Tax

Article Autumn Hines

For businesses, one of the most favorable aspects of the One Big Beautiful Bill Act (OBBBA) is the return of 100% bonus depreciation for property acquired and placed in service after January 19, 2025. This tax incentive allows businesses to immediately deduct the cost of eligible property in the year it is placed in service, rather than depreciating the cost over several years.

The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily provided for 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. For property placed in service in 2023 and later years, the bonus depreciation percentage is phased down by 20% per year through 2026.

Property eligible for bonus depreciation includes:

  • Property depreciable under the Modified Accelerated Cost Recovery System with a recovery period of 20 years or less;
  • Computer software;
  • Water utility property;
  • Qualified film, television, and live theatrical productions; and
  • Qualified Improvement Property (i.e., improvements made by the taxpayer to the interior portion of nonresidential real property).

Most tangible personal property and certain land improvements qualify for bonus depreciation.

To be eligible, the original use of the property must begin with the taxpayer. For property acquired and placed in service after September 27, 2017, used property also may qualify if it was not previously used by the taxpayer or a related party. In addition, the property must be used predominantly within the United States.

The OBBBA makes 100% bonus depreciation permanent for property acquired and placed in service after January 19, 2025. Generally, property is “acquired” on the date a written, binding contract is entered into for its acquisition. Property is “placed in service” when it is available for its intended use.

For property acquired on or before January 19, 2025, the original TCJA phase-down schedule still applies. This is an important distinction. For example, assume a taxpayer acquired a piece of equipment on January 19, 2025, and placed it in service the same day. Under the TCJA phase-down schedule, the bonus depreciation rate for that piece of equipment is 40%. If the same piece of equipment were acquired and placed in service on January 20, 2025, it would be eligible for 100% bonus depreciation, assuming all other requirements are met.

Takeaway

The return of 100% bonus depreciation provides an incentive for businesses to invest in capital assets. If you have questions about the changes to bonus depreciation or other OBBBA topics, contact your Dean Dorton or other professional advisor.

Article Autumn Hines

On May 12, 2025, the House Ways and Means Committee released its long-awaited draft of proposed tax legislation. If enacted, this could have the most significant impact on tax-exempt organizations since the Tax Cuts and Jobs Act. Below is a summary of highlights in the proposed legislation.

Increase in Rate of Tax on Net Investment Income of Certain Private Foundations

The draft bill proposes an increased excise tax on private foundations’ net investment income, which could impact grantmaking and the execution of exempt purpose activities.

  • 1.39% in the case of a private foundation with assets of less than $50,000,000
  • 2.78% in the case of a private foundation with assets of at least $50,000,000 and less than $250,000,000
  • 5% in the case of a private foundation with assets of at least $250,000,000 and less than $5,000,000,000, and
  • 10% in the case of a private foundation with assets of at least $5,000,000,000

Modification of Excise Tax on Investment Income of Certain Private Colleges and Universities

A tax would be imposed on the net investment income of an “applicable educational institution”:

  • 1.4% in the case of an institution with a student endowment in excess of $500,000 and less than $750,000
  • 7% in the case of an institution with a student endowment in excess of $750,000 and less than $1,250,000
  • 14% in the case of an institution with a student endowment in excess of $1,250,000 and less than $2,000,000, and
  • 21% in the case of an institution with a student endowment in excess of $2,000,000

See our article on how this proposed tax bill could impact colleges and universities for a more in-depth explanation of terms.

Unrelated Business Income Increased by the Amount of Certain Fringe Benefit Expenses for Which Deduction is Disallowed

The proposed bill would include qualified transportation fringe benefits and parking facilities disallowed under IRC section 274 in an organization’s unrelated business income for the year. This provision was initially included in the Tax Cuts and Jobs Act and was subsequently repealed.

Name and Logo Royalties Treated as Unrelated Business Taxable Income

The proposed bill would include the sale or licensing of an organization’s name or logo as an unrelated trade or business regularly carried on by the organization.

1% Floor on Deduction of Charitable Contributions Made by Corporations

The proposed bill would include a 1% floor on corporate charitable deductions and allow corporations to carry the unused tax benefit forward 5 years, which could help increase charitable giving.

Reinstatement of Partial Deduction for Charitable Contributions of Individuals Who Do Not Elect to Itemize

While the standard deduction was increased, which could impact individuals’ ability to deduct charitable contributions, the proposed bill reinstates the deduction for those who do not itemize. The deduction would be reduced from $600 to $300 ($150 for married filing separate and single filers).

Termination of Tax-Exempt Status of Terrorist-Supporting Organizations

This provision would allow the Treasury to revoke the exempt status of organizations deemed to provide “material support or resources” that support terrorist activities.

While the above provisions are just some highlights, there is other proposed legislation that may impact tax-exempt organizations, such as an extension of excise tax on executive compensation for employees earning over $1 million, changes to the excess business holdings rule for private foundations, updates to the exclusion for publicly available research income, termination of certain energy credits, and other individual and business income tax provisions.

Although the bill is in draft format, we will watch closely as it moves through Congress. If you have any questions about how the proposed legislation may impact your organization, please contact your trusted Dean Dorton advisor.

Article Autumn Hines

The recently released draft of the House Ways and Means Committee’s proposed tax bill included a significant impact on colleges and universities. The 2017 Tax Cuts and Jobs Act imposed a 1.4% excise tax on the investment income of an “applicable educational institution.” The proposed bill expands the excise tax, as detailed below.

  • 1.4% in the case of an institution with a student endowment in excess of $500,000 and less than $750,000
  • 7% in the case of an institution with a student endowment in excess of $750,000 and less than $1,250,000
  • 14% in the case of an institution with a student endowment in excess of $1,250,000 and less than $2,000,000, and
  • 21% in the case of an institution with a student endowment in excess of $2,000,000

Applicable Educational Institution

An “applicable educational institution” is described as an eligible educational institution (as defined in IRC section 25A(f)(2)):

  • Which had at least 500 tuition-paying students during the preceding tax year,
  • More than 50% of the tuition-paying students of which are located in the U.S.,
  • Which is not a state college or university or a qualified religious institution, and
  • The “student adjusted endowment” of which is at least $500,000.

Student Adjusted Endowment

“Student adjusted endowment” means the aggregate fair market value of the institution’s assets (determined as of the end of the preceding tax year, other than those assets used directly in carrying out the institution’s exempt purpose) divided by the number of eligible students of the institution. An eligible student meets the requirements under Section 484(a)(5) of the Higher Education Act of 1965.

The institution’s net investment income is determined under rules similar to the rules of IRC section 4940(c).

The proposed bill also includes the aggregation of related organizations. A related organization is defined as any organization that:

  • Controls, or is controlled by, such institution,
  • Is controlled by one or more persons who also control such institution, or
  • A supported organization (as defined in IRC section 509(f)(3)) or an organization described under IRC section 509(a)(3).

Although the bill is in draft format, we will watch closely as it moves through Congress. If you have any questions about how the proposed legislation may impact your organization, please contact your trusted Dean Dorton advisor.

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.