On March 30, 2017, Congressman Andy Barr (R-KY) re-introduced the Race Horse Cost Recovery Act (H.R. 1804) and the Equine Tax Parity Act (H.R. 1805). The Race Horse Cost Recovery Act would permanently place all race horses in the three-year category for tax depreciation purposes. A 2008 provision that temporarily put race horses in the three year category expired at the end of 2016. The Equine Tax Parity Act would make horses eligible for capital gains treatment after 12 months, rather than 24, similar to other business assets. The American Horse Council supports both of these bills.
Congressman Barr also introduced the Race Horse Expensing Certainty Act (H.R. 1806), the bill would provide extra clarity that race horses are eligible for the Section 179 business expense deduction. All horses purchased and placed in service by a business are currently eligible for the Section 179 deduction and the bill would not change this.
Race Horse Cost Recovery Act
The 2008 Farm Bill included language that allowed all race horses to be depreciated over three years, regardless of their age when placed in service. Prior to then, race horses were depreciated over seven years if placed in service before they turned two. Horses placed in service after two (24 months from foaling date), could be depreciated over three years. A horse is generally deemed to be placed in service when it begins training, which is usually at the end of its yearling year. This change to the tax code was extended several times, but expired at the end of 2016. The Race Horse Cost Recovery Act would permanently make all race horses eligible for three year depreciation.
Depreciation is a means of recovering the cost of property, including horses, used in a business through deductions of portions of the horse’s cost over a period of years. Generally, the recovery period approximates the estimated useful life or economic life of the property. The horse industry believes a three year deprecation schedule more accurately reflects the actual time a horse will be raced and a seven year deprecation period unfairly penalizes the horse industry.
Permanently placing all race horses in the three year depreciation category would be of great benefit to the horse industry and is supported by the AHC.
Equine Tax Parity Act
The Equine Tax Parity Act (H.R. 3672) would make horses eligible for capital gains treatment after 12 months, rather than 24, similar to other business assets.
Under the current federal tax code, gains from sales by individuals of property used in a trade or business, including horses, qualify for long-term capital gains and are subject to the maximum capital gains tax rate of 15% for taxpayers earning less than $450,000 or 20% for those earning more. Since the individual income tax rate can go as high as 39.6%, the lower rate is a real advantage.
Horses held for breeding, racing, showing or draft purposes qualify for the capital gains rates only if they are held for 24 months. All other business assets (except cattle) qualify if held for 12 months.
The Equine Tax Parity Act would end this discriminatory treatment of horses under the tax code and allow horse owners to enjoy the reduced rate upon sale after holding a horse for 12 months. For most owners and breeders shortening the capital gains holding period to 12 months should be a benefit. Reducing the holding period by half would give many horse owners and breeders more flexibility to sell and market their horses. It would mean that every sale of a horse which is held for at least 12 months will qualify as a capital gain or loss unless that horse is held primarily for sale. The AHC supports this bill.
The Race Horse Expensing Certainty Act
The Section 179 business expense deduction allows any business, including any horse business, to immediately depreciate up to $500,000 of the cost of any investment in business assets, including horses. The deduction is reduced dollar-for-dollar once investment in all one’s business activities hit $2 million. The bill would provide extra clarity that racehorses are eligible for the Section 179 business expense deduction.