By Laura Saunders | Wall Street Journal
Lots of Americans lose battles with the Internal Revenue Service. But sometimes those fights provide insights the rest of us can use to win against the IRS on similar issues.
A recent Tax Court case about so-called hobby losses by a Nebraska couple, Keith and Rhonda Schumacher, is a good example.
The Schumachers loved breeding and training horses, and they did what many taxpayers with costly hobbies do, or would like to: They claimed their interest was a business, making net losses from it deductible against their other income.
When this strategy is successful, it can save taxpayers a lot of money. In the Schumachers’ case, the horse-related losses were largely responsible for reducing their taxes by a total of nearly $200,000 from 2017 through 2019, according to the court’s opinion.
Adam Trenk, Rose Law Group Partner and Equine Law Director, tells RLGR,
“Many horse owners invest tremendous time, expertise, and money into their operations, but too few invest the same effort into the legal and business framework behind them. As a result, otherwise legitimate equine businesses can find themselves losing substantial tax benefits when the IRS views their operation as a hobby rather than a business.
This recent WSJ article highlighting a Tax Court decision involving a Nebraska horse breeding operation is a stark reminder of that reality. The court denied nearly $200,000 in tax benefits, not because the owners lacked experience or dedication, but because they failed to adequately demonstrate that their operation was managed with a genuine profit motive.
After more than fifteen years representing horse owners, breeders, trainers, ranches, and other equine businesses, I’ve found that the IRS is far less concerned with your horsemanship than with your business practices. Separate financial accounts, accurate books, a written business plan, documented efforts to generate income, and a clear path toward profitability can make all the difference.
The best time to prepare for an IRS audit is before it occurs. Establising the right corporate structure, maintaining corporate formalities, documenting decisions, coordinating with a CPA, and implementing sound operational practices will significantly strengthen your position if your operation is ever questioned.
If you own or are considering starting an equine business, proactive legal planning is one of the best investments you can make. I regularly help clients structure and protect equine businesses so they are positioned not only for long-term success, but to protect their interests and withstand legal and tax scrutiny when the stakes are high.”
