The horse business is a challenging and slow starting business, particularly for breeders.
With lots of expenses yet little or no income the first few years, those in the horse business usually offset their losses from horse activities against other sources of income.
It’s no surprise then that the most significant tax concern for most in the horse business is that the IRS will wrongfully declare their business is a “hobby” and “not engaged in for profit,” and under section §183 severely limit deductions to the extent that no losses can be generated.
Treasury Reg 1.183-2 provides that “not engaged in for profit” is a subjective standard – it looks to the taxpayer’s intent to create a profit, no matter if the belief is unreasonable. It’s not a reasonable person standard, it’s a subjective standard, but because the temptation to lie is so great, the determination is made by the IRS and courts by using a nine-factor objective standard.
A tax advocate would do well to study these factors, and especially the relevant case law when they represent their horse business clients before the IRS.