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Hobby or Business? ANSC 236 Equine Business Mgt. Spring 2010 Elaine Long Bailey
Hobby vs. Business . . .  <ul><li>Business:  “intent to make a profit . . .” </li></ul><ul><li>Revenue from horse “interes...
IRS Business Factor Test <ul><li>1:  Activity carried out in a businesslike manner? </li></ul><ul><li>Accurate records </l...
2:  Time & effort reflect efforts to generate profit? <ul><li>Material participation (>500 hours/yr.) </li></ul><ul><li>Pa...
3:  Dependence on income? <ul><li>Supported from other sources? </li></ul><ul><li>Taxpayer’s financial status </li></ul><u...
4:  Normal startup costs or catastrophic circumstances? <ul><li>Lag time in breeding operation </li></ul><ul><li>When do w...
5:  Changes to improve profitability? <ul><li>KEY FACTOR </li></ul><ul><li>Goes back to success in previous businesses (mg...
6:  Knowledge to be successful <ul><li>Horse experience and skills </li></ul><ul><li>Learn from others in business </li></...
7:  Past record of running profitable businesses <ul><li>Management professionals who change “products” </li></ul><ul><li>...
8:  Does the business make a profit? <ul><li>Balance of profit vs. loss </li></ul><ul><li>WHY profits occur? </li></ul><ul...
9:  Future  profit from appreciated assets? <ul><li>Real estate vs. horses </li></ul><ul><li>Imported foals sold as “under...
Business vs. Pleasure? <ul><li>Recreational activity* </li></ul><ul><li>Business </li></ul><ul><li>Income generators </li>...
IRS Audits <ul><li>Beware “red flags” that trigger IRS attention/audits </li></ul><ul><li>Large  losses  from “hobby” ente...
Tips to Avoid IRS Challenges <ul><li>Advance planning & written records </li></ul><ul><li>Separate bank accounts </li></ul...
IRS Form 5213 <ul><li>If no profit in 2 out of 7 years . . .  </li></ul><ul><li>http://www.irs.gov/pub/irs-pdf/f5213.pdf <...
Forms of Doing Business  <ul><li>Type of ownership </li></ul><ul><li>Sole proprietorship </li></ul><ul><li>Partnership (ge...
Sole Proprietorship <ul><li>Most popular & least complicated </li></ul><ul><li>Individual in business </li></ul><ul><li>“ ...
Partnership <ul><li>Two or more individuals in business </li></ul><ul><li>In what way are individuals involved? </li></ul>...
Comparisons <ul><li>General partnership </li></ul><ul><li>Management “say” in decisions </li></ul><ul><li>Unlimited liabil...
Corporations <ul><li>Need legal assistance to form </li></ul><ul><li>Certificate of Disclosure </li></ul><ul><li>Incorpora...
Comparisons <ul><li>Regular Corporation </li></ul><ul><li>Its own entity, from tax stance </li></ul><ul><li>Files tax retu...
Limited Liability Corporation (LLC) <ul><li>Why LLC? </li></ul><ul><li>LIMITED liability </li></ul><ul><li>Protect persona...
Syndicates <ul><li>Common interest:  stallion shares, e.g. </li></ul><ul><li>One-time breeding rights sold by shareholders...
A Few Resources . . .  <ul><li>http://mredc.umd.edu/hotlistHorseBoarding.htm </li></ul><ul><li>http://mredc.umd.edu/rootbe...
My contact info: Elaine Long Bailey [email_address] Good luck!!
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Hobby or Business?

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Some considerations for your horse business, from an IRS perspective

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Hobby or Business?

  1. 1. Hobby or Business? ANSC 236 Equine Business Mgt. Spring 2010 Elaine Long Bailey
  2. 2. Hobby vs. Business . . . <ul><li>Business: “intent to make a profit . . .” </li></ul><ul><li>Revenue from horse “interests. . .” </li></ul><ul><ul><li>Declare as income, business or not </li></ul></ul><ul><ul><li>Hobby Loss Rule (IRS) limitations </li></ul></ul>
  3. 3. IRS Business Factor Test <ul><li>1: Activity carried out in a businesslike manner? </li></ul><ul><li>Accurate records </li></ul><ul><li>Separate accounts </li></ul><ul><li>Time records (daily business operations) </li></ul><ul><li>Business plan </li></ul><ul><li>Financial statements </li></ul>
  4. 4. 2: Time & effort reflect efforts to generate profit? <ul><li>Material participation (>500 hours/yr.) </li></ul><ul><li>Partial withdrawal from other profession? </li></ul><ul><li>Employ competent, qualified persons to conduct the business </li></ul><ul><li>“ The fun” vs. “the chores” </li></ul>
  5. 5. 3: Dependence on income? <ul><li>Supported from other sources? </li></ul><ul><li>Taxpayer’s financial status </li></ul><ul><li>Hobby Loss Rule* </li></ul><ul><li>IRS prevents large businesses from reducing taxes on other income </li></ul>
  6. 6. 4: Normal startup costs or catastrophic circumstances? <ul><li>Lag time in breeding operation </li></ul><ul><li>When do we sell our product in the cycle of the business? </li></ul><ul><li>When is expected “pay day?” </li></ul><ul><li>Disease problem: MRLS or EHV-1, e.g. </li></ul><ul><li>IRS: profit 2 years out of 7 ( horse businesses ONLY ) [typical business profit required 2 years out of 5] </li></ul>
  7. 7. 5: Changes to improve profitability? <ul><li>KEY FACTOR </li></ul><ul><li>Goes back to success in previous businesses (mgt. skills)* </li></ul><ul><li>Cut costs </li></ul><ul><li>Increase revenue </li></ul><ul><li>Business plan review/update* </li></ul>
  8. 8. 6: Knowledge to be successful <ul><li>Horse experience and skills </li></ul><ul><li>Learn from others in business </li></ul><ul><li>Financial, business and management skills </li></ul><ul><li>Classes or workshops (UME, e.g.) </li></ul><ul><li>Show records/training records/successes </li></ul><ul><li>Certifications (ARIA, CHA, e.g.)* </li></ul><ul><li>Engage professionals (financial, legal, etc.) </li></ul>
  9. 9. 7: Past record of running profitable businesses <ul><li>Management professionals who change “products” </li></ul><ul><li>How turn businesses around, financially? </li></ul><ul><li>Previous business ventures </li></ul><ul><li>Previous business track records </li></ul>
  10. 10. 8: Does the business make a profit? <ul><li>Balance of profit vs. loss </li></ul><ul><li>WHY profits occur? </li></ul><ul><li>Small profits occasionally vs. large losses commonly </li></ul><ul><li>Speculative ventures* </li></ul>
  11. 11. 9: Future profit from appreciated assets? <ul><li>Real estate vs. horses </li></ul><ul><li>Imported foals sold as “under saddle” </li></ul><ul><li>Purchase of performance horses w/no show record (train and show) </li></ul><ul><li>Breeding stock (progeny’s successes) </li></ul>
  12. 12. Business vs. Pleasure? <ul><li>Recreational activity* </li></ul><ul><li>Business </li></ul><ul><li>Income generators </li></ul><ul><li>Family “pets” </li></ul><ul><li>Use percentages: 3 days/wk. for lessons vs. 3 days/wk. for pleasure (50% of expenses deductible) </li></ul>
  13. 13. IRS Audits <ul><li>Beware “red flags” that trigger IRS attention/audits </li></ul><ul><li>Large losses from “hobby” enterprises </li></ul><ul><li>Business: records, records, records! </li></ul><ul><li>Respond to the IRS audit letter!!! </li></ul><ul><li>Get appropriate professional assistance!!! </li></ul>
  14. 14. Tips to Avoid IRS Challenges <ul><li>Advance planning & written records </li></ul><ul><li>Separate bank accounts </li></ul><ul><li>Accurate, complete records </li></ul><ul><li>Business plan </li></ul><ul><li>Disprove recreational or pleasure motive </li></ul><ul><li>Adequate time & money spent on business </li></ul><ul><li>Expert consultation </li></ul><ul><li>Document excessive losses </li></ul><ul><li>Create profit when feasible* </li></ul>
  15. 15. IRS Form 5213 <ul><li>If no profit in 2 out of 7 years . . . </li></ul><ul><li>http://www.irs.gov/pub/irs-pdf/f5213.pdf </li></ul><ul><li>IRS postpones determination of profit intention </li></ul><ul><li>KEEP records </li></ul><ul><ul><li>Catastrophic circumstances </li></ul></ul><ul><ul><li>Natural disasters </li></ul></ul><ul><ul><li>Other unpredictable occurrences </li></ul></ul>
  16. 16. Forms of Doing Business <ul><li>Type of ownership </li></ul><ul><li>Sole proprietorship </li></ul><ul><li>Partnership (general or limited) </li></ul><ul><li>Corporation (regular, limited liability or subchapter S) </li></ul>
  17. 17. Sole Proprietorship <ul><li>Most popular & least complicated </li></ul><ul><li>Individual in business </li></ul><ul><li>“ Tax shelter” farms* </li></ul><ul><li>Material participation** </li></ul><ul><ul><li>>500 hours tax year, e.g. </li></ul></ul><ul><ul><li>See text for “tests” </li></ul></ul><ul><ul><li>Documentation of time use for business </li></ul></ul>
  18. 18. Partnership <ul><li>Two or more individuals in business </li></ul><ul><li>In what way are individuals involved? </li></ul><ul><ul><li>Money </li></ul></ul><ul><ul><li>Property </li></ul></ul><ul><ul><li>Business expertise/effort </li></ul></ul><ul><ul><li>Share profits/losses </li></ul></ul><ul><li>Agreement in WRITING! </li></ul>
  19. 19. Comparisons <ul><li>General partnership </li></ul><ul><li>Management “say” in decisions </li></ul><ul><li>Unlimited liability* </li></ul><ul><li>Partnership must complete separate tax return </li></ul><ul><li>Profits/losses flow through to each partner </li></ul><ul><li>Partnership not taxed; individuals taxed per profits/losses </li></ul><ul><li>Limited partnership </li></ul><ul><li>Little or no management responsibility </li></ul><ul><li>Reduced liability </li></ul><ul><li>Partnership must complete separate tax return </li></ul><ul><li>Profits/losses flow through to each partner </li></ul><ul><li>Partnership not taxed; individuals taxed </li></ul>
  20. 20. Corporations <ul><li>Need legal assistance to form </li></ul><ul><li>Certificate of Disclosure </li></ul><ul><li>Incorporators: organize, promote, raise funds, do paperwork </li></ul><ul><li>Statutory agent to represent entity </li></ul><ul><li>Transfer funds, issue stock </li></ul>
  21. 21. Comparisons <ul><li>Regular Corporation </li></ul><ul><li>Its own entity, from tax stance </li></ul><ul><li>Files tax return, pays its own taxes </li></ul><ul><li>Funding advantage </li></ul><ul><li>Limit to debts, losses, negligence (individuals) </li></ul><ul><li>Protects personal assets </li></ul><ul><li>Subchapter S Corporation </li></ul><ul><li>Like partnership, from tax stance (individuals) </li></ul><ul><li>Shareholders report income or loss </li></ul>
  22. 22. Limited Liability Corporation (LLC) <ul><li>Why LLC? </li></ul><ul><li>LIMITED liability </li></ul><ul><li>Protect personal assets </li></ul><ul><li>Family farms or businesses </li></ul><ul><li>More later </li></ul>
  23. 23. Syndicates <ul><li>Common interest: stallion shares, e.g. </li></ul><ul><li>One-time breeding rights sold by shareholders or lifetime </li></ul><ul><li>“ Security” requires attorney services </li></ul><ul><li>Within syndicates, various agreements (partnerships, e.g.) </li></ul>
  24. 24. A Few Resources . . . <ul><li>http://mredc.umd.edu/hotlistHorseBoarding.htm </li></ul><ul><li>http://mredc.umd.edu/rootbeginning.html </li></ul><ul><li>http://www.agnr.umd.edu/MCE/Publications/Publication.cfm?ID=97&cat=C </li></ul><ul><li>http://www.agnr.umd.edu/MCE/Publications/Publication.cfm?ID=102&cat=C </li></ul><ul><li>http://www.agnr.umd.edu/MCE/Publications/Publication.cfm?ID=3&cat=C </li></ul>
  25. 25. My contact info: Elaine Long Bailey [email_address] Good luck!!

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