The economic stimulus package signed into law by President Bush on March 9 includes new depreciation provisions that will benefit the horse industry. The bill was a scaled-back version of the ambitious tax bill originally proposed by both the Republicans and the Democrats. Although a broader tax bill was passed several times by the House of Representatives, it could not gain the votes needed in the Senate. The final package was crafted to include the necessary level of tax cuts, small business tax breaks and unemployment benefits needed for passage in both the House and the Senate.
Under the new depreciation rules, which will apply retroactively to purchases after September 11, 2001, taxpayers will be allowed a 30% bonus depreciation on business assets, including horses, in the year they are purchased and placed in service, as well as regular depreciation on the balance. To qualify for the new depreciation rules, a horse must be purchased during the three-year period from September 11, 2001 to September 11, 2004 and be placed in service during the period from September 11, 2001 to January 1, 2005.
Because the changes are intended to stimulate investment and the economy, the additional depreciation benefits are limited to the individual who first purchases and races or shows the horse. In other words, if a person purchased a horse that has been raced or shown by another, that purchaser would not be entitled to the bonus depreciation. “It is unclear whether a horse which has been raced or shown, but has never been bred, would qualify if purchased for breeding. Further research will have to be done on this issue,” said Jay Hickey, President of the American Horse Council. “But it is clear that a horse purchased for racing or showing, which has never been used for that purpose, qualifies for the new 30% bonus write-off.” The favorable provisions apply to all horses, regardless of breed or use, provided they are used in a trade or business.
The new rules will allow 37.5% of the cost of a yearling to be written off in the first year, more than three times the amount allowed under the old rules. Over 50% of the cost would be written off by the end of the second year, almost twice what was allowed. With respect to race horses over two and other horses over twelve, 47.5% of the cost could be depreciated in the first year and 74% would be written off after the second year.
The new provisions also benefit owners of other assets used in the horse business. Purchases of equipment and any other business property which has a depreciable life of 20 years or less will also be eligible for the 30% writeoff in the year the property is acquired and placed into service. This would include virtually all equipment used by farms, training facilities, racetracks and horse shows.