EQUINE EQUITY ACT OF 2005
Introduction
Federal law treats the equine industry differently than others in several respects. Horses must be held longer than other business assets to be subject to capital gains. Race horse owners are required to make a decision regarding when to begin depreciating their race horses that is not based on the expected racing life of the animals. Most horse owners are not eligible for federal assistance in the aftermath of a natural disaster even though other similar livestock producers and farmers are. Various bills have been introduced in prior Congresses to correct these discrepancies.
Legislation
On
This bill would end the disparate treatment of the horse industry versus other businesses under the federal tax code and other federal provisions. Specifically, the legislation would: (1) make horses eligible for capital gains treatment after twelve months, similar to other business assets; (2) place all race horses in the three-year category for depreciation purposes; and (3) make horses eligible for federal emergency assistance under circumstances presently enjoyed by other livestock and crop producers.
Reduction of Capital Gains Holding Period. Under the federal tax code, gains from sales by individuals of property used in a trade or business, including horses, qualify for long-term capital gains and are subject to the maximum capital gains tax rate of 15%. Since the individual tax rate can go as high as 35%, the lower rate is a real advantage.
Unfortunately, horses held for breeding, racing, showing or draft purposes generally qualify for the 15% capital gains rate only if they are held for 24 months. All other business assets (except cattle) qualify if held for 12 months. Passage of this legislation would end this discriminatory treatment of horses under the tax code and allow horse owners to enjoy the reduced rate upon sale after holding the horse for 12 months, rather than twenty-four.
Shortening the capital gains holding period to twelve months should be a benefit for most breeders and horse owners who breed to race or show (even if they cull some foals/yearling), or who race or show horses and sell them, or who race or show horses and syndicate them and sell shares. The change would give these horse owners and breeders more flexibility to sell and market their horses. It would mean that every sale of a horse which is held for at least twelve months would qualify as a capital gain or loss unless that horse is held primarily for sale.
Making All Racehorses Eligible for Depreciation over Three Years. Presently race horses are depreciated over either three or seven years, depending on their age when “placed in service.” A horse is generally deemed to be placed in service when it begins training, which is usually at the end of its yearling year. Race horses over two when placed in service are depreciated over three years; if not over two, they are depreciated over seven years. (A horse is deemed to be “over two” for tax purposes twenty-four months and a day after it is foaled.)
Depreciation is a means of recovering the cost of horses used in a business through deductions of portions of the horse’s cost over a period of years. Generally, the recovery period approximates the estimated useful life or economic life of the property. Current law provides that racehorses that begin training at the end of their yearling year are depreciated over seven-years, even though most will not actually race for seven years.
This legislation recognizes the unreality of this requirement by changing the tax code to allow owners to depreciate all their race horses over three years, rather than seven, regardless of when they are placed in service. The change would provide for a more equitable depreciation schedule for race horses, one that better matches the realities of the situation. Owners will no longer be required to depreciate their horses over seven years simply because they are placed in service at the end of their yearling year.
Obviously, this change would allow an owner to depreciate 62.5% over the first two years a horse is in training or races, rather than 29.85% under current law. More importantly, this allows an owner to more accurately recover his/her costs over the period that the horse is likely to race.
Making Horses Eligible for Federal Emergency Funds. The legislation would also make horses eligible for federal emergency relief similar to other livestock and crops. It would specifically repeal the restrictive definition of livestock under the old and outdated Agricultural Act of 1949, which defined “livestock” to consist of various animals, including “equine animals used for food or in the production of food.”
The exclusion of horses from relief under the various federal livestock assistance programs instituted since then seems to have followed that same definition and the U.S. Department of Agriculture has followed suit in administering them. Horses have thus been ineligible for federal emergency funds, except when the industry got special ad hoc authorization for federally-guaranteed loans for foal losses caused by Mare Reproductive Loss Syndrome.
Losses from natural disasters affect horse breeders just as they affect other livestock and crop producers. If a breeding farm or ranch loses horses because of flood, drought, tornado or other natural disasters, it has lost its “crop” and has nothing to sell. If a drought causes feed to become more expensive it affects horse ranches as well as cattle ranches. In cases of natural disasters, federal emergency payments and loans could help some horse owners to keep operating, rather than having to sell their horses or their business.
This legislation would end this unfair discrimination and provide that in future emergencies horse breeders would be eligible for emergency assistance that producers of other crops and livestock have enjoyed.
Note
Congress has passed legislation
making horses eligible for some federal relief programs. See pages 26-27 of this Briefing Book regarding
this.
Congressional Action
The bill has been referred to the Senate Finance Committee.
AHC Position
The AHC supports this legislation.