The snow is melting, the birds are chirping, and spring is just around the corner. While many enjoy the signs of warmer weather, there is one spring ritual that most of us hate to face: Tax Time. April 15 looms ahead, and for horse owners, taxes can pose a particular challenge.

Every year, I hear a common question from my clients—are my horse-related expenses deductible? And each year, the answer is the same—it depends. Tax laws are admittedly confusing and they are always subject to change. In that regard, this article is by no means meant to be a comprehensive account of all the factors that might apply to your situation, but it will hopefully give you a general idea of where you stand, tax-wise, with regard to horse ownership.

Basically, the answer as to whether or not you can deduct horse-related expenses on your income tax depends on whether your equine activities are considered a hobby or a business. This may seem like a clear-cut distinction, but it isn’t. Where is the line between hobby and business? Many horse owners who participate in activities such as showing, racing, breeding, training, and boarding, automatically assume that their equine activities are considered a business for tax purposes. They invariably report losses year after year to serve as a deduction against unrelated income (income from sources other than a horse-related activity). However, consistently reporting losses for equine “business” activities for several years in a row will raise red flags with the IRS, and they will begin to question whether the alleged horse-related business is really just a hobby in disguise. To distinguish a business from a hobby, the question the government asks is not necessarily how much profit or loss you sustained, but rather whether your intent was to turn a profit. Trying to discern someone’s intent may seem rather subjective…and it is, to a large degree. Understanding this dilemma, the IRS has devised a set of nine factors that they consider when determining if your equine activities are for business or pleasure:

1. The manner in which the activity is carried on. In other words, are you handling things in a business-like manner? Do you maintain accurate bookkeeping records? Do you have staff or employees? Are you registered as a business?
2. Your expertise with regard to the equine activity. For instance, if you hold yourself out as a professional riding instructor, are you formerly trained as such? Do you take classes or attend seminars to hone your skills and keep up with industry standards?
3. The time and effort expended in the activity. Do you just pursue the equine activity in your spare time or on weekends, or do you involve yourself on a daily basis with the management and operation of the business?
4. Expectations that the assets used in the activity may appreciate in value. For example, if you own a boarding facility or invest in a show horse, would you expect that, in the future, the operating income and capital gains from the sale of the assets would cover your costs and expenses?
5. Your background and success in other business activities. In other words, have you undertaken or had some degree of success in other business ventures? If so, it can indicate a serious intent to maintain your equine activities as a business.

6. History of income and losses. If you’re running a business, it’s expected that you will have some income to show for it. If after a span of time, you have no real income, or your income is swallowed up by losses, the scales tip in favor of hobby. However, showing a profit for just two out of seven consecutive years will be sufficient to trigger a presumption with the IRS that you intended to make a profit.
7. The amount of profit, even if occasional, or profit potential. Again, even turning a small profit every so often can bode well for you, especially if you can show that the venture, although risky (such as investment in a breeding stallion or race horse), carries a potential for substantial profit (regardless of the eventual outcome).
8. Your financial status. If it is clear that you are earning substantial income from other sources, and you’re not turning a profit with your equine activities, then the IRS is more likely to look at is as a hobby, not a business.
9. Degree of recreation or personal pleasure. While it’s OK to love your work, if your equine “business” activities are mostly personal in nature (i.e. trail riding with your friends, teaching your kids how to ride, etc.) then it will be hard to validate your claim of business.

So what is the big difference? If your horse-related activities are considered a hobby or a business, how does that affect you, tax-wise?

For the most part, according to the IRS, expenses incurred in the pursuit of a hobby are not tax deductible. If you enjoy dancing or playing baseball, you cannot expect to deduct the cost of your dance lessons or your baseball equipment. However, in the case of horse ownership, the IRS makes a limited exception. Even if your equine activities are considered a hobby, any expenses/losses you incur can be deducted, but only from income that you earn from your equine-related hobby. So, for example, if you let someone ride your horse once in a while, and they pay you for it, you will likely have to report that payment as “hobby income.” But you can then offset that particular income with horse-related expenses. Remember, though, that since it is a hobby, the horse-related expenses cannot be deducted from unrelated income. If you try to do so, you could land yourself in a lot of trouble with the IRS.

If your equine activities are considered a business for IRS purposes, then you may deduct related expenses (i.e. vet fees, farrier fees, feed, tack, grooming supplies, and so forth) from unrelated income (i.e. income from other sources). As you might imagine, these expenses can add up to substantial deductions, and provide for a major tax break. Still, keep in mind that the IRS is watching, and you must make sure those deductions are legitimate.

Mati Jarve is the managing partner of the Marlton, New Jersey law firm of Jarve Kaplan Granato, LLC. He is certified by the New Jersey Supreme Court as a Civil Trial Attorney and theNational Board of Trial Attorneys as a Trial Advocate. Licensed in New Jersey, Pennsylvania and Arizona, he maintains a national practice in civil litigation, including equine related issues. This article is for informational purposes only and is not intended to be legal advice. If you have a specific legal question or problem you should consult with an experienced and knowledgeable equine law attorney. Questions, comments or suggestions can be e-mailed to mjarve@nj-triallawyers.com, by visiting www.nj-triallawyers.com.