During 2013, horse owners, breeders and businesses enjoyed a number of favorable tax provisions that have now reverted to lower levels or expired. Over sixty tax provisions expired, some applied to all businesses, including the horse industry, and one was specifically applicable to owners of race horses.
While the Tax Extender Act of 2013 has been introduced to extend these various tax provisions, such legislation will not be passed quickly or easily. Opposition has already been expressed by some. In addition, any such extension is affected by the stomach in Congress to deal with broader, fundamental tax reform involving much of the current tax code.
For the last few years, the so-called Section 179 business expense deduction was set at $500,000. This meant that anyone in the horse business, or any business for that matter, could immediately depreciate up to $500,000 of the cost of any investment in business assets, including horses. The deduction was reduced dollar-for-dollar once investment in all one’s business activities hit $2 million. It applied to horses and other depreciable property purchased and placed in service in the horse business.
This provision was not extended by Congress and has now reverted to $25,000 for 2014.
Anyone in a business could also write-off up to 50 percent of new property purchased and placed in service in 2013, including assets used in the horse business, such as horses and other equipment. This was known as “bonus depreciation.” It was restricted to new assets, which meant that the first use of the horse or other property had to begin with the taxpayer.
This was also not extended and has expired completely for 2014.
Finally, from 2009 through 2013 all race horses could be depreciated over three years, regardless of when they were placed in service. This provision was passed in 2008 through the efforts of Minority Leader Mitch McConnell (R-Ky.). The change, which eliminated the seven-year depreciation period for race horses and made all race horses eligible for three-year depreciation, expired at the end of 2013. Beginning in 2014, the pre-2009 rules will have to be used, meaning owners will have to decide whether to place a race horses in service at the end of its yearling year and depreciate it over seven years or wait until it is over two (24 months and a day after foaling) and depreciate it over three years.
The tax extender bill would extend over 60 expired tax provisions, including:
•Reinstating the expense deduction at $500,000;
•Reinstating bonus depreciation at 50 percent; and
•Reinstating the depreciation of race horses at three years.
Whether these provisions are extended depends on whether Congress can come to grips with real tax reform package.