Business owners can reduce their taxable income by deducting ‘ordinary and necessary’ expenses. | Photo: Photos.com

Having trouble interpreting taxspeak as it applies to the horse industry? Read on.

The United States’ tax code is written in a special dialect—call it “taxspeak”—that is nearly incomprehensible for most people. One way to make sense of taxspeak is to study the subject until you master it, but that takes substantial time and effort. A more practical approach is to find someone who already knows the language and can decipher it for you. B. Paul Husband is a Burbank, California, attorney with a rare talent: He knows the tax code and, more importantly, he can explain what it means without resorting to taxspeak. In this article he will help us interpret some of the important tax provisions affecting the horse industry.

Managing Deductions

“Depreciation” is taxspeak for “cost recovery.” It’s a common accounting practice that allows a business owner to use federal tax deductions to recoup the purchase price of a horse or other property used in the business. That’s a good thing, says Husband, because cost recovery puts money back in a business owner’s pocket to use for additional purchases. In the end, policy planners in Washington say, both individual business owners and the economy will benefit.

The IRS allows business owners to reduce their taxable income by deducting expenses that are both “ordinary and necessary.” As a general rule, if the qualifying purchase is for something that will be used up within 12 months, the entire purchase price can be deducted in the year during which the purchase was made. A bag of grain, a utility bill, veterinary charges, or employees’ wages are examples of expenses that generally can be deducted in full during the tax year in which the expenditures are made. There is no depreciation on these purchases