If your horse activity rises to the level of being a trade or business, and more than just a hobby (see §183), then congratulations! Subject to the passive loss limitation rules of §469, you are now entitled to recover some of those costs as §162 Trade or Business Expenses where expenses are generally deductible without limitation when they are paid or incurred:
- In carrying on any trade or business;
- Are ordinary and necessary, and,
- Are reasonable in amount.
“Ordinary” refers to those expenses that are common in your industry, and “necessary” does not mean absolutely necessary but instead means the expense is helpful to create income. The key here is that your business expenses should be similar to those in your industry and in line with similar budgets, where the amount expensed bears a reasonable relation to the benefit expected. It does not mean that you have to be a carbon copy of another business; however, you should be prepared to explain yourself to the tax authorities if asked.
Note that when taxpayers establish that they have incurred deductible business expenses but are unable to substantiate the exact amounts, the tax court can estimate the deductible amount in some circumstances, but only if the taxpayers present sufficient evidence to establish a rational basis for making the estimate. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).