Ask an Expert    Taxes & Horses Taxes & Horses       The Taxman Cometh       Q. I have two Sweepstakes Nominated Arabian geldings and am wondering what the criteria are in order to use them on my taxes. How long do I have to make an income on them and how much do I have to make for it to be viable? What can I write off as expenses? Do you have to give your accountant any special papers? Do you have to be a bonafide farmer? A. The answer to this query was supplied by the head office of H and R Block: The tax courts have historically examined these sorts of activities for a reasonable expectation of profit and, more recently, whether there is a strong personal element. These are the personal benefit and hobby type cases where a taxpayer has invested money into an activity from which that taxpayer derives personal satisfaction or psychological benefit. Examples of such activities include horse farms, condominium rentals, ski chalet rentals, and dog kennel operations. Though these activities may in some ways be operated as businesses, the courts have generally found the main goal to be personal. As the Judge in Sipley v. Q., [1995] stated: often any desire for profit is no more than a "pious wish" or "fanciful dream." Profit is only a secondary motive for having set out on the venture. Expense claims are then simply viewed as taxpayers trying to use tax deductions to subsidize their personal expenditures. Therefore, if the profit motive of any activity or venture is not greater than the personal motive, all related expenses are simply disallowed. Back to Top Q. I've started organizing my 2000 year end and I'm sure there must be some angles I've been overlooking that could help cut my tax bill. I really don't want to pay any more tax than absolutely necessary; are there any commonly missed tax strategies that you can alert me to? A. Fred Mertz, a Calgary, Alberta-based certified general accountant specializing in agriculture had these tips for managing year end tax bills: Here's a checklist of items to consider that may help plug some of your tax leaks: WAGES TO SPOUSE AND CHILDRED - Moving income from your high marginal tax rate to the low tax rate of a family member can save some big bucks. You can deduct wages paid to a spouse or child provided the money was actually paid, the work was necessary to help earn farm income, and the rate of pay was reasonable. It is important that any salary paid out to family is not outlandish. It must be equitable based on the work involved. This is a great planning tool that is not always used by farming families. OPTIONAL INVENTORY ADJUSTMENTS - This is one of my favorite tax tips. Farmers filing on a cash basis can elect to add to income in any amount up to the fair market value of inventory on hand at year-end. In the following year this adjustment is treated as a deduction. You should consider using this if your current income is low and you expect a higher income the following year. RESTRICTED FARM LOSSES - This is a common category for many farmers in the horse industry. Restricted farm losses occur when there is a reasonable expectation of profit but your chief source of income is not farming. Your deductible loss is $2,500 plus one half of the next $12,500 to a maximum of $8,750. The portion of loss not deductible is carried forward and can be used in the future against farm income. You can carry these losses forward ten years or back three years. Remember you can protect carry forward losses that drop off by using optional inventory adjustments. CLASS 1-12 ELECTION - Section 1103 of the Income Tax Act provides an election that allows the farmer to transfer property from class 2 through 10, 11 and 12 into class 1. This election can allow the farmer to defer recaptured depreciation. This works especially well when you have an equipment auction sale by placing your farm equipment into class 1 before the sale. PERSONAL LOANS - Interest on personal loans is non-deductible for tax purposes. Therefore, one should always pay down personal loans before paying down any farm debt. REPLACEMENT PROPERTY - Consider using replacement property when selling farmland and replacing with similar property. This procedure can save you a lot of tax, however professional advice is needed and be careful on purchases of excess property. CAT/DOG FOOD - Dog and cat food are deductible expenses if barn cats are used to control mice and dogs are used to protect farm property and other farm animals. Often people are entitled to more savings than they realize. Planning for tax filing is a year round activity that too many people leave to the last minute. If you think some of these tips may be applicable to you, consult with your professional accountant, you may be surprised at how much help they can offer. Back to Top IMPORTANT DISCLAIMER: At westernhorsereview.com our 'Ask an Expert' page is not intended to replace diagnosis or treatment of your horse by your veterinarian or other professionals; westernhorsereview.com does not assume any legal responsibilty.