Whether you’re searching for last-minute tax deductions for 2023 or just feeling charitable during the holiday season, the American Horse Council (AHC) shares some holiday gift-giving and tax deduction tips.
Rehoming or Gifting Personal Horses
Are you thinking about rehoming a horse, whether for a second or third career, via donation to a school or therapeutic program?
You can earn a tax deduction by donating a horse to a qualified charitable organization. Many schools with equestrian programs and therapeutic riding organizations rely on donations of horses for their programs. The decision to donate your horse to a charitable organization can be rewarding for you, your horse, and the charity. The AHC recommends you make personal visits to vet programs and talk with other owners who have donated horses to the organizations.
Financial Donations or Contributions to Equine Organizations
Year-end donations will see many nonprofits asking social media followers for donations to help fulfill funding needs. According to Charles Schwab, charitable deductions can reduce your taxable income, if you itemize. However, overall deductions for donations are usually limited to 50% of your adjusted gross income (AGI).
What’s in the Works for Horse Owners
The U.S. government is working to help horse owners with their potential income and year-end taxes. There is hope for the adoption of legislation introduced by Representative Andy Barr (R-KY-6) and Congressman McGarvey (D-KY-3) to incentivize investment in the horse racing industry. The Race Horse Cost Recovery Act of 2023 would make the three-year depreciation schedule permanent for racehorses, regardless of their age when put into service. Currently, Congress must reauthorize this provision in the tax law on an annual basis. Their other bill, the Racehorse Tax Parity Act, would reduce the holding period for equine assets to be considered long-term capital gains. This puts them on a level playing field with other similar assets.
Regardless of the scenario, it is crucial to understand and apply the Internal Revenue Service’s (IRS) requirements and guidelines:
Tips for Donating Horses
For a charitable donation of a horse, make sure you are donating to a qualified charity. To check the status of a charity, use the IRS’s Tax Exempt Organization Search tool. Then determine the fair market value of your horse. Taxpayers seeking a deduction of more than $500 must also complete and file with their tax return IRS Form 8283.
Form 8283 requires the taxpayer to disclose:
- 1. how the horse was acquired,
- 2. the date of acquisition (approximate), and
- 3. the cost basis of the horse.
In addition, if the deduction is greater than $5,000, the taxpayer must obtain a written appraisal by a qualified appraiser. (The IRS has requirements as to the qualifications of the appraiser and the timing of the evaluation.)
Looking to maximize your tax deduction? The horse must be used by the receiving charity in connection with the charitable purpose for which it was formed. If a horse is donated to a charity that, in turn, uses the horse in a manner unrelated to its charitable purpose, (for example, selling for cash) then the donor taxpayer can deduct only their basis in the horse, which is usually the purchase price, less any depreciation. (The basis in a homebred horse would be zero.)
Always establish a paper trail.
Keep records of:
- Name and address of the charity.
- Date of the donation.
- Location of the donation.
- A description of the horse in detail reasonably sufficient under the circumstances.
- The fair market value of the horse at the time of donation.
- The method used to determine the value, including a written and signed appraisal, if used or required.
- The terms of agreement relating to the horse’s use or disposition.
Request a written receipt. Ask the charity for a tax receipt if the horse is worth more than $250 but less than $5,000. The document receipt must include a description of the horse, a statement concerning whether any goods or services were provided to the donor by the charity in exchange for, in whole or part, the horse, and a description and good faith estimate of any value or services given by the charity in exchange for the horse.
Do the math. There are many factors affecting the amount a taxpayer can receive as a deduction. For example, when a horse eligible for capital gains treatment has been depreciated and is donated to a charity, the amount of the gift is the value of the horse reduced by the amount of depreciation that has been taken. Section 170(e) of the Internal Revenue Code lists these exceptions, including horses eligible for capital gains treatment and a donation to a charity that does not relate to the charity’s exempt purpose. Another important rule to keep in mind is the horse must have been held by the donor for 24 months for sporting, breeding, or draft purposes prior to gifting it to maximize benefit to the taxpayer. You can see the rules on depreciation here. Tax guidance specific to farm and agriculture can be accessed at this site.
The American Horse Council strongly recommends consulting with a qualified tax professional. This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice.
The AHC has several tax professionals as members who would be happy to assist with any tax questions on all aspects of horse ownership. Please contact firstname.lastname@example.org for a listing.
By: Brigid Shea, American Horse Council