LEXINGTON, Ky. (December 17, 2019) – A key provision that extends three-year tax depreciation for all racehorses through 2020 today passed the House of Representatives by a vote of 297-120. The racehorse provision is part of a larger tax package agreed to by Republican and Democratic leaders and now expected to be taken up by the Senate in the next several days.
Uniform three-year racehorse depreciation was among numerous tax provisions across many industries that either expired at the beginning of 2018 or this year, or were set to expire as of Jan. 1, 2020. The bill reinstates the 3-year schedule for all racehorses retroactive to 2018.
The provision allows taxpayers to depreciate, on a three-year schedule, racehorses 24 months of age and younger when purchased and placed into service, as opposed to a seven-year schedule.
“Reinstatement of three-year depreciation for all racehorses helps attract and retain investment in the horse racing industry,” said NTRA President and Chief Executive Officer Alex Waldrop. “We appreciate the House’s work to include this important provision.”
Three-year racehorse depreciation was most recently available to the industry in 2017 but Congress did not renew it for 2018 as part of the Tax Cuts and Jobs Act (TCJA) passed in December 2017. The TCJA did include 100% bonus depreciation and a $1 million Sec. 179 expense allowance for qualified depreciable property, two important investment incentives that lessened the need for three-year depreciation in many cases. However, three-year depreciation continues to be a beneficial option for many racehorse owners, especially racing partnerships with multiple passive owners, as it better aligns deductions with corresponding income opportunities on an annual basis.
Maintaining the three-year recovery period for racehorse purchases has been a top legislative priority for the NTRA federal legislative team since the provision’s initial enactment as part of the 2008 Farm Bill.
The Senate has until Friday, December 20, to pass this legislation.
Federal depreciation incentives included with the Tax Cuts and Jobs Act continue to benefit Thoroughbred horse and farm owners. This article provides an in-depth look at the rules surrounding the 100% bonus depreciation, generally the most useful of these incentives to industry participants. This discussion is intended for those active owners operating their horse and farm activities as businesses that use the cash method of accounting.
The new law significantly expanded bonus depreciation. The percentage that may be currently deducted for tax purposes increased to 100% of the purchase price for qualifying property placed in service through 2022. After 2022, the percentage drops by 20% each year until it becomes 20% in 2026. In addition, the definition of qualifying property was expanded to include assets that have been previously owned but not those being reacquired by the purchaser. Previously, assets used by a prior owner did not qualify.
Senate Finance Committee chairman Chuck Grassley, an Iowa Republican, and ranking member Ron Wyden, an Oregon Democrat, introduced bipartisan tax and disaster relief legislation Feb. 28 that includes three-year depreciation for racehorses.
Under the proposed package, three-year racehorse depreciation would be retroactive for 2018, continue through 2019 and grant taxpayers the option to depreciate all racehorses over a three-year period.
Three-year racehorse depreciation was most recently available to the industry in 2017 but Congress did not renew it for 2018 as part of the Tax Cuts and Jobs Act (TCJA) passed in December 2017. The TCJA did include 100% bonus depreciation and a $1 million Sec. 179 expense allowance for qualified depreciable property, two important investment incentives that lessened the need for three-year depreciation in many cases.
However, three-year depreciation continues to be a beneficial option for many racehorse owners, especially racing partnerships with multiple passive owners, as it better aligns deductions with corresponding income opportunities on an annual basis.
The NTRA federal legislative team will pursue passage of three-year depreciation as part of this tax extenders legislation as we have done since its original inclusion in the 2008 Farm bill.
Proven Strategies” is a new regular series in the TDN, presented by Keeneland. It is written by Len Green of The Green Group and DJ Stables, who won the 2018 GI Breeders’ Cup Juvenile Fillies with Jaywalk (Cross Traffic).
by Leonard C. Green, CPA, MBA, and Frank R. Palino, EA, CDFA, ATA
An IRS examination notice not only creates extreme anxiety, but also may trigger possible tax assessments, interest and even penalties. Let’s face it, the horse industry, whether you are a horse/farm owner, trainer, veterinarian or buy and sell horses, can be a very difficult business in which to make money. When you deduct horse-related losses against your other income, you become the potential target for the IRS to examine your tax returns.
In the first year of operations under newly modernized U.S. Treasury and Intenal Revenue Service (IRS) regulations, there was a $307 million reduction in the amount of winning pari-mutuel wagers reported to the IRS using form W-2G, according to statistics released today by the National Thoroughbred Racing Association (NTRA).
This reduction in the amount of winning wagers reported was the result of a dramatic 89% decline in the number of winning tickets flagged for IRS reporting. The declines also led to a $35 million reduction in the amount withheld from bettors’ winnings. The new regulations, which took effect Sept. 28, 2017, recast the Treasury’s definition of the “amount of the wager” to include the entire amount wagered into a specific pari-mutuel pool by an individual rather than the prior IRS standard of using only the base amount of the winning wager.
Based on data provided by CHRIMS, which conducts settlements and other services for many of the nation’s pari-mutuel operators, individual racetracks, and the two largest U.S. totalizator companies–AmTote and United Tote–the NTRA estimates the following nationwide impacts over the first 12 months of operation under the new regulations (10/1/2017 – 9/30/2018 vs. 10/1/2016 – 9/30/2017):
• The gross amount of winning wagers reported to the IRS on Form W-2G declined $307,700,000 (82%), from approximately $374,500,000 to about $66,800,000;
• Federal taxes withheld from winning wagers and sent to the IRS declined $35,400,000 (82%), from $43,200,000 to $7,800,000; and
• The actual number of IRS tickets flagged for W-2G reporting by the IRS declined nearly 89%, from approximately 235,100 tickets to only about 26,350 winning tickets.
From a percentage standpoint, the impacts were equally positive for horseplayers, pari-mutuel operators and horsemen across the country–regardless of the size of the racetrack market. The new regulations also provided positive impacts to advance deposit wagering (ADW) operators and their customers.
“The drastic reduction in the number of winning tickets requiring reporting and withholding is consequential in several ways,” said NTRA President and Chief Executive Officer, Alex Waldrop. “Under the old regulations, it was not uncommon for horseplayers to feel the thrill of ‘winning’ only to have their proceeds reported and/or withheld by the IRS. The old regulations were both unfair and a burden to all involved. A significant overreach by the IRS has been corrected thanks to fair-minded officials at the U.S. Treasury.”
There are numerous specific examples of events where the industry benefited from the new regulations.
On-track at the host venues of the Triple Crown races–Derby Day, Preakness Day and Belmont Stakes Day–the combined number of winning tickets required by the IRS to be reported on Form W-2G fell 96%, with the gross amount of winning wagers required to be reported falling by 87% and the amount of money withheld from pari-mutuel winnings falling 71%. It is likely that similar results were realized nationwide.
On-track impacts were most pronounced at Pimlico on Preakness Day, where the number of tickets requiring reporting fell 99% and the number of tickets requiring Federal withholding fell 100% because there were no winning tickets at Pimlico on Preakness Day that triggered Federal withholding.
On-track at the 40-day 2018 Saratoga Meeting, the number of winning tickets flagged for processing by the IRS fell 96%, the gross amount of winnings required to be reported fell 94% and the amount of money withheld from winning bettors fell 91%.
“The new regulations have been enormously beneficial to every sector of our business,” Waldrop continued. “They would never have transpired without the bipartisan support we received on Capitol Hill and the unwavering support of every segment of the horse racing industry, including thousands of customers who answered our call to action. Best of all, we will continue to realize the positive impacts from these regulations for many years to come.”
For more than a decade, the NTRA and others promoted legislation to modernize pari-mutuel withholding and reporting. The industry argued that as pari-mutuel wagering increasingly shifts toward exotic bet types like Exactas, Trifectas and Pick 4s, more winning wagers are being reported and more winnings withheld, creating an unfair burden on bettors, pari-mutuel operators and state and federal governments.
Then in 2014, the NTRA developed a new strategy that relied on regulatory, not statutory relief from outdated regulations. Following the new strategy, the NTRA was able to convince the Treasury Department and the IRS to expand the definition of the phrase “amount of the wager” to include the total amount bet on a single ticket (or through an ADW) by an individual into a specific pari-mutuel pool. This one simple change in the Treasury regulations that took effect on September 28, 2017 has led to the significant benefits reported today.
Through September of this year, U.S. wagering has increased 3.95% ($336,724,709) overall while average wagering per race day has increased 7.67% ($180,231), according to statistics provided by Equibase.
March 19, 2018 – Notable equine law and tax attorney, Paul Husband will present a free webinar for all horse owners and equine business professionals on Monday, March 19th at 5:30 p.m. PST / 8:30 p.m. EST.
Hosted by Equestrian Professional, the webinar entitled: “Pros and Cons – How the New 2018 USA Tax Laws Could Affect Your Horse Business” is a must to find out whether the new tax law will be good or bad for your horse operation. The new tax law – the Tax Cuts and Jobs Act (TCJA) was signed late in 2017 and is now in effect. Yet, most are not informed about how it will affect their business and personal taxes.
As stated by Equestrian Professional, “Mr. Husband’s expertise in both equine business and tax matters makes him the ideal speaker for this event.”
Hundreds have already registered, and space is filling quickly. To reserve your spot, visit www.equestrianprofessional.com and click “Free Resources” or access the direct link at http://www.equestrianprofessional.com/public/Free-Webinar-Pros-and-Cons-How-the-New-USA-Tax-Law-Could-Affect-Your-Horse-Business.cfm
Paul Husband of Husband Law provides business and litigation services in state and federal courts, including the U.S. Tax Court, as well as tax and business planning for both for-profit and non-profit organizations. He has raised, shown and raced Arabian horses for most of his life, served for 20 years as an American Horse Shows Association Judge, has published numerous tax and equine law articles, reports and publications and is a sought-after public speaker at local and national events. He has been a member of the Board of Advisors and Contributors to The American Horse Council Tax Bulletin, is a member of the Graded Stakes Committee of the Arabian Jockey Club and is Vice President and a Director of the American College of Equine Attorneys.