Tax question

[jcummins]

Early this year we started a small cattle operation. We started with some lease pasture that had allot of woods, and have since bought 125 acres with 95 acres good open pasture, but still some woods, and no cross fencing. Hence, we felt a horse was necessary to control these cows, and there has been several situations since then that has proved that is right. In fact, we are fixing to buy another.

Today I had a review with tax people about our manner of recording expenses etc, I think we are in pretty good shape….but….I was astounded when they said the horse was not a tax deductible expense in a cattle operation. They claim there has been wholesale abuse to the point that everyone claimed their horse was a working horse, that IRS just totally disallows. Our horse to this point has been used exclusively in a working cattle situation. In fact I argued a bit with them, but they was adamant that it was not deductible.

What's everyone experience with this situation? If it's deductible, I need IRS code to refer to, and court cases to back it up.

 

[Arnold Ziffle]

Well, the costs associated with horses are certainly not automatically non-deductible in a cattle operation. But I suspect that your accountants are troubled by the issue of the need for a horse in such a small operation and it's probably hard for them to believe that the horse is not really simply a personal indulgence with occasional cattle business use. I personally know quite a few people in these parts that run cattle on 100 to 500 acres and not a single one comes to mind that uses a horse in their operation and certainly not two horses! Yet I also know a good number of people that keep horses on very small acreage for recreational use.

In order to be deductible for income tax purposes (and outside the realm of a hobby operation) expenditures (for horses or whatever) must be ordinary and necessary. For example, as regards horses, what is ordinary and necessary to a rancher running cows on a big spread in the hill country of Texas, or on big acreage in the Sandhills or Montana is probably quite different than for an operation running on a 100 or so acres just outside Houston. But each case is judged on it's own merits. Perhaps you need to be more forceful with your accountants and give them "something to hang their hat on" regarding your reasons for the horse, the uses that you've already put the horse to, the fact that you or your kids (apparently) don't do any pleasure riding of that horse, etc.; also, that you completely understand that the IRS may audit you and toss the deduction, and assess taxes, interest and possibly penalties.

Clearly, there are quite a few situations of abuse in situations similar to yours here in the Houston area and, although accountants are supposed to be advocates for their clients, some of them are no doubt too timid or gun-shy, just as some are way too aggressive. As I recall, at last count there were more horses in Harris county than any other county in Texas and at times it seems like every Tom, Dick and Harry with 10 acres in the country wants to claim a "ranch" losss. Nevertheless, if you and your accountants conclude that your particular fact situation warrants it, you should claim the deduction for your horse ---but properly document your file with memos, diary, etc. and a good paper trail and then simply be prepared to do battle with the IRS in the relatively remote case of your return being audited. But adding the second horse to the equation really makes it a stinker, IMHO.

 

[dph]

J. I can't believe they wouldn't allow you to at least deduct a percentage of your horse expense as farm related. We had a tax adviser once tell us we could deduct a portion of our dog food for the border collie. We never did do it, pretty insignificant amount, but he was a very conservative individual, and certainly wouldn't have been suggesting it if it were iffy.

 

[Running Arrow Bill]

One horse in a cattle operation "might" be suspect...but, it's up to the tax experts to sort this out.

In our Cattle and Horse operation, our adult horses are classified as "breeding stock" (including one stallion standing at stud). Our foals, yearlings, etc., are sent for training and advertised for sale. So far...our tax accountant has no problem writing off expenses for our horse component. Now...the picture would probably change a lot if we were not into breeding and selling horses.

 

[eatbeef]

I don't know the answer but you need a tax man that knows ranching, could be a woman too. also a 10,000$ horse on a 10 cow operation might raise an eyebrow

 

[wvherefords]

Here's a good reference website at irs.gov for farmers:

http://www.irs.gov/publications/p225/index.html

 

[jcummins]

I'm located in Montgomery county not Harris, and the acreage we have is in Walker county. So…I'm somewhat removed from yuppie Houston, and Harris county….at least as it relates to the cattle business. BUT, AZ you bring up the reasons why this is an IRS touchy issue. I also know most cattle operations don't necessary use horses…but I can give specific examples where there just was NO way we could have loaded certain cattle without a horse. Some of those wilder cattle have been sold, but we have a couple that produced very good calves…and I don't want to get rid of the cow….that's what we bought the horse for. Right now, we can call up about 90% of our cows, but last time we did, there were three with calves that did not. We located them with the horse.


I can see a point about two horses pushing the point on a working cattle horse. After some thought, I would business expense one but not the other…provided I can determine we don't have an IRS issue. Also I am using a tax/attorney persons that has been deeply involved with cattle ranching, and are quite familiar with the do's/don'ts. I respect their judgment, but on this topic… I'd like to see the specific IRS publication/document that says that.

I reviewed the publication http://www.irs.gov/publications/p225/index.html and also the Market Segment Specification Program (MSSP) on general livestock at http://www.irs.gov/businesses/page/0,,id%3D6984,00.html. I cannot find any reference to a horse not being a business expense in a cattle operation. I've posed that question to my tax people as well.

Is anybody here treating a horse as a business expense?

 

[hillbilly]

I don't know about horses but Dun has a mule
he has probably wrote off several times.

Hillbilly