Ask The Experts: Len Green

Today, we begin a new column where readers are invited to write in and ask our expert Len Green their equine-related tax and accounting questions. Have a question you'd like answered? Email suefinley@thetdn.com

Question #1:
I am a partner in a racing syndicate. I received a K-1 form which shows a loss for the year. My accountant is questioning whether I am entitled to deduct the loss. What is the problem?

Losses from partnership ownership fall into three categories:

a. Active–which means the losses can be used to offset any type of income you have.

b. Passive–which means the losses can only be used to offset any passive income you have and the rest carried over to future years.

c. Hobby losses–not deductible.

The key issue with the passive activity rules is “material participation.” Material participation is involvement in the operation of a business on a “regular, continuous, and substantial basis.” There are seven tests that can define material participation, but the most common ones are working at least 500 hours in the business in the course of a year. If one is a limited partner in a partnership or LLC, the income or loss is generally passive, unless the partner materially participates in the activity. Here, working at least 100 hours may qualify you as active.

Question #2
I will be going to my first 2-year-old sale to possibly purchase a horse. What steps do I have to take so I maximize the tax advantages that I can receive if I do purchase a horse?

The amount of tax deductions you can receive for the purchase of a horse continues to change over the years.

Since you will be buying a racehorse, one of the common methods is to depreciate the cost over three years.

More recently, new Tax Laws, depending on your circumstances, allow you to elect to use Bonus Depreciation or IRC §179 Expensing Deduction to write off all or most of the cost in the year you buy it and put it into use.

Question #3
I am buying a new truck that will primarily be used for my thoroughbred activities. How much can I write-off in 2020?

The Tax Law contains certain restrictions on what is called “listed property.”

Trucks fall into that category.

Test #1 is that the truck must be used more than 50% for horse-related activities. If you meet this test, then your business truck has a five-year depreciation life.

Having said that, you may be able to use first-year expensing, but to complicate the situation, depending on the weight of the truck, the first-year deduction may be limited to $25,000.

Finally, the amount of the tax deduction is limited to the percentage of time you use it for business-related activities.

Question #4
My friend says that their accountant says, “in certain cases, land can be depreciated.” What are they talking about?

The general rule is land is not depreciable because it has no determined useful life.

What your friend is probably referring to is that we have found in a number of cases the taxpayer has included in the land category items which do have depreciable lives. Examples include:

a. Fences
b. Roadways
c. Paddocks
d. Irrigation Facilities

These items can be depreciated.