Purchasing a horse involves significant financial and operational considerations that can impact accounting and tax planning. For those involved in the equine industry—whether business owners, family offices, or accountants—understanding the nuances of how to account for a horse purchase and handle its related tax implications is essential. 

Today, we’ll examine the often overlooked financial side of horse ownership, specifically the accounting and tax treatment of horse purchases. This discussion will provide practical insights to help horse owners and financial professionals better navigate these important aspects of equine investment. 

Key Considerations When Purchasing a Horse

Recording Horse Purchases on Financial Statements 

Let’s begin with the basics—horse purchases aren’t immediately deductible. Instead, these costs are capitalized and appear on the balance sheet. Expenses related to the purchase, like agent commissions and shipping fees, are also capitalized and become part of the horse’s cost basis. 

  • Personal Horses: These stay on the balance sheet until they’re sold and aren’t depreciated. 
  • Resale Horses (Pinhooking): These are classified as inventory on the balance sheet and remain non-depreciable (with a few exceptions). 
  • Business Horses: Horses purchased as part of business operations are eligible for depreciation once they’re “placed in service.” 

What Does “Placed in Service” Mean?

The meaning of “placed in service” varies based on the horse’s purpose: 

  • Sport Horses: Placed in service when training or competing begins. 
  • Racing Prospects: Typically placed in service in the fall of the yearling year or when they start racing. 
  • Breeding Stock: Considered in service when they’re ready for breeding or have been bred. 

Depreciation Basics and Methods

Depreciating vs. Expensing Horses

When it comes to depreciation, instead of a one-time deduction, the purchase price can be deducted over multiple years. For U.S. horses, the typical depreciation period is either three or seven years; for non-U.S. horses, it may extend to ten or twelve years. 

Depreciation for U.S. Tax Purposes

The current bonus depreciation allows 60-80% of the purchase price to be expensed in 2024 for qualifying purchases. For those horses and assets that don’t qualify, standard depreciation applies. 

Who Qualifies for Bonus Depreciation?

Most U.S.-purchased horses qualify for this bonus depreciation if predominantly used in the U.S. Additionally, items like farm equipment and fencing can qualify—so long as they’re placed in service during the year. 

Federal and State Depreciation Differences

Many states do not align with federal bonus depreciation rules. This divergence often requires multiple sets of records to account for differences between federal and state tax depreciation—keeping things interesting for accountants! 

Horse activity can be tracked on a per-horse basis, creating a clear financial picture of each horse’s performance over time. Specific accounting software can aid in this tracking, particularly for clients with breeding operations, enabling multigenerational tracking for detailed financial histories. 

Tax Limitations to Consider

In addition to understanding depreciation options, it’s crucial to be aware of tax limitations that can impact equine-related deductions. A few key points to note: 

  • Accounting Method: Most horse owners can use cash-basis accounting, but those with high gross receipts or passive investors may need to use accrual accounting. 
  • Excess Business Losses: These may limit deductions and carry forward as net operating loss carryovers. 
  • Passive Activity Loss Rules: These could limit current deductions based on the owner’s level of involvement. 
  • Hobby Loss Rules: Hobby loss rules disallow expense deductions for those not engaged in horse ownership as a business, even though income must still be reported. 

Final Thoughts

These topics may not be top of mind for all horse owners, but understanding them is essential for accountants, family offices, and other professionals managing equine assets. 

Please consult your advisor or reach out to our team at Dean Dorton with any questions.