As an owner, you will need to decide whether or not to insure your equine investments and activities. Insurance can be purchased or an owner can choose to self-insure. We recommend you consult with an equine insurance professional before deciding whether and how to insure your equine activity.
As an owner, you should be familiar with several types of insurance:
This policy insures the horse in the event of death, not against injury. The premium varies with the horse's age, use (racing or breeding) and with the insurable value of the horse. For a policy covering a horse of racing age, premium rates range from 4.5% to 6.5% of the horse's value for one year's coverage. In most instances, coverage is subject to a veterinary examination.
Mortality insurance covers your horse in the event it is lost, killed or has to be destroyed for any reason, such as in transport, as a result of poisoning or kidnapping, or from severe injury or disease. However, any mortality that is inexplicable or could conceivably be "malicious or willful injury caused by the insured" -- i.e., a slaughter for economic motives -- will be heavily investigated, and the claim likely be denied.
Post-mortems are required in mortality claims. They must be ordered by you in a timely fashion and performed by a private vet at your expense. Also, "necessary destruction," whether on the track or in the barn, is not a matter of discretion up to you or your trainer: You must have two licensed racing veterinarians vouch -- either before or after the horse's destruction -- that your animal could not survive its injuries, or was in a state of suffering that could not be relieved. (You will need this proof not only for your insurance carrier, but also for the official veterinarian at the track, who will require a full inquiry into the death of any animal in his purview, whether it's an exercise pony or a million-dollar stakes horse.)
No matter what you consider the value of your horse and no matter what value the horse is insured for, the insurance company will assess the "market value" of your horse at the time of its death and may adjust the reimbursement DOWN accordingly. The insurance company, however, will NOT adjust reimbursement up if you have been paying the premium on a lower dollar amount than your horse was worth.
For example, you have a $50,000 mortality insurance policy on your racehorse. As racing luck would have it, he has not been competitive at higher levels and has been dropped into a $25,000 claiming race. If the horse dies as a result of the race, you will only be reimbursed $25,000, the market value of the horse at the time of death.
FLT (Fire, Lightning and/or Transportation) is a more limited policy of insurance than full mortality. It provides coverage only in the event of death due to fire, lightning and/or transportation accidents. It does not cover death due to sickness or disease and is therefore less costly than full mortality insurance.
If you already have a horse (or horses) at that track which are covered by an annual policy, ask your broker whether or not your policy extends to other horses you may suddenly acquire. If not, you may want to inquire about claiming insurance before you enter a claim on a new horse. You may not be able to get it because claiming insurance is the loss-leader in equine insurance. It is extended only as an accommodation to owners with large stables already insured, or to trainers with good histories and good relationships with the insurance carriers. If you can get it, claiming insurance will generally cost 0.85% to 1% of the claiming price of the horse.
A general liability policy protects a horse owner against liability arising form any loss, damage, accident or injury to persons or property caused by their horse. This type of coverage is almost never included within a standard homeowner's policy. Given that your stable constitutes a business activity, you will generally need to obtain a separate policy covering this commercial activity. General liability insurance is bought in increments (up to $2 or $3 million), with premiums based on the number of horses being insured at one time.
In some states, including
In order to race a
Thoroughbred you must possess a valid owner's license from the state in which
you wish to race. In many states, each member of a partnership or syndicate
must be licensed. Licenses can be issued by state racing commissions or the National Racing Compact. The National Racing Compact is an
independent, interstate governmental entity, composed of pari-mutuel racing
regulators from participating states that can issue a national license which
will be recognized by all participating states and other states that may elect
to recognize the license.
Pay particular
attention to tax-related issues in operating your stable. Although some
consider the applicable tax code provisions onerous, they are, in reality,
manageable. However, it is most advantageous to be familiar with the provisions
most commonly applicable to this business. They are the difference between
long-term capital gains rates and ordinary income tax rates and the hobby loss
and passive loss issues.
The maximum federal income tax rate on long-term capital gains is 20%. Maximum ordinary income tax rates are up to almost 40%, so the spread between the two is significant. For certain taxpayers, the differential is made even greater by the effect of state taxes. Unlike other assets, the holding period to obtain long-term capital gain treatment on sales of horses is two years.
The two problems most often faced by horse owners when audited by the IRS or comparable state taxing agencies are the "hobby loss" and the "passive loss" rules. To prevail, owners must demonstrate that they have exercised preventive planning, followed good business practices and have documented their business activities.
In general, the tax laws referring the hobby loss rule provide that to deduct expenses that exceed income, the taxpayer must demonstrate that she is engaged in her horse-related activity with the intention of producing a profit. Initially, the burden of proof falls upon the taxpayer. However, if a profit can be shown in two of seven consecutive years beginning with the first loss year, the burden shifts to the IRS to disprove the "general presumption of profit intent."
The IRS cites nine factors in determining whether an activity is a hobby or business. They are very basic business points covering management style, degree of knowledge of the taxpayer, utilization of expert advisors, time and effort the taxpayer spends in the activity, the expectation for asset appreciation and the presence or absence of recreational aspects. From the IRS' perspective, a hobby correlates with fun, while a business means work: In other words, it is okay to enjoy the business, but only if you have a convincing profit motive.
Under the "passive loss" provision, in order to deduct losses suffered as a result of equine business activities from other income, an owner must be able to prove that she is materially participating in the activity. Material participation is satisfied by establishing that the owner spends 500 or more hours actively participating in the business during any taxable year. If the owner does not meet the 500-hour test, she may qualify with 100 or more hours if she participates on a regular, continuous basis throughout the year and meets certain other criteria. However, satisfying the requirements of this test is more difficult.
Hours spent by a husband and wife can be combined to accommodate these requirements. If an owner cannot prove material participation, losses can only be taken against other passive income. The sale of the investment, however, triggers the deductibility of all past losses disallowed.
Treat your horse-related activities as you would any other business venture. Carefully plan your time and the timing of your horse-related income and expenses. Simple documentation will aid in proving your intent to make a profit and active participation.
Horses may generally be depreciated over three to seven years. Longer periods of depreciation may be elected, and always apply in the case of foreign-based horses. Racehorses over two years old and breeding horses over 12 are depreciated over three years; all others are depreciated over seven years.
At first glance it seems more advantageous from a depreciation standpoint to purchase a horse over two years old. In the case of IRS rules, note that age is determined by the actual date of birth, not the industry-accepted January 1 of each year. Furthermore, to prevent taxpayers from purchasing at the end of the year and obtaining a large depreciation deduction, more than 40% of the purchases during one year are made during the last quarter, reduced depreciation results.