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October 24, 2014     
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Horse Owners and Breeders Big Winners in New Tax Bill

The “Economic Growth” tax bill recently signed into law by the President should be a big incentive for investment in horses. Some of the most beneficial provisions are discussed below:

Expensing Amount Increased to $100,000

A purchaser can write-off up to $100,000 of the cost of horses (up from $25,000) provided total purchases of all depreciable property during the year does not exceed $400,000 (up from $200,000). Above that, the amount allowed to be expensed is reduced one dollar for each dollar invested above $400,000. For example, if all purchases for the year total $450,000, the amount that could be expensed would be $50,000. At $500,000 of purchases, the expensing allowance is zero. The expensing allowance applies to all depreciable property, whether or not the property has been used before. Thus, a horse which has been raced or shown is eligible for expensing if purchased for the same purpose or for breeding.

The new $100,000 expensing allowance applies retroactively to purchases from January 1, 2003 through December 31, 2005.

Bonus Depreciation

The tax bill increases “bonus” first year depreciation to 50% of the cost of horses and other eligible property, up from 30%. As was the case under the prior law, the “original” use of the horse or other property must commence with the purchaser for it to be eligible. “Original use” means the first use to which the property is put, whether or not such use corresponds to the use of such property by the purchaser.

Bonus depreciation applies on top of the $100,000 expensing allowance (if available) and in addition to regular depreciation. There is no limit on the amount of bonus depreciation that can be taken or when during the year the purchase is made. Between bonus and regular deprecation, about 56% of the purchase price of a yearling or other young horse can be written off in the year of purchase.

The 50% bonus depreciation applies to purchases after May 5, 2003 and before January 1, 2005.

To illustrate the benefits of the new law, assume in July and August of 2003 an individual pays $200,000 for several young horses (in the seven-year depreciation class) which are eligible for expensing and bonus depreciation. Assuming other purchases of horses and depreciable property do not exceed $200,000 in 2003, the first year write-off would be $155,357, computed as follows:

1) Expensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
2) Bonus Depreciation (50% x (200,000-100,000) . . . . . . . $50,000
3) Regular Depreciation (10.715% x (200,000-100,000) . . . . $5,357

Assume another individual pays $500,000 for two thoroughbred yearlings in September of 2003. No expensing is allowed because the amount exceeds $400,000 by $100,000, thus reducing the expensing amount to zero. However, the person can still write off $276,787 in 2003, computed as follows:

1) Bonus Depreciation (50% x 500,000) . . . . . . . . $250,000
2) Regular Depreciation (10.715% x 250,000). . . . . $26,787

Note in the above example that the write-off for bonus depreciation would be the same even if the purchase were made in December (although the regular depreciation would be about $6,700 lower if over 40% of all purchases of depreciable property were made in the last quarter of the year.)

Capital Gains

The top long-term capital gains rate is lowered to 15% (down from 20%) on sales and exchanges (and payments received ) on or after May 6, 2003 and before January 1, 2009. The 10% long-term capital gain rate is reduced to 5%.

Dividends Taxed as Capital Gains

Dividends received by an individual shareholder from domestic and qualified foreign corporations are now taxed at the long-term capital gain rates. The new rate applies to dividends received after 2002 and before 2009.

Tax Rates Reduced

Beginning in 2003, the top income tax rate is 35% (down from 38.6) and the other rates above 15% are also reduced to 33%, 28%, and 25%. These reductions are due to sunset and rates will go up to pre-2001 levels after 2010 unless Congress acts to keep the rates as they are.

*Reprinted with permission from the American Horse Council

 

 

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