As Pivot Point Equine has been growing, I have been trying to expand the equine side of our businesses and trying to make it more profitable (yes, many of you are laughing right now about the thought of horses being profitable). But with profitability comes the inevitable tax burden. I remember being told for years that horse expenses are not tax deductible, but this was when it was strictly a hobby, so I decided to reach out to our friend Deb Cox, who knows both taxes and rodeo, to help answer some of my questions. As tax season is upon us, I hope this information is timely for you or at least it will help you be better prepared for your 2020 taxes and get more deductions from your rodeo or horse adventures.
Q: Deb, please tell us a little about yourself for the readers that don’t already know you or those that know you or what you do.
A: “Hi, my name is Deb Cox from Mullen, Nebraska. I have owned Deb Cox Tax Service for 24 years. I specialize in the ag industry and small business, but probably my forte is working with the professional rodeo cowboy. I have numerous clients that have competed at the NFR and the American. I have been a competitor for almost a half century, so I understand the nuances of the rodeo and horse industry. It is vitally important when choosing a tax practitioner that they understand the different variables and scenarios that contribute to a successful tax year. You should also be able to have a good relationship with your tax preparer and there should be good communication both ways.”
Q: At what point do we get to start claiming the expenses and have to start reporting the income?
A: “There are two theories in preparing taxes in the horse industry. One can treat it like a hobby or like a business or potential business. Most of my clients are professional athletes, and I prefer the latter scenario. But even if I was dealing with a 4-D barrel racer, I would still treat it as a business. I have seen all too often, as the horse and competitor improve, usually there is a significant value that is added to the horse. If that horse is sold, trust me, you will pay taxes on it. Therefore, I encourage competitors to keep track of all income and all expenses.”
Q: What about the kids? There are some kids out there winning some serious money. When do they have to start filing income taxes on money they win at jackpots or rodeos?
A: “So assuming we are treating this like a business, you will be responsible for self-employment taxes with a net income over $400, regardless of your age. Net income is your business income minus expenses. It is not unusual when a business is first starting out to show a loss for several years, but a person should show a profit at least in two of seven years. So even if your kids are young, they might be winning quite a bit of money, especially with some of the new formats such as the Junior NFR and the American. I would encourage them to keep track of every dime they win and every dime they spend, and this will help them to develop some great business habits for future years. Most tax practitioners give their client’s kids a discounted rate for preparing a return.”
Q: Do I have to report my winnings to the IRS?
A: “All income is reportable to the IRS, whether in cash, check, PayPal or RodeoPay, whether you receive a 1099 or not. I always tell my clients that if they report all their income I will fully support them, but if they don’t, they are on their own. Besides, if you are diligent about keeping expenses, your tax liability probably won’t be as bad as you think.”
Q: What expenses can I write off with my horse business?
A: “Of course we know the expenses are endless when dealing with the horse industry. Some of the expenses you might want to consider include: feed, vet, chiropractor, rehab, pasture rent, electricity, cell phones, insurance, repairs to vehicles, buildings, interest, supplies, trucking, tax preparation and other professional fees, either mileage or actual expenses, meals or actual days on the road, registration fees, entry fees, dues and subscriptions, labor, taxes (not income).”
Q: Good horses are not cheap. Should they be on a depreciation schedule?
A: “Of course you will want to keep track of dates capital expenses are purchased and amounts, such as vehicles, horses, trailers, major equipment, saddles.”
Q: Do you have any wise tax tips or strategies for horse or rodeo people to avoid an audit?
A: “It’s important if you have labor or rent paid that is over $600 that 1099s are sent out by January 31. We are seeing a vigilance on the IRS concerning this and has triggered some audits. I don’t think a person has to worry too much about an audit, if they have a good bookkeeping system in place. Plus it makes your tax preparer happy when you bring your items in an organized manner. :)”
Q: Anything else you can think of that you feel most people are unaware of or that they commonly make for mistakes?
A: “I think the biggest problem I see is that people think things don’t matter, whether income or expenses. The more you think, the more you save.”
Q: Where can people contact you if they have questions about this month’s topic or if they would like you to help them prepare their taxes?
A: “I can be reached at Deb Cox Tax Service, PO Box 581, Mullen NE 69152, (308) 546-2670.”
Thanks for joining our conversation today. If you would like to know more about this month’s topic, feel free to reach out to Deb at the contact information above or myself, Becky Pearson, at (308) 870-2526 or on Facebook at Pivot Point Equine Rehab, “Where Caring for You and Your Horse Is Our Passion!”