Setting up an LLC???

[ilikridn]

I saw on a recent thread someone ask the question if this is your primary source of income and whether or not you report your income from horse sales to IRS... most of you said no to both.

My husband and I had initially discussed setting up a business account, etc. but didn't do it because we know that we are not going to make money at this. We buy horses for resale and breed for resale. We are prepared to keep the horses if they don't sell, and we realize it could take a long time to sell a horse; hence, lots of expense. We do it because we love it and we love the horses.

But... I was talking to our attorney about the trust we set up for our children (in case something happens to us they won't lose this place) and how we can put the horses in there, especially if the "inventory" changes periodically. (I just this weekend sold my first horse, a QH filly, to a really nice family!!) He asked if I have an LLC and when I said no encouraged me to set one up just from a liability standpoint. When someone comes onto our property to see a horse, he said it will protect us if they get injured. We are in TX and do have a sign in the barn that the previous owners had put up that states that we are not responsible for injuries caused by equine activities, etc. but I know we need to put up some more signs.

Would love to hear your recommendations regarding this. If I do set up an LLC, do I then need to do anything different in regards to taxes (declare income and expenses)? We do have a CPA who we'll be meeting with when preparing our taxes this year, and we'll discuss all this with her. But I'd like to hear from you as well... thanks!

[VarsityHero4]

We started an LLC just last year so have not gone through our first tax season yet. One of the biggest benefits is that the gov't does not require (or expect) farm businesses to make a profit and it really helps your budget by being able to write-off a lot of your expenses. I'm not much help in the matter since I'm the fortunate "child" in the situation and my dad is the one with all the knowledge but I can definitely say forming an LLC is a good idea from many aspects.

[Evalee Hunter]

I saw on a recent thread someone ask the question if this is your primary source of income and whether or not you report your income from horse sales to IRS... most of you said no to both. . . .

People can do as they wish (obviously) & apparently they "get away with it" but failure to report income (from a horse sale or anything else) is absolutely, totally illegal. You may have so many expenses that your sale is not profitable, but you still must report such income.

. . . . My husband and I had initially discussed setting up a business account, etc. but didn't do it because we know that we are not going to make money at this. We buy horses for resale and breed for resale. We are prepared to keep the horses if they don't sell, and we realize it could take a long time to sell a horse; hence, lots of expense. We do it because we love it and we love the horses. . . .

Whether you have a hobby or a business that makes money, you will be in the strongest position if you are ever audited if you treat your entire financial life in a business-like manner. In other words, even a hobby with gross income requires you to report the income & allows you to take expenses up to the income. A business allows you to take expenses even exceeding income & to use the excess expenses against other income you may have (for example, from a job).

. . . . But... I was talking to our attorney about the trust we set up for our children (in case something happens to us they won't lose this place) and how we can put the horses in there, especially if the "inventory" changes periodically. (I just this weekend sold my first horse, a QH filly, to a really nice family!!) He asked if I have an LLC and when I said no encouraged me to set one up just from a liability standpoint. When someone comes onto our property to see a horse, he said it will protect us if they get injured. . . .

I think you are ESPECIALLY in a position where you need an LLC if you have a farm or ranch! You attorney is giving you good advice (as one would hope).

. . . . If I do set up an LLC, do I then need to do anything different in regards to taxes (declare income and expenses)? We do have a CPA who we'll be meeting with when preparing our taxes this year, and we'll discuss all this with her. But I'd like to hear from you as well... thanks!

The LLC is an entity which files its own federal tax return showing income & expenses, depreciation, etc. Then, the gains or losses of the LLC "pass through" to the members of the LLC & are reported on the members' individual tax returns. For federal purposes, an LLC may be treated as a partnership or as ... (I forget, ask your CPA). Of course, Texas does not have a personal income tax but your CPA will have to tell you how the LLC is treated for tax reporting at the state level.

[ilikridn]

Evalee, We certainly aren't trying to get away with anything and don't want to do anything illegal. We were under the impression that it would be illegal to declare income and expenses when we know there is not really a chance to make a profit in this "business". We figured that in our case, it would be considered a hobby because we don't do it on a large scale and certainly don't come close to turning a profit. I just sold my first horse, a little quarter horse filly. I did make a little profit on her, but not much, and none at all if I were to start expensing things such as truck, horse trailer, camera, video camera, farm utility vehicles, tractor, etc., etc.

We'll definitely discuss all this with our CPA, and we will definitely set up an LLC for the liability benefit. But I have to admit I'm confused about the difference between a hobby breeder and a full-scale breeder who has large amounts of inventory and maybe stands a few stallions, etc. I am planning to breed two mares this year, I don't have a stallion, and I also look for deals on nice horses that I can put some work and training into and re-sell. It's a very small "operation." Who knows? Maybe someday, it will become something bigger. Or... what if I never sell another horse? But for now... is it really okay for me to start declaring income and deducting expenses? Seems kind of silly.

But that's why I'm here asking all of you who have experience in this area. You had to start somewhere, right?

[Evalee Hunter]

. . . . We were under the impression that it would be illegal to declare income and expenses when we know there is not really a chance to make a profit in this "business". We figured that in our case, it would be considered a hobby because we don't do it on a large scale and certainly don't come close to turning a profit. . . . We'll definitely discuss all this with our CPA, . . . . But I have to admit I'm confused about the difference between a hobby breeder and a full-scale breeder . . . .

What the government does not want you to do is have a *little* income, combined with *huge* losses, which are subtracted from other income, so that you pay little or no taxes (e.g., the huge losses are used to reduce your other income &, since you have less income, your taxes are lowered).

In the case where you have a little income, you are supposed to report it but only use expenses up to the amount of income. The method of deducting expenses & which expenses you may deduct are actually specified under law. (Your CPA can give you the details if you are interested.)

If you have a little income & large expenses from an activity where you might also experience enjoyment or pleasure or recreation, the the government gets to wondering if this is really a business or is this a hobby with the intent of sheltering your other income from taxation. Some of the things they might look at to decide if you have a business or a hobby include:

1. What is your INTENT? Do you intend to make money or intend to have a pleasant experience & making money is a nice side effect?

2. Do you run things in a business-like manner? Do you have a business plan? Do you have a separate business bank account(s)?

3. How much time do you put into the activity? Does the making money part come first in your life or does it come after other things that you treat as more important?

These are questions to discuss with your CPA.

To summarize: the law REQUIRES you to report all money you make, whether you make it from buying things at yard sales & re-selling on e-bay or whether you restore an old car (just one) & sell it to a collector or whether you make some money gambling. As a practical matter, there is a huge "underground economy" of unreported income in this country & the number of people who say they never report horse sales is just one example of that.

Regarding horse sales, I would like to add that I think a lot of people on this board don't know whether their own horse sales are reported as income or not, because if you ask a lot of questions, you will learn that (1) many are kids whose parents (or parents' tax preparer) do their tax returns & the kid doesn't know what was reported & (2) many adult professionals give "all their info" to the tax preparer & also don't understand their return & what was or was not reported.

I also know for a fact that when small amounts of money are involved, many tax preparers will groan & say "don't tell me about it!" So you have to sit down with your CPA & lay out all the facts & get their professional expertise as to how to handle this in a manner that is practical while also conforming as much as humanly possible to tax laws.

[horsetales]

We are getting ready for our third tax season with the LLC. We too were advised for liability reasons, it would be best to separate the farm interest from our home in case of law suit. The farm is run as a business with everything kept separate. We have a CPA prepare all of the tax stuff. We spoke with both him and an attorney before diving in.

[FriesianX]

Evalee makes some very good points. I'd also point out that in many states, HORSE sales are subject to SALES TAX reporting too!

Hobby loss rules apply if you are not running it as a genuine business. In the case of hobby loss, you can deduct direct costs up to the amount of your hobby income. So, if you are just dabbling in the horse business, don't really intend to make a profit, aren't running it as a serious business, you'd probably follow the hobby loss rules.

On the other hand, if you are running a business, farm or otherwise, the IRS FULLY expects you to make a profit at some point. If you look at their guidelines, they generally expect that sometime within seven years, you will show a profit. There are reasons beyond a business's control that might result in no profit (such as significant start up costs, unexpected disaster, etc), but you still need to show that you have a plan to make a profit and have adjusted your business plan to deal with whatever has stopped you from profit in the past.

An LLC is really for your own liability protection, not for protection from income taxes.

[ilikridn]

Evalee, my thought would be that we would keep the horse income separate from my husband's income from his job. We are not doing this as a way to pay less in taxes. I would think that the LLC would be its own entity and pay its own taxes. Is that correct? Bear with me... I'm learning!

And, Fresian, yes this would be considered a hobby. We are not doing it as a way to increase income. We're doing it for the enjoyment aspect, and if we can help to offset our horsey expenses somewhat in the process when we sell a horse, well then terrific. I would not be selling to "whoever." I'll only sell if I can place the horses in suitable environments and situations. When I sold this quarter horse filly, I was surprised at how sad it made me to see her go. We had only had her for two months. We bought her at an auction. I couldn't believe we found her at an auction... she was a super nice filly. The thing that made it a little easier is that the she went to a very nice family. What am I going to do when I sell the baby I raised from birth?!! UGH!!

Anyway... back to the subject at hand... Fresian, you mentioned that we could deduct the direct expenses. I take that to mean the cost of purchasing the horse, the cost of feeding the horse while we own it, the costs of vet, farrier and worming while in our care. Correct? Does that mean that we would not deduct costs like truck, horse trailer, barn and pasture maintenance, etc?

Another question I have... How did you set up your LLC? In other words, what all did you put into it? Just the horses? When I talked to the paralegal about it, she said we have to decide what all we want to include in the LLC. For instance, we just bought dirt for our arena area and our roundpen. So do expenses like that get included? Do we include the horse trailer as part of the LLC?

Sorry to ask so many questions. I do realize that I probably should be saving these for my attorney and CPA, but they are not horse people. I'd like to hear answers from a horse person's perspective and one who has been through this before. I wasn't sure if this was the right forum to put it in, but breeding is a business so I figured this was the best place for this.

Thanks for all your help and for taking the time to answer my questions!

[horsetales]

[QUOTE=ilikridn;3826414]Evalee, my thought would be that we would keep the horse income separate from my husband's income from his job. We are not doing this as a way to pay less in taxes. I would think that the LLC would be its own entity and pay its own taxes. Is that correct? Bear with me... I'm learning!

Anyway... back to the subject at hand... Fresian, you mentioned that we could deduct the direct expenses. I take that to mean the cost of purchasing the horse, the cost of feeding the horse while we own it, the costs of vet, farrier and worming while in our care. Correct? Does that mean that we would not deduct costs like truck, horse trailer, barn and pasture maintenance, etc?

Another question I have... How did you set up your LLC? In other words, what all did you put into it? Just the horses? When I talked to the paralegal about it, she said we have to decide what all we want to include in the LLC. For instance, we just bought dirt for our arena area and our roundpen. So do expenses like that get included? Do we include the horse trailer as part of the LLC?

Sorry to ask so many questions. I do realize that I probably should be saving these for my attorney and CPA, but they are not horse people. I'd like to hear answers from a horse person's perspective and one who has been through this before. I wasn't sure if this was the right forum to put it in, but breeding is a business so I figured this was the best place for this


Our attorney set everything up. As I remember there was a form that SO and I did showing we both made a monetary contribution to the business account (no set amount, it can be a few hundred). The rest of the paperwork was setting up/registering the LLC up and getting an EIN #. We submit all of our expenses to the CPA. Not being a CPA, I'll give my best stab at this - Costs such as trailers, buildings are handled different from other routine expenses. I'm sure someone much more knowledgeable can explain it 1000 times better than me. The taxes for the farm are completely separate from our household taxes.

[Evalee Hunter]

Evalee, my thought would be that we would keep the horse income separate from my husband's income from his job. We are not doing this as a way to pay less in taxes. I would think that the LLC would be its own entity and pay its own taxes. Is that correct? Bear with me... I'm learning! . . .

Well, I'm fairly sure that your CPA & attorney will advise you to keep the horse income separate, so yes to that.

An LLC does file a tax return but it does not pay taxes. The LLC issues a form called a K-1 to each member (owner) of the LLC. Each member then reports the various numbers in the appropriate place on their own tax return. For example, if the LLC has a savings account or owns stock, there might be income from interest or dividends & that income is then reported on the member's own tax return & added to the member's other income. If the LLC has losses, these might or might not be deductable from the member's other income in the year incurred. If your LLC losses (as determined by your CPA) are considered "passive" they can be deducted only against passive income. However, if you have losses that cannot be deducted, they are added up (year after year added together) & carried forward until the LLC ends & then the losses are deducted as part of the final settlement of the LLC accounts. For example, if the LLC owns a farm & the farm is sold, then the LLC ends & all losses & gains are divied up & reported.

Again, I do not know how LLCs are treated under Texas law for state purposes, so you will have to ask your CPA. I am speaking to federal only.

I THINK in the U.S. only C-corporations are entities that pay their own taxes. If you are a sole proprietor of a business, you report income & expenses on a schedule C (which is NOT - I repeat, **NOT**, the same as having a C-corp). If you are a partner, or have an S-corporation, LLC, or whatever, the income & losses feed to your personal return.

It is very important to verify what I have said with your CPA, first, because states treat things differently than federal, AND, second, because laws change & what I remember from a few years ago could be incorrect.

[Evalee Hunter]

Just another thought -LLCs can be members of other LLCs & partnerships can be members of an LLC. Many times, people have layers of entities. For example, a person might have rental properties with each property in a separate LLC with an overall LLC owning the various LLCs that own the individual properties. The members of the overall LLC would thus not directly own the properties, nor would they directly own the LLCs that own the properties. The IRS takes a dismal view of too many layers of LLCs - once it gets to about 6 layers the IRS starts twitching their noses, although CPAs will say there are reasons why layers of entities can be very useful legally.

[FriesianX]

The hobby loss rules apply to all taxpayers – individuals, LLC’s, partnerships, S Corporations…………….so forming an LLC per se does not change the issue. It hides it better, but does not negate it. There has to be an expectation that the business is entered into to make a profit. The issue is when the activity has aspects of personal enjoyment --- unless that activity is operated like a real business, the presumption is you accept incurring continual losses because of the personal pleasure derived from the activity. If the activity is operated to minimize losses and has the potential for profit, it doesn’t ever have to show a profit, as long as a prudent business person would run the business that way on the realistic expectation of making future profits from the operation. And, yes, appreciation of value of the business assets is ONE of the factors looked at.

The “two years profit out of seven” rule is a safe harbor that a taxpayer can use to rebut the IRS saying the activity is a hobby. You are not REQUIRED to show a profit as either an individual Sch F or Sch C, LLC, S corporation…………….but if you have continual losses you have to show that you operate the activity in a manner that a real business owner would……………and that is with a plan to make a profit, and by changing business operations to limit losses and increase the likelihood of making a profit. There is no distinction in the tax code between the type of entity – the hobby loss issue applies equally to all. Using an LLC or S corporation helps to “mask” the issue only.

I'm no tax expert - but I have access to one, can you tell :D And I get the ongoing lecture about making sure I run things as a business. It is a tough business to be in, and it is an area the IRS watches carefully. As for operating as a hobby, you can deduct direct expenses UP TO your hobby income - so, if you sell a horse for $20,000, you couldn't deduct $25,000 in expenses, even if you had $25,000 in DIRECT expenses.

ETA - I'm also not at all familiar with your state laws, we live in CA. But from an IRS standpoint, the laws are the same for all of us in the U.S.

[ilikridn]

This is great. Lots of good information... AND points me in the right direction of what kinds of questions to ask our CPA.

I would love to be able to make a business out of this someday, but for now, it is just for pleasure and I am learning so much. Love the breeding, love the babies and have learned A LOT working with them. But I also enjoy the challenge of finding good deals on good horses who just need some time put on them. So my interests lie in breeding and sales.

I've sold one horse so far, and I did make a profit on her. But because I also have a now-two-year-old warmblood filly that's for sale that I've raised from birth, I would assume she would be considered a deductible expense. I've got her advertised on several well-known horse sale websites, so I am actively marketing her. We've always believed that because she is a bred to be a hunter horse, we probably won't be able to sell her until she's under saddle.

My confusion still lies with which horses are considered deductible expenses? I am breeding two horses this year. One is a Hanoverian mare, and I'm pretty sure we'll actively try to sell her baby. The other is my well-bred quarter horse mare who I love dearly. I'm not so sure I wouldn't want to keep the baby for myself. But, then again, I might want to sell the baby and breed her again. So how do you go about making those deductions? Do you wait and deduct the expenses two years from now if you decide to sell that baby? Or do you have to have a plan from the very beginning when you do the breeding? What if you change your mind?

ARGGG... so many questions! I'm sorry... hope I'm not wearing out my welcome here! If I am, just tell me and I'll direct all these questions to my CPA.

[FriesianX]

You should talk to your CPA, but in general, if you are NOT running a business, the first thing to remember is your deductions are limited to related (hobby) income. So if you sell NO horses, you have NO income, thus NO deductions. If you have hobby income (sell a horse), then you can deduct costs up to the income level for that horse's feed, training, vet bills, advertising, etc.

As for breeding a horse, you'd start tracking the costs of "creating" that foal, the stud fee, vet repro costs, etc.

Talk to your CPA - you'll want some pretty detailed advice, and a forum like this isn't the place to get it ;) None of us are your tax advisors, and none of us will be there to represent you through an IRS audit should you be selected suffer such an event:eek:

By the way, if you search this forum, there have been stories over the years about people who have won (and lost) with the IRS.

[equinelaw]

Texas has lots of equine lawyers:)

Every year there are hundreds of IRS cases on the hobby/business question. But that's not why your lawyer suggested you set up an LLC. Your lawyer or CPA can read the latest cases and learn pretty fast what you need to do tax wise.

He said that for asset protection in case you get sued. You need to be asking questions about whether Texas law will allow you do get the protections of a corporation if your only plan is to have a hobby and not a "real business".

LLC's are fairly new concept. How this rush to protect assets for pleasure ventures plays out over time is a much harder question to answer.

Clearly if you are a business and LLC is just as valid ans an s-corp or a partnership or any other corporate structure, but its is fair for you to hide behind the "corporate veil" just because owning horses can be risky?

I don't know, but some day soon a judge will be asking that question. It worries me. Trusts are old fashioned, but much safer.

[Evalee Hunter]

. . . . LLC's are fairly new concept. How this rush to protect assets for pleasure ventures plays out over time is a much harder question to answer.

Clearly if you are a business and LLC is just as valid ans an s-corp or a partnership or any other corporate structure, but its is fair for you to hide behind the "corporate veil" just because owning horses can be risky?

I don't know, but some day soon a judge will be asking that question. It worries me. Trusts are old fashioned, but much safer.

LLCs are very popular in this area. I've seen a beach house held in an LLC - a beach house that never made any money (not rented), was for personal use only. Why was it in an LLC? I don't know. I have seen LLCs that (as far as I could tell) were formed only to hold assets such as stocks & bonds. Again, why, I do not know. I have seen LLCs that were thought "bogus" by the CPAs preparing the tax returns - certain financial planners in recent years seem to have pushed LLCs as a way to keep various assets separate from other aspects of one's life. I guess it will all fall out some day, some way.

But, how are trusts "much safer"? Are you saying a trust would make sense for holding a business? (I wouldn't think so??) Yes, I've seen what seems like a million trusts over the years, keeping in mind that this is the land of the Duponts & their various relatives & descendants.

. . . . But, then again, I might want to sell the baby and breed her again. So how do you go about making those deductions? Do you wait and deduct the expenses two years from now if you decide to sell that baby? Or do you have to have a plan from the very beginning when you do the breeding? What if you change your mind? . . .

Ask your CPA whether there is a "federal election" you can use to take ALL of your expenses at the time of sale, even if the expenses were incurred in an earlier year. I had an EA (Enrolled Agent) tell me there was such a "federal election" but I never researched whether there was so I don't know.

Many of your questions can be answered differently, depending on the orientation of the CPA/EA. Some are very agressive in taking deductions & some are very cautious & conservative. Whoever you choose to work with can tell you what they are comfortable with & what they have seen work in the past. They will guide you in what horses to include as part of your operations.

[ilikridn]

Talk to your CPA - you'll want some pretty detailed advice, and a forum like this isn't the place to get it ;) None of us are your tax advisors, and none of us will be there to represent you through an IRS audit should you be selected suffer such an event:eek:

By the way, if you search this forum, there have been stories over the years about people who have won (and lost) with the IRS.


Don't worry... we will absolutely be talking to our CPA about this and our attorney and possibly insurance agent as well. I'll also do a search of the forum and see what I find... thanks... hadn't thought of that. I've been checking out the Texas Secretary of State's website as well.

Thanks everyone for your help. I realize that getting help on the internet has to be taken for what it is, but you have helped me understand the concept a whole lot better.

[equinelaw]

Trusts are safer for protecting assets. I think the rise in LLC is for asset protection and to generate income for people who sell the service. In my state, you do not even need a lawyer to form one. Just sign up on-line and pay the fee.

I love them for real businesses because of their flexibility, but I am wary of using them as a "screen" to hide assets behind. Not that OP had any intention of doing anything unethical, but that is why her attorney suggested she incorporate--to shield her from liability and loosing her assets.

If its just you and you treat it as a hobby and run it like a hobby then you might be treated like those assets are yours--not the LLC's. In a trust, the assets are not actually yours anymore at all. It can be more complicated for tax purposes, but I do not see yearly accumulations of trusts/tax/horse issues.

For asset protection a trust can own your horses and your land and all sorts of things. They are pretty cool too and all those rich folks who put their money into them do so for tax and asset protection purposes. That's how they stay rich:)

[buschkn]

I have an LLC and I am the sole proprietor. As such, my taxes are filed together with my personal and LLC. I also have another business which is not an LLC so that is separate. It really doesn't complicate your taxes much to have an LLC. And I set it up myself, went to the courthouse, paid $40, voila- LLC.

Also, I do report everything, AND pay sales taxes to the state on my horse sales, which is painful, but the way it is supposed to be legally. You should definitely check into that if you are in business.

[Evalee Hunter]

I have an LLC and I am the sole proprietor. As such, my taxes are filed together with my personal and LLC. . . .

Yes, a one-owner LLC is filed on Schedule C of the 1040 just like a sole proprietorship which is NOT an LLC. Not sure why it is done that way, but you are correct, it is.

However, if the LLC has two or more members, then a separate tax return is filed, K-1s are issued & the numbers flow onto the personal return from the K-1s.

[Evalee Hunter]

I came across these numbers in Turbotax Business 2008. I thought this was very interesting information & relevant to this discussion:


TYPE OF RETURN…………........PERCENT AUDITED IN RECENT YEARS
Partnership/LLC………………………...... 0.36%

S Corporations………………………....... 0.50%

C Corporations………………………....... 0.90%

Individuals filing Schedule C ……….. 3.12%

Individuals filing Schedule F…………. 0.50%

[ilikridn]

Hubby has a meeting with the CPA tomorrow. He's meeting with her back in AZ so I can't be there, but he is going armed with lots of questions.