Client is starting a horse riding lesson business. In summer of 2006 she put up a fence (for pasture and riding area), and completed construction of an indoor riding arena mid-Dec 06. She's been using the fenced areas and arena to train her lesson horse. She did not give any lessons in 06, but did host a "ride and brush the horse" birthday party for which she was paid $100. Should she file a Sch C for 2006??
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Definitely... the accounting is way easier if you book the arena and expenses in the year they occur, rather than wait til net income occurs. It is more correct as well, because all these expenses occurred in 2006. If you are wondering about starting the sch C when there is no net income, there is nothing wrong with recording a loss in first year. This is probably normal for most startups. Just worry if there is no income in second and third years. -Bob -
As this is a new business, I would take the opportunity to educate the client on the Hobby Loss Rules. Copy pages 5-19 through 5-21 of TTB and give to the client. Explain that this type of activity is looked at very closely by IRS if you do not show a profit.
She might even admit after reading it that she really is just a hobby and doesn't need the income. There is nothing wrong with being a hobby. You just can't use the expenses to offset other income.Comment
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Depreciable Assets
It seems to me if the person is a business that both expenditures would be depreciable and not deductible.Comment
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Toth Case
May be ok. See Toth vs Commisioner Jan. 18,2007 U.S. Tax Court.Comment
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Why is horse riding lesson business looked at very closely by IRS? It is a legit biz. I mean it is not like horse breeding or horse racing.Originally posted by Brad Imsdahl View Post
I personally would file the business if it is legit under sch c . take the appropriate deductions and make sure the right documentation is available.Comment
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Anything to do with horses is very expensive. It is a very difficult business to make money at.Originally posted by sea-tax View PostComment
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Start up Expenses not deductible
Seems like the work on the fences and construction might be start up expenses and be captalized, not deducted in 2006. The client did not start giving lessons in 2006, so she didn't start her business in 2006. See TaxBook p. 8-17
JMHO,
CarolComment
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Yes, but...
I think this taxpayer can file a schedule C for 2006, showing the $100 as revenue and deducting those expenses which are not start-up (some convention on depreciation and anything else not required to be capitalized).
However, I live in a rural area, and have never been exposed to a single case where a horse operation of any kind made any money. The world-famous Tennessee Walking Horse Festival is in Shelbyville, only 30 miles away, and even most of the prize money winners have big losses.
Most of the time, wealthy owners are aware of how much money they are spending for huge expenses, such as sheltering, breeding, feeding horses and are looking for a way to deduct it. The requirement for hay also gives rise to invoking all manner of equipment costs - and that REALLY ups the ante.
As a preparer, I would not prejudge profit by refusing to file a schedule C. But if there is no substantial revenue by the second year, I would not take a loss. And if no evidence that there will be a profitable operation, I wouldn't take a loss in the third year.
And a word of advice: Tell the client up front that you're taking the loss only one or two years. If the client thinks he has "carte blanc" deductions, he will spend more money than ever because his accountant told him he can write it off. Then in year 2 or 3, you decide you should no longer take these losses, he will think you're pulling the rug out from under him.Comment
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