Tax & Legal
www.fosterresults.com
If you own horses, a farm or livestock, chances are you could be headed for an audit by the Internal Revenue Service. As an industry, equine businesses in particular are notoriously poor record keepers—and the IRS knows it. Running a part-time business and relying on contract employees and seasonal managers easily pushes an agri-business to the head of the audit line.
Of all of the small businesses audited in the 2007 fiscal year, 27 percent were farming, ranching, or horse operations.
According to a recent American Horse Council study:
• The horse industry pays $1.9 billion in taxes to all levels of government.
• Approximately 34 percent of horse owners have a household income of less than $50,000 and 28 percent have an annual income of over $100,000.
• Forty-six percent of horse owners have an income of $25,000 to $75,000.
While there is no way to guarantee an equine business won’t be audited, the best way to avoid the audit (or survive it) is to maintain accurate “accountant level” business records and have an experienced accountant with real horse sense—or experience in your sector.
IRS auditors are taught to look for specific clues in underreporting income.
The most successful farmer or rancher may fail to disclose all income because of the accompanying income tax benefits, according to the federal audit guide.
Federal auditors are also told the “use of multiple bank accounts with reliance on the bank records for reporting purposes lends itself to misreporting due to exclusion of some records … Watch for transfers to/from savings, money market, and investment accounts or certificates of deposit.”
The IRS suspects, in general, that equine business owners commonly report personal expenses as business expenses. “All aspects of a farmer’s life are centered around the crop or animal and is therefore easily considered to be financially related to the business. Customarily, you will find personal expenses in insurance, gasoline, interest, taxes, utilities and repairs.”
The IRS is also looking at contract labor; cash payments to workers and lack of employment records.
Another “flag” auditors are trained to look for is bartering that may account for some sales. This can include trading or swapping of equipment or services for a percentage of ownership in the horse or breeding stock.
Horse hobbyists can also run afoul of the law.
They may not know the specifics of IRS rules and regulations—such as geldings cannot be placed in service in a breeding operation except in working or “teasing” applications. A certain type of race, known as a “futurity,” involves periodic payments of entry fees toward future events, which can be deducted currently even though the animal may be unable to participate.
The specifics are also spelled out for race horses subject to “syndication,” or those that are owned by up to 40 shareholders.
More people in the startup phase of horse businesses are being audited than ever before.
For the fiscal business year 2007, the IRS filed 3.8 million levies and almost 700,000 liens against individual assets.
The best way to prove to the IRS that your horse business is a legitimate business, not a hobby, is to have accurate documentation, use accounting software to track your incoming and outgoing monies correctly, or to hire a bookkeeper who understands equine accounting.
IRS Audit Rates
Type of Business Size Audit Rate
Sole proprietorship Gross receipts < $25,000 3.2%
Receipts $25,000 to $100,000 2.6%
Receipts $100,000 and more 4.1%
All proprietorships 3.2%
Farmers, Ranchers Gross receipts <$100,000 1.3%
Receipts $100,000 and more 2.8%
All farmers/ranchers 1.8%
Partnership All partnerships 0.6%
S corporation All S corporations 1.0%
Corporation Assets <$250,000 1.2%
Source: Internal Revenue Service
(Jennifer Foster, CMA, CFM is President of Foster Results LLC, a firm in Westfield, Ind., offering bookkeeping services and providing “big thinking for small business.” She is a family owner of Arabian horses and her husband and children ride competitively. She’s been riding horses since the third grade. Her recreational time is spent at shows, including the Youth Nationals in Albuquerque, New Mexico, and the U.S. Nationals in Tulsa, Oklahoma.)
Top of Page
|
