Tax Law and the Horse Industry: Part III, Incorporating Your Horse-Related Business

Anyone who runs a horse-related business without incorporating it takes a tremendous risk of losing their home and other personal assets. A riding accident, a horse out of control, a boarder’s slip-and-fall – any of these could jeopardize your home and life savings.

Horse-related ventures are generally high risk – by forming a business entity you can protect yourself by legally separating your business and your family’s assets. You can do this through a corporation (“C” or “S”), or a limited liability company (LCC). Here are some of the main benefits of formalizing your horse-related activities:

Limited liability

When you run your horse operations as a corporation or an LLC, you reduce your vulnerability to lawsuits and creditor claims. Your shareholders, if any, are also protected. For example, if one of your horses injures someone, that person will only be able to collect from the corporation, not from your personal assets. There is no such protection if you have a sole proprietorship or partnership, and for that reason alone they are generally a poor choice for horse-related businesses.

Audit protection

Incorporation can also help you in the event of an IRS audit. By complying with entity formalities, you will have records to establish your entity meetings, ongoing statements of information, and separation of business activities from personal (i.e., no comingling of activities). This makes it easier to demonstrate substantiation and compliance with other IRS regulations pertaining to your activities.

Proving professionalism

By complying with corporate formalities, you also make it easier to prove that you are conducting your activities in the “businesslike manner” required by the IRS.

Other non-tax issues

A number of ranches, breeders, and racetracks are structured as corporations, benefiting from centralized management and the ability to pass interest in the entity to future generations in perpetuity.

An LLC is the most popular choice for horse-related businesses that are owned and operated by two or more unrelated people. If you choose an LLC you will have a simple, flexible business structure with an operating agreement that sets forth how the business should be managed, the rights and responsibilities of the owners, the allocation of profits and losses among the investors, and how things should be handled if an investor wants to leave the company.

Note that it is critical that you conduct ongoing internal compliance reviews and meet regularly with tax professionals. If you are unable or unwilling to do this, the IRS is likely to view your activities as a hobby.

Equine business tax laws

Once you have selected the most appropriate legal structure for your business, you can then focus on maximizing the tax benefits of your choice. If you choose to operate as a “C” corporation, you will pay the new, reduced corporate income tax rate of 21%. However, as an LLC, or if you elect Subchapter “S” status, you can take advantage of the new 20% deduction against qualified business income (although some individuals, including veterinarians, trainers, and bloodstock agents, may fall under the new deduction’s service business limitations).

The IRS can still deny your deductions on the basis that you do not “materially participate” in your trade or business. Our next post will outline the passive activity loss rules and provide tax tips for horse owners on how to overcome them.

* The information contained in this blog should not be used as a substitute for a consultation with equine tax accountant and/or attorney.