As a tax accountant working in a CPA firm specializing in equestrian-related accounting and tax services, I have seen some epic mistakes made by equine companies that could cost them. There are really only two reasons for these mistakes: 1) They don’t know the rules. 2) They are trying to cheat. Either way, it is not a good situation.
Most CPA firms and tax accountants are absolutely clueless when it comes to the eligibility of expenses and/or hobby vs. business eligibility. Many CPA firms and tax accountants are absolutely scared to death to sign their names to these grey areas because they are not sure of the rules themselves. However, the firm I work at specializes in these types of activities and we handle equine tax and accounting issues on a daily basis.
Obviously there are many technicalities, hypotheticals, and exceptions to these rules, but generally speaking, you should avoid making these mistakes if you would like to steer clear of IRS issues:
1. Treating your “business” as a hobby.
If your equine business is incorporated (except not-for-profits), your business must be “profit-seeking”, which means that you need to show a profit motive for your business. If you are not showing a profit motive and are not conducting your business as a “business” then you are risking losing the deductibility of your expenses. If you think you’re going to get away with using your equine business as a tax shelter to absorb income from your other ventures, think again. If the IRS classifies your company operation as a hobby, you could be in for some big trouble.
2. Improper classification of expenses.
If you are doing your own bookkeeping for your equine business, be sure to research and follow the rules regarding the deductibility of your expenses. If you’re unsure, too lazy, or don’t have the time to research these rules, let an accountant do your books. Throughout the years, I have some seen some expense classifications that are so wrong that I almost broke down into tears. The IRS states that business deductions in general are not deductible, unless they fit into a category of deductible expenses. Below are a few business deduction clarifications:
Meals and Entertainment
50% deductible expense that is incurred when it is necessary to take a potential client out to dinner or to an event to discuss a possible business relationship. The company claiming the expense must write who the guest was and what was discussed on the receipt in order to be deductible. Meals and Entertainment does not include: going to the movies with your wife/girlfriend, taking your friend out to dinner, taking your employees out to dinner, buying a McDonald’s cheeseburger for lunch, buying a gatorade at the gas station, going to the nail salon, taking a trip to vegas, or buying tickets to see Iggy Azalea fall of the stage at Warped Tour.
Your dress shoes, tie, sport-coat, nails, hair coloring, hat, sunglasses, and lame khaki cargo shorts are not deductible. Sorry to ruin your day, but these are not considered “uniforms” by IRS code. The rule states that if your uniform can be worn on a “date” or “casually” then it is not deductible as a uniform expense. If you work as an auto-mechanic and you buy a jumpsuit with your name on it, then yes, your uniform is deductible. It would be laughable to show up on a date in a jumpsuit with your name tag on it. Even though to some it would be nothing short of a comical joke to show up to a date wearing anything less than a white gucci suit threaded from the hides of defenseless baby seals, does not mean that it is deductible.
Travel expenses must have a proven business purpose. You cannot deduct trips with the Griswold Family to Wally World, cruises with your long lost fraternity brother, sightseeing trips to the grand canyon, the costs of your everyday commute to and from your business location, or any trips that do not require you to stay overnight. Your business purpose must occupy the majority of your trip. Don’t think you can fool the system by booking a business trip to vegas that requires you to be there for 2 days, spend the remaining 5 days gambling at the MGM Grand and then deduct the entire trip. You can only deduct the two days that you spent there for business purposes.
Let’s not forget travel meals! Each county has a particular “per diem”, giving the traveler an allowable deductible amount per day. If you go over that amount, the remainder is not deductible. If you think ordering a $1300 bottle of aged wine at dinner is a way to create tax savings, you are mistaken.
3. Not keeping your receipts.
For the love of all that is holy, KEEP YOUR RECEIPTS! If you get audited by the IRS and they ask for your receipts, you need to provide them with copies of the receipts. If you don’t have the receipts for transactions, they are immediately NOT DEDUCTIBLE. The peanut gallery will tell you that you can always use your bank statements and credit card statements as proof of a transaction. Don’t believe the hype, it is 100% wrong. The IRS does not consider your bank/credit card statements as proof of a transaction. If you don’t have a receipt, the transaction never occurred, and therefore you lose the deduction. Sorry chief.
4. Spending too much on personal expenses.
This is an issue possibly worse than the black plague. Quit using your company bank accounts and credit cards for personal expenses, it is just bad business practice. As a corporation you have limited liability, which means if you run into legal issues such as a lawsuit or a breach of contract on a loan, then you will not be held personally liable. If the court investigates your finances and determines that you have been using your company to pay all of your personal expenses, then the court can Pierce the Corporate Veil. This means that you have been treating your company bank/credit accounts like it was your personal piggy bank, giving the illusion that it is your personal account. When the corporate veil is pierced, you wave ‘bye-bye’ to your limited liability and you can now be held personally liable for any legal issues, including possible repossession of your car, home, and wage garnishment. This is not something you want to play with.
5. Not keeping track of your books.
Any real company has accounting records, your equine company should too. If you aren’t even keeping track of your accounting records, you have know way of analyzing your own business. How much money is owed to you? How much money do you owe? What expenses are killing your profits? What is your profit margin? Are you able to pay off that loan this year? Should you pay off that loan this year? How much money would you save in interest by paying off that loan today? Are you doing better than last year? Is your business dwindling or growing? If you don’t keep accounting records, the answer to these questions is “who knows“.
I can tell you one thing though, if you aren’t even concerned about keeping accounting records, then I’m sure you probably don’t care about your business enough to care if it succeeds or fails. Accounting can give you a company overview so that you can analyze and make necessary changes to your company in order to increase growth. Fifty percent of all new businesses fail within 10 years. With that being said, if you aren’t keeping accounting records, chances are your business is slipping. It would be nothing short of a miracle that your company can grow and continue to turn great profits without the proper analysis derived from accounting records. If your child fails a test at school, you may ask “well, did you study?”. If his response is “no”, then it only makes sense as to why. The same goes for your business. For most business owners, their livelihood is on the line, stop gambling with your business!