“The new law includes two tax incentives that would allow a much bigger write-off for horses and other depreciable property purchased and placed in service during 2008,” said AHC president Jay Hickey. “This should provide an additional incentive for people to invest in more horses for racing, showing and breeding as part of their business activities.”
According to the AHC and a memorandum on the new tax law distributed by the National Thoroughbred Racing Association, the first incentive would increase the so-called Section 179 expensing allowance for horses purchased and placed into service in 2008 from $128,000 to $250,000. This expensing allowance also applies to farm equipment and most other depreciable property. Once total purchases of horses, and other eligible depreciable property, reach $800,000 during 2008, the expense allowance goes down one dollar for each dollar spent on eligible property over $800,000.
“The horse industry almost lost the Section 179 expense deduction in 1996. The House of Representatives passed legislation taking this deduction away from the horse industry,” said Hickey. “But we were able to convince the Senate to remove this restriction before passing the final bill and the deduction was preserved. It was worth $17,500 then. Over the years it has been increased and will now go up to $250,000 for 2008. That is a real benefit to horse owners.”
To illustrate the expensing allowance, the AHC cited the following example: Assume a horse business purchases $750,000 of depreciable property in 2008, including $650,000 for horses. That business can write off $250,000 on its 2008 tax return and depreciate the balance. If instead, purchases were $900,000, the expense allowance would go down by $100,000. In either case, the amount of the purchases not expensed may also be eligible for bonus depreciation, which is reinstated for 2008 in the new tax stimulus package.
According to the AHC, the second incentive brings back 50% first-year bonus depreciation for horses and most other depreciable property purchased and placed in service during 2008. “Bonus depreciation was first passed in 2002 as a way to stimulate the economy. It phased out at the end of 2004,” Hickey said. “It was a benefit for the industry then and it should be again.” It does not apply to property that has a depreciation life of over 20 years.
Also, as was the case when bonus depreciation was available in 2003 and 2004, the property must be new, meaning that the original use of the horse or other property must begin with the purchaser for the property to be eligible. “Original use” means the first use to which the property is put, whether or not that use corresponds to the use of the property by the purchaser. “There is no limit on the amount of bonus depreciation that can be taken, as there is with the expense deduction,” noted Hickey.
To illustrate bonus depreciation, assume that in 2008 a business pays $500,000 for a colt to be used for racing and $50,000 for other depreciable property, bringing total purchases to $550,000. The young colt had never been raced or used for any other purpose before the purchase. The business would be able to expense $250,000, deduct another $150,000 of bonus depreciation (50% of the $300,000 remaining balance), and take regular depreciation on the $150,000 balance.