IRS and Horse Businesses

Or what I’ve learned from the IRS In 2011

I’ve wrapped up an IRS audit with a client. It is a similar business to a horse training/show barn. So I’ve picked up on a couple of trends based on the auditor’s questions.

1. Even with excellent records, i.e. with invoices and receipts to support the deductions, I was asked many questions about how the expenses related to their business. I had to describe how and why each questioned item was used in the business and why it was necessary. I am very familiar with their business so was able to address the auditor’s concerns. When I explained the nature of the questions to my client, their comment was “good thing we didn’t have a normal accountant” meaning the questions were so specific to their business that a less familiar CPA might not have known the answer. At least, I think that is what they meant.

Takeaway – Hire a CPA who is familiar with horse businesses and knows the ins and outs of what you do on a daily basis.

2. “Are any of these pets?” Believe the auditor’s goal with that question was to deduct some of the business expense since they were attributable to “pets”. Just like your business, they are not pets and each animal contributes to your business. Either as a lesson horse, broodmare or horse you are working with to sell; they do contribute to your bottom line.

Takeaway – Be sure you can show the business purpose of each horse.

3. Be profitable. The auditor was surprised the business was profitable. I think this helped reassure the auditor that it is a legitimate business and not a hobby.

Takeaway – The best defense is to be profitable. With this economy your business probably has taken some hits. But this economy has also reduced your competition. We can work with you to get a plan to get your business to capitalize on the new opportunities.

Tax audits always an interesting process. Time consuming too. Glad it is over!