…In a Businesslike Manner

The IRS defines business as an activity “engaged in for profit”. When the business consists of an activity that many people enjoy as a hobby, the presence of a profit motive is often questioned. Because horse related businesses fall into this category, their owners need to be diligent about operating in a “businesslike manner”.

The dictionary defines “businesslike” as “efficient, practical, or realistic”. Do any of these words describe your horse business?

A “businesslike” approach begins with having the knowledge needed to be successful in your venture, and putting in the time and effort required to make it work. Hiring the expertise and/or the labor is acceptable, but it makes a profit harder to come by.

Are you getting (and following) professional advice on improving the profitability of your business? There’s two sides to this—advice on the horses, and advice on the business side of things. Professional guidance on the horse side can be fun—who doesn’t like a reason to contact top breeders and trainers, or to attend a clinic or major breed/discipline event? Professional guidance on the business side of things usually isn’t as fun. Most of us don’t relish meeting with accountants and attorneys. But these meetings are an essential part of being in business.

The obvious and easiest way to demonstrate your profit motive is to….make a profit. An activity claimed as a business is presumed by the IRS to be “for profit” if it shows a profit part of the time—two years out of seven, in the case of breeding, showing, training or racing horses. (The rule is 3 of 5 years for everything else, which should tell you something about the horse business—that you may not want to hear.)

If your business isn’t showing a profit now, do you have a good reason why? Losses in the start-up phase of a business are normal, and catastrophes happen. Do you have a plan for getting your business to profitability? If you had a plan and it didn’t work, have you made appropriate changes? This could mean marketing your young horses in a different discipline, or changing the circuit where you show them.

Do you have appreciating assets in the business that you’ll sell in the future for a profit? A talented young horse can be an appreciating asset, especially if he’s winning his way up the levels in his sport of choice. Many years of losses can be a ‘businesslike’ choice if they result in a proven broodmare whose foals will bring big money.

No matter the current profit status of your business, keeping complete and accurate records of income and expenses is an essential part of being “businesslike”. In addition to demonstrating that you take a professional approach to your business, records and receipts help document your pursuit of profits.

A written business plan is another important tool for showing an intent for profit. Budgets show how you expect things to go, and give you a way to compare actual to plan. Using industry averages can also provide useful insights into where your business may have room for improvement in its income & profit. Plans and budgets should be updated annually to show continuous progress towards an efficient, practical, and realistic business profit.

Leave a Reply

Your email address will not be published. Required fields are marked *