Agriculture Reference
In-Depth Information
sure you fully understand the definitions and requirements for an expense to qualify for a
particular category. Some expenses are only partially deductible (such as business meals),
and others are deductible only if your horse operation is showing a profit (such as an office
in the home).
Expenses that need to be prorated include vehicles, taxes, and utilities. In each situation
you must determine, to the best of your ability, what percentage of the expense is directly
attributable to the horse operation. If a vehicle is shared between domestic and farm pur-
poses, keep a logbook with the starting and ending mileage each time you use the vehicle
for business-related activities, along with the business purpose of the trip.
Determine what percentage the business miles are of the total miles traveled by that
vehicle during the year. Then your tax counselor will determine which is to your advant-
age—using a mileage allowance deduction (so many cents per mile) based on actual busi-
ness miles traveled or taking a percentage of actual expenses (total of gas, oil, repairs, etc.)
based on the percentage of business use. Either way, for your tax counselor to make this as-
sessment, you will need to keep all receipts concerning vehicle operation and maintenance
as well as a mileage log to determine the business percentage use. If you are using a leased
vehicle, you are allowed to deduct only actual expenses.
Property taxes are usually determined by consulting the itemized breakdown on your
property valuation and tax statement. The tax resulting from the assessed value of horse-
related buildings is deductible, as is the tax assigned to the portion of the land you use for
the horse operation. If you have 10 acres, you may be using 2 acres for house, yard, and
other domestic uses and 8 acres for the horse operation. The tax related to the 8 acres is
deductible
Prorated expenses that may be a little tougher to divide up are utilities. With electricity,
for example, unless you have separate meters for your barn and your house, you will have
to estimate what percentage is farm-related. If you are just adding horse facilities to your
residential acreage, you can compare utility bills before and after the additions to help you
calculate business-related kilowatt-hours and dollars. To further help you determine your
utility business percentage, you may be able to get hourly rate estimates from your utility
company on the kilowatts required to operate various electrical devices. Note that what you
determine as a percentage for electricity may be totally different from the business percent-
age for gas, water, or other utilities. Most small horse operations located on a residence use
an average of 20 to 30 percent of the total utilities.
Large assets purchased for the business (truck, trailer, buildings, tractor) and those con-
verted to business use are often depreciated. Your tax counselor either will advise you to
take a full expense in the year incurred for an item (depending on the cost of the item and
the status of your profit or loss) or will determine what depreciation schedule each item
will follow. Then each year of the depreciation schedule, a certain percentage of the cost
of the tractor, for example, will be available to use as a deductible expense. It must be re-
