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By the time this article goes to print we will be thinking about April 15, and the Internal Revenue Service. Many horse owners spend a lot of time and money in advertising their product for sale. Paid advertising draws people and potential customers to the business and helps create a favorable interest for the advertiser’s business operation.
Lynn Telleen, Editor of The Draft Horse Journal, provided me with some interesting facts and figures. In the year 2005, The Draft Horse Journal had 456 individual advertisers. In the Winter 2005-2006 issue alone, there were 299 advertisers. That’s a lot of advertisers promoting their product. The circulation of The Draft Horse Journal reaches every state in the United States, every Canadian province and 25 foreign countries around the globe. That’s a lot of exposure!
Proper advertising takes thought. The first thought that comes to mind is expense. Therefore, it is helpful to have a budget. To get the best results from your advertising, it is helpful to create an advertising plan and consider the expense in terms of an estimated budget. As a general rule you can expect to spend approximately five to ten percent of the expected return on advertising. If you plan to sell a horse for $5,000, you can expect to spend $250 to $500 in advertising. The same holds true for training and boarding services and breeding advertisements. Calculate the potential income desired from these activities and do the math. Once you have an established business this could all change, but to start, the above is a good rule of thumb.
Now that you have planned your advertising and promotional activities and have paid the advertiser’s fee, can you deduct these expenses from the income earned? In short, in the case of the $5,000 horse where the advertising costs were $500, must you claim $5,000 or $4,500 as income? The answer is that the cost of advertising to sell horses and other advertising costs associated with your horse business are deductible as ordinary and necessary expenses and can be deducted from your sales price.
Simple enough if you have a horse business. But, what if you have another business, say an insurance or construction business. Can you use your horses to advertise those unrelated businesses and deduct the horse-related advertising expenses from the unrelated business? Tax law allows a deduction for the horse-related expenses if there is a connection between the two activities.
The Internal Revenue Service has certain general rules which apply in a case involving the deduction of advertising expenses from another activity. The basic rules are as follows:
- The taxpayer must show that customers and/or business have been created by the advertising activity;
- The taxpayer must show that the expense is not exorbitant compared to the income received;
- The advertising activity must have some relationship and identification to the business in question; and
- The horse-related activity must not primarily be for the taxpayer’s social and personal desires.
One of the important indicators used to analyze this issue is whether the horse activity actually refers to and identifies with the business in question–clearly the "beer" hitches refer to the business activity. The hitch name bears the name of the business product and the horses and wagon have a distinct historical connection to the business. The horse-related equipment and wagons can easily be identified with the beer business and many wagons even carry replica beer kegs for promotional activity. These horse-related advertising expenses are reasonably related to the beer business and are clearly deductible.
Now what about the example of the construction or insurance business? If the horse-related advertising refers to the business, let’s say the vehicle used to transport the horses, or the wagon used in the shows, and all entries and premiums are in the name of the construction or insurance activity it will go a long way to satisfy the IRS test. Remember, however, that the shows, parades and other promotional activities must be well attended and recognized to create the argument that customers and business are created as a result of these activities.
It is important to show a connection between the horse activity and the business in question. The IRS is looking to see if the horse activity is nothing more than a disguise for personal and recreational pursuits. In this regard an interesting case is presented where expenses from an African safari were deducted as business expenses for another business. The IRS allowed the deduction for the safari’s expense finding that the safari resulted in a lot of publicity for the business. The business also maintained a display of its trophies in its headquarters and actually had a trophy room. The business permitted schools and local organizations to tour the display. All of this publicity was found to be good advertising for the business according to the Internal Revenue Service.
In another Tax Court case the result was the opposite. In this case the taxpayer had a construction business. He also played polo and attempted to deduct the horse-related advertising expenses as part of his construction business. The taxpayer argued that playing polo allowed him to meet people who might use his services to construct homes and barns. The Court viewed the facts very closely and noted that there was no advertising which connected his polo activities with the construction business. The Court found that playing polo without mentioning his construction business was primarily a social or personal purpose and disallowed the deductions.
There are many show hitches that are paid for or sponsored by an owner’s other business and this issue becomes important, especially considering the amount of dollars it takes to put a hitch on the road. If you are careful about the manner in which you perform your advertising and promotional activities and remember to be sure that the business name is used in all aspects of the horse-related activity, the taxpayer should be able to take advantage of the advertising expense deduction. Of course, if you want to be satisfied that you have complied with the IRS requirements for advertising deductions you can always consult with your accountant or tax attorney and obtain his or her opinion.
There simply is no substitute for a creative accountant or attorney especially when April 15 rolls around.
Enough legal talk—it’s time to hitch horses!
Ken is a practicing attorney in Myerstown, Pennsylvania, where a good bit of his practice involves negligence cases. Ken and his wife, Karen, own Sunny Hill Farm Belgians, and they have been exhibiting their six horse hitch for the past few years at most major shows in the east.