Am I at risk of being audited by the IRS?

The average additional tax resulting from the audit of someone with a Schedule C or F (sole proprietor) with gross receipts between $100,000 and $200,000 is about $33,000.

The same such individual is 25 times more likely to be audited than an S-corporation. 

Why is this especially important for you as the owner of a horse business?  The IRS assumes you’re in business to make money.  For most businesses the IRS considers them a real business if they made money in at least three tax years of the past five tax years, including the current tax year. Since horse businesses have a longer startup period, the IRS allows horse businesses (horse breeding, racing, training, or showing) additional time to prove it is profitable.  For you then the test is taxable profits in two tax years of seven consecutive tax years.  Since the nature of your business is challenging to be profitable, your horse business could be you further at risk of being audited.

So what is the best option for you after reading the previous three paragraphs?  A business plan.  Why?  The IRS has identified nine factors that it reviews to determine if the business has the ability to be profitable.  Several of these factors can be achieved by preparing and updating a business plan. 

What should the business plan include? 

  • Prepare a written statement describing how you intend to make a profit in the horse business.
  • Include consultations with financial experts as well as equine experts.
  • Include statistical data – industry trends, economics of the horse industry.
  • Include financial projections.
  • Follow the plan! – or revise if not working.

Preparing the plan is a good defense.  But what you should find is that it turns into an offensive play allowing to run the business with more success.  This will be covered in the next post.  Using your business plan to go from surviving to thriving.

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