Tax

Article Nikki Gilland

The nationwide injunction on beneficial ownership information (BOI) reporting that was lifted on December 23, 2024, appears to be back in place as of December 26, 2024.

Our recommendation remains that reporting companies be prepared to do their BOI reporting before December 31, 2024, so that the companies can comply with the law on a moment’s notice.

Here is a brief recap of the events of this month.

Recall that the Corporate Transparency Act (“CTA”) and its implementing regulations, require certain business entities to report stakeholder information to the Treasury Department’s agency called FinCEN. The CTA, enacted as an anti-money laundering measure, required reporting entities that existed before 2024 to disclose the identities of their beneficial owners—individuals who own or control the business—by Jan. 1, 2025.

  • On Tuesday, December 3, 2024, in a case called Texas Top Cop Shop, Inc. v. Garland, a federal judge in the Eastern District of Texas issued a “nationwide” injunction saying beneficial ownership information reports did not have to be filed until the issues in the case were decided.
  • On Monday, December 23, 2024, a panel of judges from the Fifth Circuit Court of Appeals struck down the nationwide injunction, which meant that reporting companies once again had to file BOI reports. FinCEN issued an alert extending the deadline for reporting by about two weeks.

Now, a different panel of judges from the Fifth Circuit Court of Appeals reinstated the nationwide injunction, through an order issued yesterday, December 26, 2024. This panel will consider the constitutionality of the CTA, and it’s ruling appears to supersede the ruling of December 23, 2024. Thus, once again, it seems BOI reporting is not required by January 1, 2025.

Our recommendation remains that reporting companies be prepared to do their BOI reporting before December 31, 2024, so that the companies can comply with the law on a moment’s notice. There is a chance that the government will seek emergency relief from the U.S. Supreme Court and a ruling could be issued before year-end.

Where can I find more information?

For more information about BOI reporting and access to guidance issued by FinCEN, you can refer to our previous article on the topic here:

What is “Beneficial Ownership Information” reporting, and why do I care?

Article Autumn Hines

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. 

Article Autumn Hines

As I write this article, the elections have not yet occurred. Much of my recent conversations with our clients, many of whom are horse and farm owners with other operating businesses and/or significant investment portfolios, have focused on “what ifs” – e.g., what happens to income tax rates or the lifetime gifting exemption if there is a change of political party control in Congress and/or the White House. Perhaps by the time you are reading this article, we will know who our next President is and which political party controls each chamber of Congress.  In the meantime, this article includes a few tax planning items that may be helpful as year-end approaches. The items discussed below are current as of September 14, 2024.

Let’s first focus on some year-end income tax planning items. If the goal is to accelerate deductions this year, then consider purchasing and placing in service (meaning the asset is ready to be used for its intended purpose) assets that qualify for the 60% bonus depreciation by 12/31/24. Qualifying assets, which must be used predominantly in the United States, include equipment, fencing, land improvements, barns, and most horse purchases (with some exceptions). In addition to the above favorable depreciation write-off, many horse and farm owners qualify to use the cash method of accounting when filing annual tax returns. If you are cash-basis, consider pre-paying expenses by year-end. Please note, however, that you should have a non-tax reason for doing so. Non-tax reasons may include bulk or early payment discounts obtained for expenditures such as feed, supplies, or advertising or for access to a particular stallion.

The above commentary assumes your horse operations are conducted as a business and you are either an active participant under the material participation rules (a description of which is beyond the scope of this article) or have enough other passive activity income to offset these losses. You should also be aware of the excess business loss limitation, which may limit the amount of net business loss claimed on your individual tax return and convert the excess into a net operating loss carryover available in future years.

For individuals who are charitably inclined, cash contributions made to qualified public operating charities (NOT including donor-advised funds, however) by year-end may offset up to 60% of your 2024 adjusted gross income. For C corporations, these contributions may offset up to 10% of 2024 taxable income. 

In addition to year-end income tax considerations, it may be prudent to address estate planning matters. One of the most effective ways to do this is via lifetime gifts. First, a few basics regarding gifting – Annual gifts of $18,000 may be given to US citizens free of gift and generation-skipping tax (GST) in 2024. In addition to this annual gift limit, the 2024 lifetime gift and GST exclusion is $13.61 million per person.  If the lifetime threshold is exceeded, then the gift is taxable to the person who makes the gift at a 40% gift tax rate and a 40% GST rate (if applicable). The GST is charged in addition to the gift tax if gifts are made to a person who is more than 37.5 years younger than the person making the gift, the intent being to capture the additional tax on gifts that may skip a generation (the most common of which may be gifts to grandchildren).

Under current law, the lifetime gift and GST exemption is scheduled to be at an increased level through 2025 (amount adjusted annually for inflation). In 2026, this lifetime exemption is scheduled to revert to the 2017 limitation of $5 million (plus subsequent inflation adjustments). If you have not previously taken advantage of this increased exemption over the past few years, I recommend discussing this now with your advisors.

An ideal asset to gift is property that is expected to appreciate in value. If you gift something worth $100,000 today and it appreciates to $500,000 at your death, then you’ve gotten $500,000 out of your estate and only used $100,000 of lifetime gifting exemption. On the other hand, if that $100,000 gift depreciates to a $40,000 value, then you’ve potentially wasted $60,000 of lifetime gifting exemption.

Equine assets may also be included in your gifting plan, albeit some equine assets may be more effective than others. Horses are tricky with regard to gifting as it certainly can be difficult to determine whether or not they will appreciate in value. If you want horses to be part of your gifting plan, consider stallion shares from an already profitable stallion (which produces cash-flow) or a broodmare interest versus younger racing prospects. Of course, the person receiving this gift will then be responsible for care of the horses, so that ongoing expense should be considered. Farms, on the other hand, tend to be held long-term which hopefully will lead to appreciation over time.

To maximize the gift, assets are often contributed to a pass-through entity (holding company) by parents or grandparents. Non-controlling interests in this holding company are either gifted or sold at a discount to the children or grandchildren (or trusts for their benefit) with the voting interest retained by the original owner.

As the saying goes, nothing is certain in life except death and taxes. The first is unavoidable, but exposure to the second may be managed via effective tax planning, some of which is mentioned above. It will be interesting to see what impact, if any, the results of the election have on tax planning.

Click here to learn more about Dean Dorton’s equine services.

Article Autumn Hines

The moratorium on processing new Employee Retention Credit (ERC) claims, which began last September, will continue for the foreseeable future. The IRS announced this information in a June 20 news release, which also provided an update on the status of its ERC processing.

The IRS’s announcement provides little solace to taxpayers with legitimate claims that have waited months for those claims to be processed. The IRS has emphasized that taxpayers with pending claims do not need to take any action at this time and should await further notification from the agency. The agency emphasized those with ERC claims should not call IRS toll-free lines because additional information is generally not available on these claims as processing work continues.

According to the IRS, it analyzed more than one million ERC claims following last fall’s moratorium, which indicated an extremely high rate of improper claims. As a result of this review, the IRS intends to deny tens of thousands of high-risk claims in the coming weeks. These claims, which constitute 10-20% of the total claims analyzed, show clear signs of falling outside the guidelines for the credit established by Congress. Another 60-70% of claims show an unacceptable level of risk, and the IRS intends to gather more information on claims falling in this category.

The remaining 10-20% of claims show a low risk. The IRS, committed to a thorough and fair process, and will begin “judiciously” processing claims received before the moratorium that show no warning signs. It anticipates that the first payments to these taxpayers will go out later this summer. The IRS, however, cautioned that its processing speed will be “dramatically slower” than during the pandemic, given the need for increased scrutiny.

Meanwhile, no claims submitted during the moratorium, which began on September 15, 2023, will be processed at this time. IRS Commissioner Danny Werfel stated that ending the moratorium might trigger a flood of new claims from ERC promoters. The IRS intends to consult with Congress on potential legislative action before deciding on the future of the moratorium, including possibly ending new claims entirely and seeking an extension of the statute of limitations to give the agency more time to pursue improper claims. According to the IRS, ERC claims have continued to be submitted at the rate of more than 17,000 per week since the start of the moratorium, resulting in a current ERC inventory of 1.4 million.

The IRS, understanding the complexity of ERC claims, has continued to urge taxpayers to work with a trusted tax professional when evaluating their eligibility for the ERC. This guidance is to ensure that employers are supported and guided through the process. The agency is also considering reopening its Voluntary Disclosure Program, which ended in March, at a reduced rate for taxpayers with previously processed claims who wish to avoid future compliance action by the IRS.

Article Dean Dorton

Success in the equine industry boils down to a simple formula. You need healthy animals; you need qualified people to train and care for them; and you need robust equine accounting software to keep the whole operation funded and organized. 

Any equine business is set for success with all three in place—but success becomes elusive or impossible with any missing piece. 

Many people who enter this industry have a deep equine background, so they know how to pick horses and trainers. For that same reason, however, they have less experience selecting accounting software. That might cause some to pick less-than-ideal solutions without realizing the mistake. 

Later, when business issues arise, the accounting software is the likely culprit. It causes more chaos and consequences than most realize, making it a potential problem to be worried about…and a possible solution to be excited about.  

Indicators You Have the Wrong Equine Accounting Software

  • Overwhelming Chart of Accounts: The scale becomes unmanageable yet keeps growing.
  • Lengthy Month-End Close: It takes hours of manual data manipulation every single month. 
  • Painful Multi-Entity Management: There’s no easy way to get everything in one place.
  • Insufficient Reporting Capabilities: Reporting takes too much time and reveals too little. 
  • Outdated Financial Metrics: Data is days or weeks old because updates are take too much time and effort.

Put Success in the Saddle with Sage Intacct

Whether it’s Microsoft Dynamics GP or QuickBooks, some of the biggest accounting solutions on the market are also the wrong choice for equine businesses. They make accounting more difficult than lean and agile operators want it to be. Despite the complexity, they don’t have the necessary features. 

Sage Intacct reverses that equation, making sophisticated accounting simple and streamlined for equine businesses of any breed. 

This cloud-native financial management platform brings all financial data and every accounting tool together on one platform that’s accessible anywhere—farm, office, racetrack—with Internet access.  Coordination, visibility, and efficiency all multiply with a cloud accounting such as Sage Intacct.

Business intelligence amplifies as well thanks to Sage Intacct’s dimensional chart of accounts, which makes data easier to input and extract from the general ledger. Accountants save massive amounts of time on routine accounting tasks that they can redirect towards reporting using Sage Intacct’s powerful and intuitive tools. So much data management gets replaced with financial analysis, forecasting, and planning instead. 

With the ability to collect, consolidate, and consider all financial activities in one place, Sage Intacct gives equine businesses what few have but all need: real-time insights into financial and operational performance. Dashboards track and update key metrics automatically to give business leaders at all levels the numbers they need to make informed decisions more likely to have the intended outcome. 

Sage Intacct doesn’t guarantee success—but it puts all the pieces in place (besides the horses and trainers).

Put another important piece in place by partnering with Dean Dorton: a Sage Intacct implementation provider with deep expertise in accounting and decades-long experience serving the equine industry In Kentucky and around the world. 

Make the transition to Sage Intacct as smooth and successful as possible. Contact us.

Article Dean Dorton

In November of 2023, the Department of Treasury and the Internal Revenue Service published their first installment of proposed regulations providing guidance on operating and interpreting the tax provisions governing donor-advised funds (“DAF”). Before these proposed regulations, sponsoring organizations that manage DAFs had limited guidance to operate their DAF programs.

The new proposed regulations clarify and broaden the definition of accounts treated as DAFs and the distributions constituting taxable distributions, as well as other regulations for DAFs. In addition, future guidance for DAFs is also expected in the following areas:

  • What constitutes a prohibited benefit under Section 4967? – a prohibited benefit that is more than incidental benefit to the donor; donor-advisors, related persons, and fund managers from the DAF.
  • Excess benefit transaction under Internal Revenue Code (IRC) Section 4958.
  • Tax treatment of DAF distributions to public charities for purposes of the public support computations under Section 509(a).

The proposed regulations will become effective for taxable years ending after the date when they are published as final regulations. Comments are requested on the proposed regulations by January 16, 2024.

This article will explain (1) the basic terms that are part of the definition of a DAF (2) the exceptions to a DAF and (3) the definition of a taxable distribution under IRC Section 4966. Although many questions are unanswered, the proposed regulations provide guidance that will affect the operations of a sponsoring organization with DAFs.

Definition of a DAF

Background – With certain exceptions, Section 4966 defines DAFs as a fund or account:

  • that is separately identified by reference to contributions of a donor or donors;
  • that is owned and controlled by a sponsoring organization (a public charity); AND
  • with respect to which at least one donor or donor-advisor has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor’s status as a donor.

The proposed regulations provide clearer guidance to determine whether a DAF exists and broaden the definition of a DAF, by defining the “Bolded Words” above, which are explained further below.

Key Words Definition
Separately Identified Before the proposed regulations, generally, if the fund did not reference the names of donor(s), the fund or account would not qualify as a DAF.

The proposed regulations provide that a fund or account is separately identified by reference to contributions if the sponsoring organization maintains a formal record of contributions to the fund of the donor(s).

If there is no formal record, whether the fund is separately identifiable would be based on all the facts and circumstances. The following factors tend to show the fund is separately identified:

  1. Whether the fund or account balance reflects items such as contributions, dividends, interest, distributions, administrative expenses, and gains and losses (realized or unrealized) and whether the sponsoring organization generally solicits advice from the donor or donor-advisor before making distributions from the fund or account.
  2. Whether the fund or account is named after one or more donors or related persons.
  3. Whether the sponsoring organization refers to the fund or account as a DAF or the sponsoring organization has an agreement or understanding with the donor(s) that such fund is a DAF.
  4. The donor(s) regularly receive a fund or account statement from the sponsoring organization.
  5. The sponsoring organization generally solicits advice from the donor(s) before making distributions from the fund or account.

Exception – A fund or account solely funded by contributions from public charities (other than non-functionally integrated supported organizations) and governmental units described in Section 170(c)(2) are not treated as separately identified, and thus would not be considered a DAF.
Donor or Donor-Advisor The proposed regulations define a donor, generally, as any person or entity, but specifically excludes public charities, other non-integrated supporting organizations, and governmental units under Section 170(c)(2). The definitions of donor and donor advisor are both extremely important in determining whether an arrangement is a DAF, but also in determining who may be subject to the excise taxes on taxable distributions.

The proposed regulations define a donor-advisor as a person appointed or designated by the donor to have advisory privileges regarding the distribution or investment of assets held in a DAF or a person to whom a donor-advisor delegates advisory privileges. There is no specific appointment form or designation that is necessary under the proposed regulations.

A donor-advisor includes the following:

  • An investment advisor who provides investment management services with respect to both the DAF and personal non-DAF assets of a donor.
  • An investment advisor who serves the sponsoring organization as a whole and is recommended by a donor is not a donor-advisor.
  • A person, other than a public charity or governmental unit, who establishes a fund and has advisory rights regardless of whether they make contributions to the fund.
  • An advisory committee member recommended by the donor or donor-advisor and appointed by the sponsoring organization unless certain criteria are met.
Advisory Privileges The proposed regulations expand when a donor or donor-advisor has advisory privileges that would result in DAF treatment. A facts and circumstances test is provided as to whether a donor has advisory privileges, regardless of whether the privileges are exercised.

A donor or donor advisor would have advisory privileges if any of the four factors exist:

  • The sponsoring organization allows the donor or donor-advisor to provide non-binding recommendations regarding distributions or investments of the DAF.
  • A written agreement states that a donor or donor-advisor has advisory privileges.
  • Marketing materials or a document indicating that a donor or donor-advisor may advise on distributions or investments of the DAF.
  • The sponsoring organization generally solicits advice from a donor or donor-advisor.

In addition, the proposed regulations go on to provide additional special rules relating to advisory privileges.
Distribution The proposed regulations provide that the term “distribution” generally means any grant, payment, disbursement, or transfer, whether in cash or in-kind, from a DAF. In addition, the proposed regulations expand the definition of distribution by defining “a deemed distribution.” Any use of DAF assets that results in a more than incidental benefit to a donor, donor-advisor, or related person is a deemed distribution that would generally be a taxable distribution.

The last section of this article will explain what constitutes a taxable distribution. The proposed regulations note distributions resulting in more than an incidental benefit to a donor, donor-advisor, or related party may also result in a prohibited transaction subject to the excise tax under Section 4967.

Exceptions to the Definition of a DAF

The proposed regulations also expand and clarify the exceptions when certain funds or accounts are included in the statutory exceptions from the definition of a DAF.

  • Funds that make grants to a single identified organization

A fund or account is not a DAF if it is established to make distributions solely to a single identified public charity or governmental entity. The proposed regulations define a “single identified organization” as an organization described in IRC Sections 170(c)(2) or 509(a)(1), (2), or (3) (other than a Type III non-functionally integrated supporting organization), and a governmental entity.

This exception does not apply if the donor, donor-advisor, or related party has or reasonably expects to have the ability to advise regarding distributions from the single identified organization or if a distribution from the fund or account will have a more than incidental benefit to a donor, donor-advisor or related party.

  • Grants to individuals for travel, study, or other similar purposes

A fund or account that only provides scholarships, fellowships, or other grants is not a DAF if certain requirements are met. The proposed regulations also provide a facts and circumstances analysis to make sure the donor or donor-advisor is not directly or indirectly in control of the selection committee.  Section 501(c)(4) organizations that are broad-based also meet this exception if certain conditions are met.  In addition, the selection committee may be controlled by a Section 501(c)(4) organization.

  • Disaster relief funds

Consistent with Notice 2006-109, the proposed regulations establish disaster relief funds or accounts that meet the requirements of IRC Section 139 (e.g., for a federally declared disaster) is not a DAF. The proposed regulations do not extend this exception to emergency hardship funds.

Definition of a Taxable Distribution

Background – Under Section 4966 a 20% excise tax is imposed on a sponsoring organization with respect to any taxable distribution from a DAF and a 5% excise tax on any fund manager that knowingly agrees to a taxable distribution.

The definition of “knowingly agrees to a taxable distribution” is interpreted broadly.  A fund manager will be considered to know that a distribution is taxable if they know the distribution is taxable or if they have knowledge of facts sufficient to determine the distribution is taxable and fails to make reasonable attempts to determine whether the distribution is taxable.

The proposed regulation incorporates the definition of a taxable distribution found in IRC Section 4966(c)(1). A taxable distribution means any distribution from a DAF (1) to a natural person or (2) to any other person, if the distribution is for any purposes other than one specified in Section 170(c)(2)(B) or if the sponsoring organization does not exercise expenditure responsibility in accordance with Section 4945(h).

The proposed regulations include an anti-abuse rule providing that, if a series of distributions through intermediary distributees undertaken pursuant to a plan achieves a result that is inconsistent with the purposes of section 4966, these distributions are treated as a single distribution for purposes of section 4966.

For example, if a donor advises on a distribution that the sponsoring organization makes from a DAF to a charity, and the donor arranges for that charity to use the distributed funds to make distributions to an individual recommended by the donor which is inconsistent with Section 4966, then the distribution would be considered a single distribution, and a taxable distribution from the sponsoring organization to the individual.

The proposed regulation also provides the following guidance regarding taxable distributions:

  • Distributions to a foreign organization are not a taxable distribution if the sponsoring organization exercises expenditure responsibility or obtains an equivalency determination in accordance with Section 4945.
  • Distributions to an organization that is not a charity described in Section 170(b)(1)(A) is not a taxable distribution as long expenditure responsibility is exercised.
  • Incorporates the expenditure responsibility rules applicable to grants by private foundations with slight modifications.
  • A taxable distribution is a distribution that is used for non-charitable activities including a distribution for lobbying, even though public charities are permitted to engage in a limited amount of lobbying.

Summary

Treasury and the IRS have requested comments on these proposed regulations by January 16, 2024. The application will likely affect numerous individuals and organizations. Sponsoring organizations should determine whether DAF certain funds or accounts are considered DAFs under the proposed regulations and whether their DAF structures comply with these proposed regulations.

If you have any questions regarding the proposed regulations, please contact your trusted Dean Dorton advisor.