by Teresa Genaro, Forbes.com
Not everyone was happy on January 2 when President Obama signed into law the American Taxpayer Relief Act, notably those whose first 2013 paychecks were smaller than the ones they’d received in 2012.
But the law gave Thoroughbred horse owners a reason to raise a glass in a belated New Year’s toast, as it enacted retroactively favorable provisions that had expired at the end of 2011.
“What was supposed to happen in 2013,” said Joe Bacigalupo, director of member development for the National Thoroughbred Racing Association, “was that the bonus depreciation for 2012, which was set at a 50% schedule, would disappear entirely. The passage of the American Taxpayer Relief Act extended it for 2013.
“There’s a significant improvement between what was expected to happen and what actually happened.”
According to an NTRA release, the bonus depreciation on purchases of race horses was reinstated at 50%, which was the 2012 rate. The expense allowance was increased to $500,000 for this year and retroactively increased from $125,000 to $500,000 for horses purchased in 2012.
Said Joel Turner, a member of Frost Brown Todd attorneys in Louisville, Kentucky, and a specialist in equine legal services, “These incentives are real.”
While conceding that the announcement of the retroactive provisions wasn’t great for tax planning, he said their beneficiaries will be “rewarded for legitimate reasons” and that the aggregate of benefits will mean that in some cases, 80% of the purchase price of a horse can be deducted in the first year.
“The ability to expense the first $500,000 and take depreciation on the next $500,000 means that essentially you’re almost getting a 100% write-off in the first year,” he explained.
Estimating the value of all aspects of the Thoroughbred racing industry to be worth about $4 billion dollars to his home state of Kentucky, Turner approved of the renewal of the provisions.
“Buying horses and writing them off was included in the law because of the ripple effect to the economy,” he said. “This encourages investment in assets.”
Bacigalupo concurred. “These incentives are put in place across business to stimulate investment. There are all levels of participation in the racing industry: some people are involved at higher levels with more expensive horses, and some people sell one or two horses at auction and that’s their income for the whole year.”
In addition to the depreciation and expense allowances, said Bacigalupo, accelerated depreciation for young racehorses continues through 2013: taxpayers can depreciate racehorses that are 24 months and younger when purchased and placed in service using a three-year schedule rather than the previous seven-year schedule.
“The depreciation schedule for young racehorses was sort of skewed because it doesn’t reflect the true earning years of the animal,” he said. “Getting that down to a three-year schedule was much more reasonable and fair.”
Leonard Green has been involved in horse racing for 40 years; he currently owns about 100 horses, some in training, some racing, some breeding. His horses have competed at the sport’s highest levels and won more than 1,000 races.
He’s also the CEO of the Green Group, which offers tax, accounting, and consulting services, including Thoroughbred consulting.
“They told me you can’t make a living in horse racing,” he said by phone from his office in New Jersey. “I set out to prove them wrong.
“If you play your cards correctly, you can increase your chances for success.”
Green, whose horses run in the name of D.J. Stable, knows something about business success, having been involved with SoBe beverages, which sold for $375 million, and Blue Buffalo pet food, which did, he said, did $675 million in sales last year.
“What makes the new law so interesting,” he said, “is that most people in the horse business are in the 50% tax bracket, so if they can get deductions for out-of-pocket expenses, they can reduce their taxes by 50%.”
“If there weren’t a first year allowance,” he went on, “a normal person—not a millionaire—might say, ‘OK, this year, I’m going to spend $100,000 instead of $300,000.’”
And, he pointed out, the allowances are not only for race horses but for broodmares as well, as long as they were put into service for the first time in 2012.
Turner expects that the beneficiaries of the tax provisions will take their money and re-invest it right back in racing.
“Tax incentives drive people back into marketplace,” he said, “They’d rather take another shot on buying a winning race horse than pay Uncle Sam.”