Horse Racing Losses Not Deductible
A taxpayer failed to persuade the Tax Court that his horse racing activity was for profit. Only one factor, time and effort spent working on horse racing, favored the taxpayer, the court found. Others factors favored the IRS, which had denied the taxpayer’s claimed deductions and deemed the activity a hobby.
Background
The taxpayer worked in marketing and sales. For a number of years, he owned race horses, which he boarded on a farm that he also owned. The taxpayer helped to care for the horses and attended races. The taxpayer also educated himself about horses and racing.
On his federal income tax returns, the taxpayer deducted many of the costs associated with his horses. The IRS determined that the taxpayer’s horse racing activity was not engaged in for profit and denied those deductions. The taxpayer appealed to the Tax Court.
Court’s analysis
The court first found that whether a taxpayer has the requisite intent to earn a profit turns on all the facts and circumstances, the court found. Current IRS regulations provide a nonexhaustive list of factors to determine whether an activity is engaged in for profit vs an activity that is pursued as a hobby.
The court agreed that the taxpayer had spent time and effort to carry on the horse-racing activity. The taxpayer’s time was limited because he had a full-time job, but he altered his work schedule to help care for the horses. The taxpayer also did not avoid menial tasks, such as cleaning horse stalls.
However, the court found that the taxpayer did not have a written business plan. The taxpayer also did not maintain budgets or prepare economic forecasts. Further, the court found that taxpayer’s horse-racing activity sustained losses for more than 20 years.
It was the taxpayer’s income from his full-time employment that allowed him to continue his unprofitable horse-racing activity, the court added. The court upheld the IRS’s determination.
If you need help determining whether your costs can be deducted as a legitimate business expense, please contact your expert tax consultant at our office.
