another $150,000 of bonus depreciation (50% of the $300,000 remaining balance), and take regular depreciation on the $150,000 balance.
“The Stimulus Bill includes several other changes that may benefit horse owners, including allowing taxpayers a deduction for state and local sales and excises taxes paid on the purchase of new cars, light trucks, and recreational vehicles in 2009; a change in the net operating loss carryback period to five years for small businesses; and a reduction for 2009 in the required estimated tax payments for some small businesses,” said Hickey.
Congress Overrides Veto of Farm Bill, Provisions Beneficial to Horses Become Law
On Thursday May 22, 2008, Congress overrode Presidents Bush’s veto of the Food, Conservation, and Energy Act of 2008, commonly known as the Farm Bill. The House passed the bill again on May 21, by a vote of 316 to 108. The Senate passed it a day later, May 22, by a vote of 82 to 13. Due to a clerical error one title of the Farm Bill concerning trade remains in limbo. However, all other titles of the bill including several provisions that benefit the horse industry are now law.
Depreciation of Race Horses Shortened
The tax portion of the bill will amend the current depreciation schedule for race horses to make it uniform at three years. Effective January 1, 2009 all race horses will be depreciated over three years, regardless of their age when placed in service. Prior to then race horses will continue to be depreciated over seven years if they are placed in service before they turn two. This change to the tax code for race horses will “sunset” after five years, ending at the end of 2013.
Last year Senators Mitch McConnell (R-KY), Jim Bunning (R-KY) and Blanche Lincoln (D-AR) introduced the Equine Equity Act (EEA), which proposed to put all racehorses in the three-year category for depreciation purposes and make horses eligible for capital gains tax treatment after being held for twelve months.
“The EEA was included in the Senate version of the Farm Bill by an amendment offered by Senator McConnell,” said Jay Hickey president of the American Horse council. “Although the Equity Act was not in the House-passed Farm Bill, the depreciation provision was included in the final bill through the efforts of Senator McConnell who understood the inequity and worked overtime to ensure it was changed.”
With the passage of this provision, horse owners will no longer have to decide whether to place their horse in service at the end of its yearling year, and depreciate it over seven years, or wait until the horse reaches 24 months and a day in order to use the three-year depreciation schedule. This period is often only a few months. “Beginning in 2009, all race horses will be depreciated over three years regardless of when placed in service. This amendment will end the inequitable situation of depreciating race horses over seven years, a period that is about twice as long as their actual racing time,” said Hickey.
The second tax provision in the EEA, which would have shortened the capitol gains holding period for horses from two years to one year, was not included in the final conference version of the Farm Bill passed by Congress.
Equine Farmers and Ranchers Eligible for Emergency Loans
Another provision in the bill makes horse breeders eligible for the first time for emergency federal loans following a disaster. This change will include “equine farmers and ranchers” within the group of producers eligible for these federal emergency loans. “Horse breeders have not been eligible for these loans, which have been available to other livestock producers for some time,” said Hickey. “Horse breeders suffer losses from hurricanes, drought, ice, floods and other natural disasters just like other livestock producers do. This provision will end the disparate treatment of horses and horse breeders by making them eligible for emergency loans under the same conditions and limits as other livestock producers. Again, the horse industry owes thanks to Senator McConnell for his efforts in passing this provision.”
Horses Specifically Included as Livestock in Disaster Assistance Program
The Farm Bill also includes a new permanent disaster assistance program that will provide relief funds to farmers and ranchers who suffer losses in areas that are declared disaster areas by USDA. This program is intended to make funds available sooner following a disaster. Horses are specifically included within the definition of livestock eligible for the program. “The inclusion of horses was pursuant to an amendment offered by Senator Bunning to the Senate Farm Bill. The provision was accepted by the Conference Committee,” said Hickey. “This is important to the horse industry and we appreciate his efforts.”
The horse industry has been working for these last two changes for some time. The industry is now treated like other livestock producers with respect to federal emergency programs.