President Signs Bill Allowing Bonus Depreciation on Horse Purchases

The "Economic Stimulus" package signed into law by President George W. Bush on March 9 includes new depreciation provisions that can be beneficial for horse purchases according a release issued by the National Thoroughbred Racing Association. And, the new rules apply back to purchases after Sept. 11 of last year.

The new depreciation rules allow a 30% bonus depreciation in the year of purchase, as well as regular depreciation on the balance. To qualify for the new rules, these requirements must be met: (1) the horse must be purchased during the three-year period from Sept. 11, 2001 to Sept. 11, 2004 and be placed in service during the period from Sept. 11, 2001 to Jan. 1, 2005; and (2) the original use of the horse must commence with the purchaser.

The second requirement appears to leave out horses purchased after they have been raced by someone other than the purchaser. It is unclear whether a horse that has been raced but has never been bred would qualify if purchased for breeding. But, it is clear that a horse purchased for racing that has never been raced can qualify for the new bonus write-off.

Looking to the yearling sales this year, the depreciation of a horse purchased and placed into service before the horse turns two, will be as follows:

Race horses two years old or younger when acquired and placed in service
(depreciation deduction as a % of the original cost)

New Rules______________Pre-9/11 Rules
Year.....%......Cumulative %__Year......%........Cumulative %
1....... 37.5%.......37.5%-----------1......10.7%........10.7%
2....... 13.4%.......50.9%-----------2......19.1%........28.8%
3........10.5%.......61.4%-----------3......15.0%........44.8%
4..........8.6%.......70.0%-----------4.......12.3%.......57.1%
5......... 8.6%.......78.6%---------- 5.......12.3%.......69.4%
6..........8.6%.......87.2%-----------6.......12.3%.......81.7%
7..........8.5%.......95.8%-----------7.......12.2%.......93.9%
8..........4.3%.....100.0%-----------8.........6.1%.....100.0%

Thus, for example, the new rules allow 37.5% of the cost of a yearling purchased at a July 2002 sale to be written off in 2002, more than 3 times the amount allowed under old the rules. Over 50% of the cost would be written off by the end of 2003, almost twice what was allowed.

Race Horses over two year olds when acquired and placed in service
(Depreciation Deduction as a % of the Original Cost)

New Rules_______________Pre-9/11 Rules
Year...%........Cumulative %___Year....%.......Cumulative %
1......47.5%.........47.5%-------------1......25%..........10.7%
2......26.25%......73.75%------------2......37.5%......62.5%
3......17.5%........91.25%------------3......25%..........87.5%
4........8.75%....100.00%------------4......12.5%....100.0%

As the tables shows, 47.5% of the cost of a race horse over two years old that has not been raced before can be written off in the year of purchase and 73.75% would be written off after the second year.

All of the depreciation figures in the two charts above would be slightly lower if more than 40% of the cost of all purchases of depreciable property made during the year were made in the last quarter of the year.

Purchases of equipment and any other business property that have a depreciation life of 20 years or less would also be eligible for the 30% write-off in the year the property is acquired and placed into service. This would include virtually all track equipment, tractors, computers, tote machines and any other items, excepting buildings and their components.

The new law did not change the current expensing deduction for horses or any other property (except property placed into service in the Liberty Zone of New York City). However, the current expensing deduction, which allows up to $24,000 of first year write-off, may also be available. If so, the deductions are even greater in the year the horse is purchased and placed into service.