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.
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
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
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.)
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