It’s Tax Time! -- Parts I & II

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This two-part series covers government regulations and new tax laws, as well as great tips for finding an accountant that is knowledgeable about the equine business. Conducting business in the agricultural segment certainly has its advantages...and disadvantages.

Part I: New Rules

It can be tough to keep up with all the changes in governmental regulations and the tax code, but it is a critical element to staying on top of the industry and the impact that these changes may have for your horse business. A summary follows of key top issues that the industry is looking at in 2012 and beyond.

LABOR

H-2B: Though it is not difficult to locate riding instructors and horse trainers, finding people who want to work in the horse industry that are knowledgeable, particularly about horse care, can be difficult. Because of that, many horse showing and racing enterprise owners make use of the H-2B program to fill their employment needs. H-2B refers to the U.S. program that allows for temporary and/or seasonal, non-agricultural employment to be filled by foreign nationals. The Department of Labor (DOL) has, just this past month, released a final rule governing the H-2B program and it is particularly onerous to employers. In a nutshell, the DOL will create a national job registry for all H2-B postings in order to show recruitment for U.S. workers and the job posting has to be listed on the State Workforce Agency site for up to 21 days. On top of that, the employer will have to “demonstrate” that they were unable to find U.S. workers for the positions—under the old rule the employer only had to “attest” that point.

In addition, full-time employment is now 35 hours instead of 30. And employers will have to pick up more of the employee’s travel costs. The employer will also have to provide all equipment necessary to perform the job.

The effective date of this new rule is April 23, 2012. In the meantime, some in Congress are working to block the new rule.

Child labor:?Another labor issue the horse industry is facing is DOL’s proposed new child labor regulations applicable to the entire agriculture industry. If the new rule passes, it restricts youth from being able to work for pay on farms and ranches that aren’t owned solely by their parents. It also would effectually prohibit workers under 16 from working in most realms in agriculture, particularly around livestock, and hence horses. Since this rule has not been passed yet, horse businesses may want to contact their Congressional representatives to speak up on this issue.

TAXES

Payroll Tax:?In late December, Congress passed a new law that “temporarily extends the two-percentage-point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012,” the IRS says. IN late February, Congress extended payroll tax relief through 2012, largely because it’s an election year. Employers should have implemented the new law’s payroll-tax rate as soon as possible, and no later than the end of January 2012. For any Social Security tax withheld in excess of the new law prior to implementing it, employers must make an offsetting adjustment in workers’ pay no later than March 31, 2012. Additionally, the IRS states, “Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.”

Two other tax provisions did not fare as well and have returned to prior lower levels. They are the Section 179 Expense Deduction and the Bonus Depreciation.

Section 179 Expense Deduction: As part of the economic stimulus efforts in 2010, the expense allowance for 2010-2011 for Section 179 Expense deduction was $500,000 and was done away with after expenses went over $2 million. For 2012, however, the section 179 deduction has reverted to $125,000. It also phases out dollar-for-dollar after it reaches $500,000 for property that qualifies. What qualifies? Horse businesses equipment that’s needed on an ongoing basis, including machinery, computers, software, office furniture, vehicles, or other tangible goods that is depreciable.

Bonus Depreciation:?In 2010 the Tax Relief Act allowed for 100% bonus depreciation for all qualified property beginning in September 2010 and expiring in 2011. Generally speaking, in the horse industry, qualified property means tangible property and equipment purchased for use in a business operation, such as horses, trucks, trailers, tractors and other horse farm equipment, as long as it meets certain conditions. Starting in 2012 bonus depreciation has reverted back to its prior level of 50%. The two primary conditions that must be met include: 1) the original use of the property must begin with this taxpayer (equipment must be new; horses must not have started in training, for example); and 2) that the new property must be placed in service by January 1, 2013.

The Section 179 Expense Deduction and Bonus Depreciation can be used together. Typically Section 179 is taken first and then followed by Bonus Depreciation. This is not the case if the business has no taxable profit in 2012.

LAND

The horse industry has benefitted from the Federal Highway Administration’s Recreational Trails Program (RTP) for several years. This program provides a funding source for recreational trail projects, such as maintaining, building and restoring trails and their facilities. It also allows for the securing easements and/or land for trails. Funding for accessing and improving equestrian trails in state and local parks is hard to come by, and the RTP was set to expire in March 2012, threatening this source of revenue for this purpose. Thankfully, MAP-21, the new national highway transportation bill that reauthorizes the RTP program, was amended on March 14 and calls for reinstituting the Federal Highway Administration’s Recreational Trails Program (RTP) for 2 years and allocates $85 million in annual funding for the program.

Part II: Finding an Accountant for your Equine Enterprise

Now that we’ve covered some of the new government regulations, let’s take a look at how horse professionals can benefit from (or avoid) them by finding a knowledgeable accountant. Though the financial aspect of keeping a horse business viable and profitable is never far from mind, it is front-and-center during tax season. Finding a qualified accountant is a good investment and can actually save you a lot of money in the long run. Since the horse industry generally fits into the agricultural realm, it’s important to find an accountant that really knows the horse industry and how agricultural rules and regulations apply. So going to the neighborhood H&R Block or conducting an internet search are not the best solutions for your accounting needs.

“Hiring an accountant who is not familiar with horse businesses makes as much sense as hiring a cutting horse trainer to produce a jumper—no matter how good they are at what they do, they won’t have the specialized knowledge you need,” shares Helen Donnell, CPA and Certified QuickBooks ProAdvisor. She also owns Pink Flamingo Farm, LLC specializing in Arabian and Arabian-cross sport horses. “Agriculture has a lot of special provisions, particularly when it comes to the tax code—if you’re the only client your accountant has in the ag/equine field, there’s a good chance they’ll miss something important—and costly. Especially if breeding is part of your business, since that is treated differently for tax purposes than training or boarding,” offers Donnell.

Where can you look to find an accountant with equine/agricultural expertise? First, talk to your horse business peers and colleagues and ask who they use for their accounting needs and what their experience has been. Second, touch base with any horse associations you are a member of. They may be aware of equine-oriented accountants. Third, contact your state horse council, as they are likely to have members that offer these services. Fourth, find your local agricultural organizations, such as farm bureaus and other agricultural commodities groups. They often know of accountants that serve the broader agricultural community and may know of any that also specialize in equine. Develop a list of several accountants, and make note if there are one or two that are mentioned often.

Jumping to hire the first accountant with equine background is also not the best idea. Your accountant becomes a trusted advisor for financial knowledge and guidance, so knowing what role the accountant will play in your business is an important element. Will they be handling your books, taxes, loan applications or some combination of these?

Interviewing several prospective advisors is a good idea. Here are some questions you might ask:

1) What are your credentials? CPA’s pass state tests and need ongoing professional development, yet there are other bookkeeping and financial specialists who may have expertise in the industry for ag/equine accounting and financial consulting that fits your needs.

2) Do you have good business advice to share with me? Ask the candidates to share 2 or 3 things that can help you to save money now.

3) What systems and technology do you use?

4) What are your fees?

5) Who can I call for recommendations?

Lisa Derby Oden has been providing business development, marketing, and nonprofit consulting services to the horse industry since 1995. Oden is author of “Growing Your Horse Business” and “Bang for Your Buck: Making $ense of Marketing for Your Horse Business.” She can be reached at: (603) 878-1694; e-mail at Lisa@blueribbonconsulting.com; or visit her website at www.blueribbonconsulting.com.

Resources to stay on top of these issues:

American Horse Council – www.horsecouncil.org/

Your State Horse Council – do a web search for your “XX Horse Council” or look through the links at www.horsecouncil.org/node/256

Your State Farm Bureau – many of these issues relate to agricultural issues as well. Your state Farm Bureau may have an active equine committee.

Section 179 and Bonus Depreciation - www.section179.org/