Many people with hobbies related to horses will tell you that their involvement often extends a bit deeper than the term “pastime” would suggest. For most of us, our equine endeavors are as central to who we are and the lifestyle we live as any other aspects of our lives. It’s human nature to want to marry your passion and occupation into one blissful union, and it’s not uncommon for horse people to start wondering, “How can I make money with horses?” Starting a horse business, though, should involve extensive evaluation of your goals and serious business planning. There is some truth to the old joke, which asks: “How do I make $1 million in the horse business?” Of course, the old answer is “Start with $3 million.” Ha.
Is Starting a Horse Business Right for You?
Starting a business of any kind is a big step and a significant commitment. While horse people are likely comfortable with both leaps and loyalty, it is important to plan certain aspects of your equine business with the mindset of a business owner, not a horse enthusiast.
What to Consider when Starting a Horse Business
Small business owners often work 50 to 60 or more hours each week. The idea of ditching your day job and spending that amount of time doing something you love might feel like winning the Triple Crown, but you must remember that much of the work involved in running an equine business will not be spent “horsing around.” (Please forgive me, could not resist.)
An equine business is first and foremost a business. This means the prospective business owner should have a well-formed and vetted business plan, including a market analysis and evaluation of income potential and anticipated expenses. You will need to determine what business structure is best for you, so as to best protect your personal interests from liability. This structure, whether it be an LLC or corporation, will also determine many of the record-keeping and tax-filing requirements for your company.
Insurance is often a critical aspect of an equine business and in some states, like West Virginia, it is required by law. You will also need to be able to handle or seek assistance with the various contracts and agreements involved in your operations. In any business, diligent preparation in and attention to these areas can help prevent disputes and even litigation in the years to come.
Horse Businesses versus Hobby Endeavors
Horse businesses that claim losses on federal taxes must be established for the purpose of making a profit and be able to demonstrate good faith attempts to do so. Title 26 of Code of Federal Regulations specifically outlines the relevant factors that the IRS considers when determining if operations are for business or hobby purposes:
- Is the activity carried out in a businesslike manner, with bookkeeping, record-keeping, and active efforts to profit?
- Has the business owner sought and heeded the advice of legal, financial, and/or other business professionals?
- How much time and effort is expended on the business?
- Have the actions of the business shown an anticipation of the future value of assets?
- Does the business owner have a previous record of success in transitioning an unprofitable business to profitable?
- Is there a history of losses or income related to the activities of the business?
- What are the ratios of profits, losses, and investments?
- Does the business owner receive significant income from other sources?
- Are there relevant and significant elements of personal recreation or pleasure in the activities of the business?
In short, you can run an equine business and fail to make a profit, but if the IRS suspects that your business exists for the sole purpose of writing off losses related to your horse hobby, you could find yourself out of the saddle.
Consult with a Licensed Equine Attorney
Whether you are looking for advice on starting a horse business or trying to determine if your activities qualify for tax treatment as an equine business in WV, OH, or PA, the counsel of an equine attorney is recommended and beneficial. Attorney Allison J. Farrell of Jenkins Fenstermaker, PLLC in Clarksburg, WV is an avid horsewoman and horse business owner who knows the equine industry and the law. Contact Allison by calling (304) 521-6120 or completing the equine team’s online contact form to start the conversation.