Tax bill continues and improves benefits for horse owners and breeders On December 17, 2010, the President signed into law the high profile tax bill that extended the current income tax rates and many other tax benefits that were expiring at the end of 2010. Included in the new law, in addition to lower rates, were several provisions that can significantly lower taxes for thoroughbred owners and breeders. Certainly two of the most important benefits are the continuation of more generous bonus depreciation and a higher expense allowance through 2012.
Bonus Depreciation was increased to 100% for eligible horses or farm equipment placed in service after September 8, 2010 and before January 1, 2012. In other words, the entire cost of eligible horses or farm equipment purchased and place in service during that period can be written off. For example, two yearlings purchased and placed in service in 2011 at a total cost of $1 million can be entirely written off that year. The rate goes down to 50% for eligible horses placed in service during 2012. As has been true in the past, to be eligible for bonus depreciation the original use of the eligible property must commence with the purchaser. Any prior use, personal or business, disqualifies the property.
The Expense Allowance currently in effect allows the purchaser to write off up to $500,000 of the cost of horses or farm equipment purchased and placed in service in 2010 and 2011 if the total of all purchases of depreciable property during the year do not exceed $2 million. If purchases exceed $2 million, the expense allowance goes down one dollar for every dollar purchases exceed $2 million. Unlike bonus depreciation, the expense allowance applies to all horses or farm equipment regardless of whether they have been previously used for some purpose by someone else. The expense allowance was scheduled to go down to $25,000 in 2012 and thereafter. The new law changes the expense allowance to $125,000 in 2012, with an investment phase-out that starts once purchases exceed $500,000.
The new law also keeps the top tax rate on capital gains and dividends at 15% through 2012. Otherwise, the top rate on capital gains would have gone to 20% and the top rate on dividends to 35%.
Estate tax rates in 2011 and 2012 will be a maximum of 35%, with an exemption of $5 million per person and $10 million per couple. Estates of people who died in 2010 will have an election to choose no estate tax and modified carryover basis or the 2011 rates and exemptions.
The limits on contributions of Conservation Easements and the carryforward period for contributions of appreciated real property in effect in 2009 were extended in the new law through 2011.
Author Thomas A. (Tad) Davis is tax counsel for the National Thoroughbred Racing Association and the American Horse Council. Readers are urged to consult their tax advisor for additional information.