Janitor Bob Posted January 31, 2013 Report Share Posted January 31, 2013 Client has a full-time job. Bought a horse to race at local fairs. had a few winning places and won $829.00 during the year. Expenses (excluding the cost of the horse) was $3,397...for a loss (before depreciation is considered) of $2,568. My question is this...In your opinions, is this a Sch C business or a hobby? Quote Link to comment Share on other sites More sharing options...
Guest Taxed Posted January 31, 2013 Report Share Posted January 31, 2013 I guess you will have to weigh the option of an audit to the potential tax savings by having a sch C loss of around 2568? Most of those startup costs would have to be amortized anyways. I have one client who quit her job as a rental manager to become a "Rental Professional". She and her Dad own a bunch of duplexes in our area and just bought a commercial place. The first year while she was still working part time as a secretary, I recommended that she NOT consider herself as a "Rental Professional" and do Sch E (active management). The following year we did Sch C. The key was to document should there be any audit that her main source of income was from the rental business and not some other part time job. I suspect your client's main source of income is his job and NOT horse racing? Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted January 31, 2013 Author Report Share Posted January 31, 2013 Correct.....W-2 Income $49,000....Horse racing loss as mentioned...sounds like hobby to me, but I am unclear on exactly what the IRS would want to see to justify this as a business. I think I will advise her that the increase to her refund (approx. $450) would not be worth the risk should IRS audit and that IRS would likely view this as a hobby. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted January 31, 2013 Report Share Posted January 31, 2013 Same set of rules as for any other business... expectation of a profit?, appreciable assets? run in businesslike manner? books and records look like a business set of books? advertising? expertise in the field? prior success in other similar endeavors? significant amount of personal pleasure or enjoyment? degree to which they seek professional help? These are the factors that they look at for any business that they suspect is not being run for profit. I have been told that IRS does not believe anyone who is operating a horse racing or car racing endeavor is in business. Tom Hollister, CA 1 Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted January 31, 2013 Report Share Posted January 31, 2013 I have won an audit that included the expense of a couple of race horses. Frankly, I'm still surprised I won that part! But my client had talked to me before he ever invested, so he kept detailed records from day one. And he hired a professional trainer, who participated in picking the horses he bought, and in racing them. And it certainly helped that although he had a net loss, he did have significant winnings. The thing that impressed the auditor the most was that in two years of racing, my client had only attended one race. If your client has great records, you might go with it, but if not, tell him what to do this year, and warn him of the significant risk of audit. Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted January 31, 2013 Author Report Share Posted January 31, 2013 My dilemna is this: Personally, I do not think it is a business. What I "think" is that the client happens to like horses and wanted one. She bought one and decided to race it at a couple of county fairs. I think I'd feel differently if she had raced in a lot of races, but she only entered the horse into two races in 2012. But I'm trying to keep my personal view limited and do what is best for her professionally. She does keep very good records. Also....she paid more than $600.00 to one person for stall rental. If we decide this is a business, I need to ASAP get a 1099-MISC sent to this person. Quote Link to comment Share on other sites More sharing options...
jainen Posted January 31, 2013 Report Share Posted January 31, 2013 >>I'm trying to keep my personal view limited<< The view you describe already sounds more professional than personal. You say it is based on her having another full-time job, some winnings but less than expenses, very good records, element of pleasure--all appropriate considerations for a professional view. Now read about those and others in Pub 535. See if her very good records include separate business bank account and credit card, market research and a business plan, license and insurance. If you are still uncomfortable, there are some interesting court cases to research. Usually the taxpayer lost, whether racing animals or machines, but sometimes the court commented on the determining factors. If you are STILL uncomfortable, just file Form 5213 and relax for seven years. Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted January 31, 2013 Report Share Posted January 31, 2013 How much can she pay for you to represent her at audit...because it is likely to be coming when you find the code for Horse Racing in the schedule C. If she wants to roll the dice and give you a retainer up front, take the position. Let her pay you for the audit as well. Found money. Tom Hollister, CA Quote Link to comment Share on other sites More sharing options...
Janitor Bob Posted February 1, 2013 Author Report Share Posted February 1, 2013 I discussed everything with client...including potential audit and my fees if such audit did occur.....She decided it is a hobby. 1 Quote Link to comment Share on other sites More sharing options...
jainen Posted February 1, 2013 Report Share Posted February 1, 2013 >>She decided it is a hobby<< I wish there were a better word for activities that have a profit motive but don't rise to the level of business activity. At least now that she understands the issues, did you make an appointment for May to discuss forming an LLC or other structure to operate as a bona fide business? Just takes a bit of horse-sense! Quote Link to comment Share on other sites More sharing options...
michaelmars Posted February 1, 2013 Report Share Posted February 1, 2013 HAY HAY HAY - Enough with the puns, you have me racing around the office with the galoping giggles. Quote Link to comment Share on other sites More sharing options...
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