10 Common Tax Mistakes Horse Racing Business Owners Make
Prepping this Sharp Azteca filly for the Iowa Fall Sale. Photo by Kristyn Whitican.
Owning or operating a business in the horse racing industry comes with unique financial opportunities and tax challenges. From breeding and racing to sales and training, the IRS views these activities through the lens of business compliance, and mistakes can be costly.
In working with business owners over the years, I’ve noticed a series of common tax mistakes or misunderstandings
1. Failing to File Federal Tax Returns
Many owners assume that if their horse-related business passes through income to them personally, like in the case of an LLC or partnership, they don’t need to file a separate tax return for the entity. That’s incorrect.
Partnerships and S corporations are required to file their own returns (Forms 1065 and 1120-S, respectively), even if no tax is due. Missing these filings can result in steep penalties—$220 per partner per month (as of 2025) for each month the return is late.
2. Not Depreciating Horses or Assets Properly
Depreciation is a powerful tax tool in horse operations when used correctly. Racehorses, equipment, trailers, and even fencing can often be depreciated under the MACRS system, typically using 3, 5, or 7-year schedules.
Depreciation amounts can vary by year depending on the convention chosen, along with any accelerated depreciation taken. Failing to account for depreciation can result in overpayment or underpayment of income taxes.
3. Deducting Loan Payments Instead of Loan Interest
Loan payments are not fully deductible business expenses. Only the interest portion of each payment qualifies as a deduction. Many owners mistakenly deduct the full payment amount, not realizing that the principal portion is considered a balance sheet transaction, not an expense.
In addition, assets purchased with loans, like trucks or breeding stock, should be depreciated over time, not deducted in full through loan payments. Mixing up these items leads to inaccurate bookkeeping and overstated deductions.
4. Not Tracking Basis in Horses and Equipment
When selling a horse, trailer, or other business asset, your gain or loss is calculated based on its adjusted cost basis: what you paid, minus depreciation taken. Owners often lose track of the original purchase price, capital improvements, or depreciation schedules, making it difficult to report the sale correctly.
This can lead to overpaying taxes on a gain or underreporting income, both of which carry financial and legal risk.
5. Commingling Personal and Business Expenses
Paying for hay, vet bills, or travel from a personal account creates a bookkeeping headache and a risk of losing deductions. The IRS expects clear separation between business and personal activity, and commingled accounts weaken the credibility of your deductions.
Setting up a dedicated business bank account and using it exclusively for horse business activity is a key step in protecting your deductions. Additionally, if you have multiple businesses, each business should have its own account.
6. Deducting Personal Expenses as Business Expenses
Some owners believe that anything remotely related to horses is deductible, but the IRS draws a hard line: personal expenses are not deductible, even if they relate to an industry you're involved in.
Examples of nondeductible items include:
Clothing unless it’s a uniform required for work.
Personal meals or entertainment not tied to a legitimate business activity.
Family travel to races or sales with no business purpose.
Rent expense for your residence if you don’t maintain a tax home elsewhere.
Misclassifying these items results in underpayment of taxes and could create major problems in an audit.
7. Missing Out on Deductible Travel and Meals
On the flip side, many owners fail to deduct legitimate travel expenses because they lack proper documentation. Travel to race meets, auctions, breeding farms, or training facilities may be deductible—but only if:
The trip has a clear business purpose
Mileage logs or receipts are kept
Meal expenses follow the IRS 50% deduction rule
Without these details, even legitimate deductions can be disallowed.
8. Not Tracking Expenses By Location
For horsemen who operate in multiple states or frequently cross state lines for races and sales, tracking income and expenses by location is essential. Many states require nonresident income tax filings based on the location where income is earned, such as race winnings.
Failing to allocate income and expenses geographically can lead to:
Overpaying in one state
Underpaying in another
Or worse, triggering penalties for failure to file nonresident returns
9. Overlooking State and Local Tax Obligations
Each state (and sometimes city) has its own set of rules, including licensing fees, business taxes, and withholding requirements. Horse owners may:
Race in one state
Breed and sell in another
Reside in a third
If they don’t file the proper returns in all applicable states, they may miss out on deductions or overpay tax in their home state. It can also make audits more complicated, especially when winnings show up on 1099-MISC or W-2G forms issued across state lines.
10. Failing to Make Estimated Tax Payments
Racing and breeding income is typically non-wage income, meaning no taxes are withheld. This creates a common cash flow trap: you spend the income and forget to set aside money for taxes.
The IRS expects you to pay taxes as you go, usually through quarterly estimated payments. Missing those deadlines can trigger:
Underpayment penalties
Interest charges
A large surprise balance due in April
Smart tax planning involves forecasting earnings and making timely quarterly payments.
Final Thoughts
The horse racing industry is exciting, but it’s also complex, and from a tax standpoint, unforgiving. The key to avoiding these costly mistakes is to treat your operation like a real business: with proper records, intentional planning, and professional support.
Whether you’re a trainer, breeder, owner, or jockey, working with a financial advisor and tax professional who understands the industry can keep you compliant, and more importantly, profitable.
