Tax Bill Includes Provisions Beneficial to Horse Industry

(From the American Horse Council)

On May 28, U.S. President George Bush signed the $350 billion Jobs and Growth Tax Relief Reconciliation Act of 2003 into law, the third federal tax reduction in as many years. The bill, which is intended to prompt investment, provide jobs, and get the economy jump-started, includes some attractive incentives for investing in the $112-billion horse industry.

Section 179 Expensing Amount Increased to $100,000
Under the new law, an individual who treats his/her equine activities as a business may write-off (deduct) up to $100,000 of the cost of horses and other farm assets purchased and placed in service in 2003 through 2005. This is a substantial increase from the prior limitation of $25,000.

This so-called "expense deduction" is permitted under Section 179 of the Internal Revenue Code, which allows an individual to elect to write off as a current expense, just like operating expenses, the cost of depreciable property purchased and placed in service during the year. For example, under the new law, if a person buys a horse for $100,000 or less and begins to use it or train it, he/she can deduct the entire purchase price in the first year, provided other requirements are satisfied. This deduction also applies to the purchase of other depreciable assets used in the horse business.

There are restrictions on the deduction.  Once the total purchases of depreciable property exceed $400,000 (up from $200,000), the amount that can be expensed is reduced one dollar for each dollar invested above $400,000.  Thus, if an individual purchases a total of $500,000 of depreciable property in a year, the expense deduction is not available. But for most horse owners and breeders total purchases for the year are under the $400,000 limit and this additional first-year deduction should be a strong incentive for people to buy horses.

The Section 179 expensing allowance applies to all depreciable property, including fences, farm equipment, tack, etc.   There is no "original use" restriction as there is with "bonus depreciation," discussed hereafter. For this reason, even a horse which has been trained, raced, shown, competed, or bred is eligible for expensing if purchased for use in the individual's horse business.

As an aside, the horse industry almost lost the Section 179 expense deduction in 1996.  In fact, the House of Representatives passed a tax bill that actually included a provision repealing the expense deduction for horses.  Fortunately, through the efforts of the American Horse Council and the industry, the final bill passed by Congress did not include the repeal and the incentive was preserved. At that time, the expense deduction was $17,500.

Bonus Depreciation
The new tax bill also increases the first year "bonus" depreciation allowed, first enacted in the 2002 tax bill, to 50% of the cost of horses and other eligible property purchased and placed in service during the year.  This is an increase from 30%.  This "bonus" depreciation is in addition to the regular first-year depreciation allowed.  The balance is then depreciated over the depreciable life of the horse under the existing schedules, depending on whether the horse is in the three or seven year category of assets.

As was the case under the 2002 law, the "original" use of the horse or other property must begin with the purchaser for the property to be eligible. "Original use" means the first use to which the property is put, whether or not that use corresponds to the use of such property by the purchaser. In other words, if a horseowner uses a horse in his business in one way, racing for example, and then another individual purchases that horse and uses it in another manner, breeding or showing, the second purchaser is likely not entitled to the bonus depreciation.

Unlike the Section 179 expense deduction, there is no limit on the amount of bonus depreciation that can be taken with respect to business assets in any one year. The 50% bonus depreciation applies to purchases after May 5, 2003 and before January 1, 2005.

Bonus depreciation may be taken in addition to the $100,000 expensing allowance and in addition to regular depreciation.  In other words, a taxpayer may take the $100,000 expense deduction, plus the 50% bonus depreciation on the remainder, plus regular depreciation in the first year the horse or other asset is purchased and placed in service, if he/she satisfies the restrictions described above.

These are important tax incentives to invest.

Capital Gains
Under the new law, the top long-term capital gains rate is lowered to 15% (down from 20%) on sales and exchanges (and payments received ) on or after May 6, 2003 and before January 1, 2009. The  long-term capital gain rate is reduced to 5% for taxpayers in the lowest bracket. Remember that a horse must be held for twenty-four months to qualify for long-term capital gains tax treatment.

Tax Rates Reduced
Beginning in 2003, the top income tax rate has been reduced to 35% (down from 38.6%) and the other rates above 15% are also reduced to 33%, 28%, and 25%. These reductions are due to "sunset," meaning expire, and go back to pre-2001 levels after 2010 unless Congress acts to keep the rates as they are.

Dividends Taxed at Capital Gains Rate
Finally, dividends received by an individual from domestic and qualified foreign corporations are now taxed at the long-term capital gain rates, 15% and 5% for taxpayers in the lowest bracket. The new rate applies to dividends received after 2002 and before 2009.

All things considered, if the purpose of the new tax law is to spur investment and the jobs that generally rely on investment, there are certainly some attractive tax consequences for investing in the horse industry, which now supports 1.4 million job

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