Horse Breeding Expenses
In our tax tip Tuesday post from June 22nd, we discussed the depreciation of horses. If your business purchases a horse, you generally must depreciate the cost of the horse over an IRS-determined period of time which is based on the use of the horse.
Today, we are going to cover the breeding expenses of equines. These guidelines apply to businesses using the cash accounting method. A different treatment may apply if your business uses the accrual accounting method.
You can generally deduct breeding fees as a farm business expense. However, if the breeder guarantees live offspring as a result of the breeding or other veterinary procedure, you must capitalize these costs as the cost basis of the offspring. Included in these costs may also be the costs of caring for the mare and foal until the foal is weaned.
If you are a breeder utilizing embryo transfer or purchasing embryos, you may be able to deduct these costs at the time of purchase rather than capitalize them. A breeder may incur a variety of costs associated with the embryo transfer including, but not limited to: the costs of preparing and cycling the donor and recipient mares; the cost of the transfer service; the cost of the recipient mare; and the cost of the mare during gestation.
In order to determine the tax treatment of these expenses, the agreement for purchase should be reviewed. If the agreement does not include a guarantee of live birth and the guarantee is a limited assurance that the recipient will be pregnant or provides no guarantee at all, the risk of loss would stay with the purchaser and the cost of the purchase and associated embryo transfer fees may be deducted at the time of the purchase.
It is important to note that the fee for the purchase of a recipient mare would be subject to capitalization and would not be deductible at the time incurred. Lease fees for a recipient would generally be deductible as lease expense at the time incurred, assuming no guarantee for live birth was included in such agreement.
Breeding expense recognition and capitalization can be a complex tax topic. A topic that should likely be discussed alongside these considerations is whether or not the activity is engaged for profit. Consult with your tax advisor or reach out to us if you wish to evaluate these areas further.
This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter.
Revenue Ruling 79-176
Letter Ruling 8304020
Duggar v. Commissioner
Letter Ruling 8007002