Benefits for Horse Industry in Tax Bills

Introduction

Several tax bills were passed in the 111th Congress that included tax benefits for the horse industry. The American Recovery and Reinvestment Act of 2009, better known as the stimulus act, the Hiring Incentives to Restore Employment Act, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, passed during the lame-duck session, all included important tax benefits.

Individual Tax Rates

The legislation passed in December, 2010 fixed individual income tax rates at current levels for two more years, through 2012. The marginal rates will stay at 10% to 35% depending on one’s income bracket. The rate structure is indexed for inflation. Had the bill not been passed and the current rates allowed to lapse, tax rates would have risen about 4% for each bracket.

The tax rate on capital gains will remain at 15% through 2012, rather than rising to 20%.

The tax rate on dividends will remain at 15% through 2012, rather than being taxed at the same rate as a taxpayer’s ordinary income, which could be as high as 35%.

Payroll taxes for all workers and the self-employed will be reduced 2% from 6.2% to 4.2%, and 12.4% to 10.4%, respectively, for 2011 on wages up to $106,800. This will put extra buying power in the pocket of every U.S. worker.

Estate Tax Rate and Exemption

Effective January 1, 2011, the top estate tax rate will be 35% with an exemption of $5 million for individuals and $10 million for married couples through 2012. This means that only estates valued at over $5 million ($10 million for married couples) will be subject to the tax.

Expensing Allowance Continues

Earlier legislation provided that anyone who purchases a horse or other property for his horse business and places it in service in 2010 and 2011 can deduct up to $500,000 of the cost. This applies to horses, farm equipment and other depreciable property used in a business. If purchases exceed $2 million, the deduction decreases one dollar for each dollar over $2 million. This provision remains in effect through 2011.

Bonus Depreciation Increased to 100%

Finally, under the lame-duck legislation bonus depreciation is doubled from 50% to 100% for eligible assets, allowing horse owners and other horse businesses to write off the entire cost of “new” capital assets when purchased and placed in service. To be eligible for bonus depreciation the original use of the property must commence with the taxpayer. Any prior use makes the property ineligible. This provision is retroactive and will benefit any business involved in the horse industry that purchases and places eligible depreciable property in service after September 8, 2010 and through 2011.

Contribution of Property for Conservation Purposes

Owners of horse farms and ranches are interested in the tax benefits available to those who contribute property for conservation purposes. Conservation easements are one way that owners can keep their property available for farming, rather than selling it for commercial purposes, while getting a tax benefit. Under legislation passed a number of years ago, a landowner with 50% of more of his/her income from agriculture could get a deduction for the contribution of a conservation easement up to his/her full income, with any unused amount carried forward for 15 years. This provision had expired and the deduction was limited to 30% of income.

The last tax bill reinstated the conservation easement through 2012.