Any help with Horse Breeding?

[pjpest]

I am new to reporting of horse breeders. Are the horses considered inventory or depreciated and when sold reported on 4797. However if writing off current expenses, ie boarding, feeding etc. there would never be any income if are depreciated and sold. Did a lot of reading still a bit confused!

[Roland Slugg]

Breeding and draft (work) horses are in the 7-year MACRS class if they are 12 years of age or younger when placed in service. If they are more than 12 years of age when PIS, they fall in the 3-year MACRS class. (Code §168(e)(3)(A))

there would never be any income if are depreciated and sold.

Of course there would. If a horse is sold, there will be a gain or loss in almost all cases, just like the sale of any other depreciable asset.

[mastertaxguy]

Horse farm?

I am new to reporting of horse breeders. Are the horses considered inventory or depreciated and when sold reported on 4797. However if writing off current expenses, ie boarding, feeding etc. there would never be any income if are depreciated and sold. Did a lot of reading still a bit confused!

1. I found T.C. Memo. 2015-54, HENRY J. METZ AND CHRISTIE M. METZ, an informative read on this area of tax compliance. It, and other such cases, contain in a subtle way, much guidance as to preparers.
2. The real issue is not depreciation, but whether the taxpayers are engaged in a business or hobby horse farm.
3. Another issue is whether this is something you want to get involved in. AFAB is frequently the source of many a bad jam.

[Nashville]

Just like any other business

Ostensibly, a horse farm is like any other business, with reporting similar to raising livestock. Investment in breeding animals is considered an investment in depreciable property, and if any of these animals are sold it should be reported on a 4797. The offspring of these animals is considered as zero investment and if any of these are sold, these are sold on a Sch F with no offsetting cost. Alternatively, if the taxpayer so elects, some of the costs of raising these offspring can be capitalized into the offspring and then sold with an offsetting cost as if they were inventory. This is explained better in the information available under the "accrual" method of farming.

Revenue has to be reported, whether selling offspring or selling breeding stock. I don't know where any such idea came from that sales are not income.

As forewarned, the foregoing assumes the horse farm to be like any other business. Unless the farm raises Secretariat, the chances of it making money are very slim. As compared to cattle, the cost of feeding a horse is 300-400% of feeding a cow/bull. Ditto for veterinary costs, and restraining costs such as fences and barns. For this reason, the IRS loves to zero in on horse rearing and disallow losses because there is virtually no hope for making a profit in the overwhelming number of them.

It is devastating if the IRS reclassifies this activity as a "hobby." Revenue from the hobby is claimed as income on Line 21, whereas expenses are methodically whittled away, first on Sch A, then as misc expenses subject to 2%.

Be careful with taxes for this taxpayer.