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New Tax Laws Benefit Kiger Mustang Breeders/Exhibitors

Washington, DC -February 14, 2008 - The President signed into law the Economic Stimulus Act on February 13. The bill is intended to provide a jump-start to the lagging U.S. economy.

“The new law includes two tax incentives that would allow a much bigger write-off for Kiger Mustang owners and other depreciable property purchased and placed in service during 2008.  This should provide an additional incentive for people to invest in more Kiger Mustangs for endurance racing, showing and breeding as part of their business activities.”
The first incentive increases expensing allowance for Kiger Mustangs purchased and placed into service in 2008 up to $250,000 the first year. This expensing allowance also applies to farm equipment and most other depreciable property used in conjunction with your Kiger Mustang.
To illustrate the expensing allowance, assume a Kiger Mustang Breeder purchases $350,000 of breeding stock and depreciable property in 2008. That business can write off $250,000 on its 2008 tax return and depreciate the balance; the amount of the purchases not expensed may also be eligible for bonus depreciation, which is reinstated for 2008 in the new tax stimulus package.
The second incentive brings back 50% first-year bonus depreciation for horses and most other depreciable property purchased and placed in service during 2008.
But the Kiger Mustang must be new, meaning that the original use of the horse or other property must begin with the purchaser for the property to be eligible. There is no limit on the amount of bonus depreciation that can be taken.

To illustrate bonus depreciation, assume that in 2008 a Kiger Owner pays $400,000 for a colt to be used for racing or breeding and $150,000 for other depreciable property, (trailers, trucks) bringing total purchases to $550,000. The young colt had never been raced or used for any other purpose before the purchase. The business would be able to expense $250,000, deduct another $150,000 of bonus depreciation (50% of the $300,000 remaining balance), and take regular depreciation on the $150,000 balance.

Tax Talk

New Tax Deduction
Available to Horse Breeders in 2005

Horse breeders don’t have to in the red to benefit from new tax advantage that begins in 2005 and increases over the next five years until fully implemented in 2010. The deduction can shelter up to 3% of 2005 profit from the sale of horses a breeder bred and sold. The American Jobs Creation Act of 2004, passed by Congress at the end of 2004, provided a new tax benefit which lowers the tax on income from U.S. production. Specifically, it applies to income realized by breeders from breeding and selling horses.The deduction is 3% of profits in 2005 and 2006, 6% in 2007 through 2009, and 9% in 2010 and thereafter.

For example, if a breeder makes a profit of $100,000 in 2005 from the sale of horses bred, the breeder can deduct $3,000 on his or her tax return. This is in addition to any other deductions to which the breeder is entitled. That deduction rises to $6,000 in 2007 and tops out at $9,000 in 2010 and thereafter.The new deduction applies to sales of horses. But it is limited. It cannot exceed the profit from breeding sales, although it appears that a breeder could get a deduction even though the overall horse business incurs a loss.

In addition, it cannot exceed 50% of wages paid to employees. So be sure you are paying yourself, your significant other or your children, however tax rules do not require you to pay wages that exceed no payroll tax levels. I believe no payroll taxes are due if wage earner makes less than $3000 to $6000 depending on marital status. “Wages” are the sum of wages and deferrals required to be included on IRS Form W-2. But check with your accountant.

This explanation is based on a preliminary analysis of the new provision. We recommend that horse breeders consult with their tax advisors to see how this new change affects their specific breeding activities.

Horse Investment Bill Initiated
In Both houses of Congress

A bill designed to promote investment in the horse industry by removing provisions of federal law that favor other investments was introduced by U.S. Senator Mitch McConnell July 28.


Federal law treats the equine industry differently than others in several respects.  Horses must be held longer than other business assets to be subject to capital gains


On July 28, 2005, Senators Mitch McConnell (R-KY), Jim Bunning (R-KY) and Blanche Lincoln (D-AR) introduced the Equine Equity Act (S. 1528) to deal with each of these unfair situations.  This bill would end the disparate treatment of the horse industry versus other businesses under the federal tax code and other federal provisions. Specifically, the legislation would: (1) make horses eligible for capital gains treatment after twelve months; (2) place all horses in the three-year category for depreciation purposes; and (3) make horses eligible for federal emergency assistance under circumstances presently enjoyed by other livestock and crop producers.

Reduction of Capital Gains Period

Under the federal tax code, gains from sales by individuals of property used in a trade or business, including horses, qualify for long-term capital gains and are subject to the maximum capital gains tax rate of 15%. Since the individual tax rate can go as high as 35%, the lower rate is a real advantage.

Unfortunately, horses held for breeding, racing, showing or draft purposes generally qualify for the 15% capital gains rate only if they are held for 24 months. All other business assets (except cattle) qualify if held for 12 months. Passage of this legislation would end this discriminatory treatment of horses under the tax code and allow horse owners to enjoy the reduced rate upon sale after holding the horse for 12 months, rather than twenty-four.

Shortening the capital gains holding period to twelve months should be a benefit for most breeders and horse owners who breed to race or show (even if they cull some foals/yearling), or who race or show horses and sell them, or who race or show horses and syndicate them and sell shares. The change would give these horse owners and breeders more flexibility to sell and market their horses. It would mean that every sale of a horse which is held for at least twelve months would qualify as a capital gain or loss unless that horse is held primarily for sale.

Making All horses Eligible for Depreciation
over Three Years.

Presently horses are depreciated over either three or seven years, depending on their age when “placed in service.” A horse is generally deemed to be placed in service when it begins training, which is usually at the end of its yearling year. Horses over two when placed in service are depreciated over three years; if not over two, they are depreciated over seven years. Depreciation is a means of recovering the cost of horses used in a business through deductions of portions of the horse’s cost over a period of years. Generally, the recovery period approximates the estimated useful life or economic life of the property. Current law provides that endurance horses that begin training at the end of their yearling year are depreciated over seven-years, even though most will not actually race for seven years.

This legislation recognizes the unreality of this requirement by changing the tax code to allow owners to depreciate all their race horses over three years, rather than seven, regardless of when they are placed in service. The change would provide for a more equitable depreciation schedule for endurance horses, one that better matches the realities of the situation. Owners will no longer be required to depreciate their horses over seven years simply because they are placed in service at the end of their yearling year.

Obviously, this change would allow an owner to depreciate 62.5% over the first two years a horse is in training or races, rather than 29.85% under current law.

Making Horses Eligible for Federal Emergency Funds

 The legislation would also make horses eligible for federal emergency relief similar to other livestock and crops.

Losses from natural disasters affect horse breeders just as they affect other livestock and crop producers. If a breeding farm or ranch loses horses because of flood, drought, tornado or other natural disasters, it has lost its “crop” and has nothing to sell. If a drought causes feed to become more expensive it affects horse ranches as well as cattle ranches. In cases of natural disasters, federal emergency payments and loans could help some horse owners to keep operating, rather than having to sell their horses or their business.

This legislation would end this unfair discrimination and provide that in future emergencies horse breeders would be eligible for emergency assistance that producers of other crops and livestock have enjoyed.

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