IRS Red Flags That Equestrian Businesses Should Avoid
Tuesday, April 2, 2013
The number one reason horse businesses get audited by the IRS is that they show no income and lots of expenses. Larry Rosenblum, E.A., M.B.A., of The Equine Tax Group, explains that while this is more common for breeding farms that have never sold a foal or broodmare, many other horse types of horse businesses are also guilty. He said the IRS understands you might not make a profit for the first year or so. However, if you don't show a profit within five to seven years, you will draw the attention of the IRS. Rosenblum offers some other tips to help keep you out of the IRS's crosshairs:• Separate your personal and business accounts. Even if you are operating your business as a sole proprietor, it's important to separate your checking accounts. You can create a DBA (Doing Business As) name for your business and use that documentation to open business checking account. Not only does this make it much simpler to track your business income and expenses, it also tells the IRS that you are acting as a business owner.
• Have a business plan. Again, not only is this essential for you as a business owner to plan how you will run your business and to forecast your expenses and income, but it also tells the IRS that you are putting the effort and planning into a true business and not a just a hobby. A business plan will also be necessary if you plan to secure any business loans or partners.
• Consult experts. If you are ever audited, the IRS will look at the quality of experts you consulted before starting your business. You are certainly an expert in the service portion of your business. However, think about your veterinarian, farrier, accountant, trainer, etc. and what their qualifications are. If it comes to an audit, the credibility of your experts is really important.
• Hire qualified people. If you're hiring your friends just because they are your friends, you have a hobby and not a business. The IRS agents are going to find that out. Keep resumes on file of all your employees and contractors.
Horse businesses are a common target of the IRS because often times they don't follow these simple steps. Make sure that your are treating your business as a business and you'll reduce the risk of the IRS knocking on your door, or at the very least you'll be ready to explain your business financials when they do.
Members, you can listen to the latest Horse Business Hotline and learn about other things that might flag your tax returns and why it might be better for you to file an extension rather than getting your taxes done early. Also, you'll learn what to look for in an accountant for your business. Watch a free replay of the session below or listen to the full replay.