Is Racing A Business Or A Hobby? Why Does This Matter?

Is cash from horse racing tax-free or do you get taxed until it makes you bleed? This question hounds newbies who are new to the stables, and even those who have been around much longer but have never won large enough to merit the filing of tax forms.

The head and tail of this horsing matter is that horse racing and breeding expenses can be a tax deduction - but only if you can prove you don’t race or breed horses as a hobby. What kind of proof does the IRS need? A lot! After all, the IRS does not clown around when it comes to matters of the wallet. In fact, the IRS has a list of guidelines you must meet to prove you are operating a business and are not engaged in a hobby.

These include:

1. You are dependent on your income from horse racing or breeding for your livelihood.

2. You invested money, time, and effort into making the business profitable. To this end, you must be able to prove you are either running the business yourself or are directly involved in its operations. Consequently, you must put in a lot of documented hours - hours for which you are compensated or are directly profiting from.

3. You are racing or breeding horses in a businesslike manner. Thus, you keep exact and verifiable records of your cash inflow and outflow, and the horse racing system of accounting that you follow.

4. Your business must be generating profit. In other words, to avoid having your venture considered a hobby, it must be profitable at least two out of every seven years. Otherwise, the IRS would have reasons to suspect you are simply using horse breeding or racing as a tax shelter, and thus, they will be more likely to audit you. It’s no walk in the park having the IRS poke their expert noses into your business. You will find yourself having to show truckloads of documents. At the very least, you will have to hire a tax lawyer to defend your claim of running a legitimate business.

5. Your losses must be in the normal range expected of a start-up business. Other losses must be due to of circumstances beyond your control. Again, the IRS does not want you parlaying the venture into a tax shelter.

Horse racing or breeding is fun, but not when it’s time to deal with the IRS. To avoid unnecessary grief come tax season, make use of many horse racing tip and equine resources found online. While many only discuss the basics of punting, there are materials that teach horsemen how to get their figures right for the taxmen.