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Question about Taxes and paying yourself

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  • Question about Taxes and paying yourself

    Ok, I have a full time job and run the horse business on the said. Luckily my full time job allows me to be home a few days a week, and hubby is home the other days so the horses are always covered. Most of our barn profit comes from sales, well almost all of it since I cut back lessons when I had Erica. But we have a few boarders. However in the past I've always wrote down the board money I made but have not ever paid myself. How does one pay them self for the work they do? The amount I charge for board is so minimal, I'm hardly making money, especially in the winter. Then I think I go and feed and clean every day. Even if I only pay myself for two hours of it. How do those of you that work for yourself handle that? I'm not sure my accountant will understand, so I want to have a reasoning for what I'm doing. My only other option would be to take out of the board what I feel I paid myself for caring for those horses.
    Maria Hayes-Frosty Oak Stables
    Home to All Eyez On Me, 1998 16.2 Cleveland Bay Sporthorse Stallion
    & FrostyOak Hampton 2008 Pure Cleveland Bay Colt
    www.frostyoaks.com

  • #2
    Is your farm business incorporated? If so, you give yourself a paycheck like an employee.
    If not incorporated, then you get to deduct the losses against your income. You don't get to pay yourself.
    Karousel Farms, Breeders of Fine Trakehner Sporthorses.

    Comment

    • Original Poster

      #3
      Originally posted by suzette View Post
      Is your farm business incorporated? If so, you give yourself a paycheck like an employee.
      If not incorporated, then you get to deduct the losses against your income. You don't get to pay yourself.
      Gotcha which makes me wonder, usually we take like a 2,000 loss. I think in the end it's hurting us with our normal taxes, as we have two dependents. Friends are getting 4,000 back with one child and we are getting that or less with taking a loss on the farm. I'm also not sure he's taking all the deductions/losses. I just need to sit down and talk to him.
      Maria Hayes-Frosty Oak Stables
      Home to All Eyez On Me, 1998 16.2 Cleveland Bay Sporthorse Stallion
      & FrostyOak Hampton 2008 Pure Cleveland Bay Colt
      www.frostyoaks.com

      Comment


      • #4
        Originally posted by suzette View Post
        Is your farm business incorporated? If so, you give yourself a paycheck like an employee.
        If not incorporated, then you get to deduct the losses against your income. You don't get to pay yourself.
        Ditto.

        I don't see how you can get around that, as long as you are running your business, one or many, as sole propietorships.

        Do ask your accountant and let us know, that would be interesting.

        Comment


        • #5
          Originally posted by aspenlucas View Post
          Gotcha which makes me wonder, usually we take like a 2,000 loss. I think in the end it's hurting us with our normal taxes, as we have two dependents. Friends are getting 4,000 back with one child and we are getting that or less with taking a loss on the farm. I'm also not sure he's taking all the deductions/losses. I just need to sit down and talk to him.
          Taking a loss, as long as it is honestly there, is NOT hurting you with your regular taxes.

          Do talk to your accountant. They should be willing to review your tax return with you, line by line, showing you where every number comes from (what form, what box of the form). They should also be willing to discuss your business in regard to both income & expenses, what expenses they used, &, if there were any expenses they didn't use, why they considered those expenses to not be applicable.

          Your accountant HAS to have information from you. If you don't supply the information, they have no way to prepare your business return correctly. They need DETAILED information; not just that you have a truck but WHAT SIZE truck because the deduction varies; that you have a horse trailer & use it in your business & what expenses you had as the accountant has no way to guess such things; every piece of equipment & tack you have & your basis (generally, the price you paid) in it needs to be listed so it can be depreciated; if you own your farm, the value of all farm buildings so they can be depreciated; the value of any improvements you make, such as fencing or buying a tractor or a round pen; the price you paid for each horse that you did not breed yourself, as well as its age & use in your business (stallion, broodmare, lesson horse). And so on & so on.

          Of course, your accountant also needs to know how much income you received & the source of the income - income from the sale of a horse might be treated differently from income from riding lessons or boarding. If you sell a horse, they need to know WHICH horse so they can match it up against the purchase price & any depreciation that might have been taken.

          You really need to keep books & records day by day. Then, at the end of the year, you need to put everything together & summarize it, as the accountant will charge you for adding it all up - adding it all up is your job. It is nice if you are able to use Excell & make a spreadsheet.

          Now, why are your friends getting more back? Of course, I don't know the exact reason, but I can tell you some possibilities.

          First, how much you get back is always a balancing act between how much you have withheld & your tax liability. It may be that your friends are having LARGE amounts withheld. But they don't tell you that - all they tell you is how much they get back. I prepared taxes for many years in an office where many auto workers came. Typically, these guys (more so than the women who also worked on the line) had a LOT of money withheld. It was common to see them have $20,000 or $30,000 withheld. Then they got $10,000 back, which they loved to go around & tell people. It's a stupid strategy because you are letting the government use your money all year & not pay you interest, but if you want to do it, you are allowed to. I could never convince any of them to change their ways.

          The second possibility that comes quickly to mind is that your friends may be low enough income to qualify for Earned Income Credit (EIC). I would guess that with both you & your husband working, you don't qualify for EIC but quite a few people with children do qualify.

          EIC is pretty much the only circumstance where you can get more back than you put in. Generally speaking, the most you can get as a refund is whatever you had withheld. If you had $2,000 withheld & you have ZERO tax liability, you get $2,000 back. You do NOT get $4,000 back, even though your friends do & even though you would like to get that much back.

          On the other hand, if you have $2,000 withheld & your tax liability is $4,000, you OWE the government $2,000 more on top of what was already withheld!

          Another possibility is that your friends are taking advantage of credits that you are not receiving. If you accountant does not sit down with you & ask a hundred nosey questions, they probably are not getting you all the breaks. The accountant needs to know when your child was born (possible child tax credit), how much you spend for child care/day care while you work (possible child care credit), if you support other relatives that live in North America, stuff like that.

          Taxes are complex. You need to be proactive in asking questions & supplying information.

          Comment


          • #6
            I actually do think your accountant will understand what you are talking about. . we arn't as naive as you may think!

            Basically, as someone said above, since I'm guessing you are running as a sole propreitorship (your not a corporation), you do not get to deduct a salary expense for yourself, as you would for employees. However you can make withdrawals from your business, they technically come out of your "capital account" (aka equity). Which basically means, as you invest money into your business (building barns, fences etc), in accounting terms, the other side of the journal entry is money flowing into your capital account. So, if like you mentioned, you want to get "paid" for 2 hours of work a day, you can take money out of the business for those two hours of work a day, but it won't show up on your income statement (and taxes) as its not an expense, its more of a balance sheet item.

            I really would suggest talking to your accountant, they can help you set up a method of how to do your books, and the more they know about you and your business, the more they can help you and ultimatly the more money they can save you.

            Comment


            • #7
              How much friends are getting back means little if you don't know how their tax witholding situation looks, what their income is, how much they can deduct for their mortgages and other deductions, etc.

              Comment

              • Original Poster

                #8
                Originally posted by Ambrey View Post
                How much friends are getting back means little if you don't know how their tax witholding situation looks, what their income is, how much they can deduct for their mortgages and other deductions, etc.
                True she could be claiming "0". But so do my husband and I. We are just going to sit down and talk to the accountant. I have a lot of good information here now!
                Maria Hayes-Frosty Oak Stables
                Home to All Eyez On Me, 1998 16.2 Cleveland Bay Sporthorse Stallion
                & FrostyOak Hampton 2008 Pure Cleveland Bay Colt
                www.frostyoaks.com

                Comment


                • #9
                  Dumb question: Are there accountants that specialize in horse business?

                  Comment


                  • #10
                    But even still, they could have huge deductions that you know nothing about, or they could be claiming single and zero, or they could be in a different tax bracket, or... it goes on and on

                    Just be thankful that you don't live in the state issuing IOUs instead of refunds! (there's $1700 I never plan to see again!).

                    Comment


                    • #11
                      It sounds like the OP is and should be using Schedule F.

                      I would be very hesitant about incorporating and then paying myself. First off, you have to pay BOTH the employer and employee Social Security and Medicare contributions. Corporations have advantages, but keep in mind that both the corporation and the employees will pay taxes on the same money. There are some reasons why this makes sense for some businesses, but it's generally not for tax avoidance reasons. Also, whether a sole proprietership or corporation -- if you haven't been withholding and filing appropriate tax reurns in 2008, it's a little late to start now. In fact, you could be penalized.
                      Where Fjeral Norwegian Fjords Rule
                      http://www.ironwood-farm.com

                      Comment


                      • #12
                        Originally posted by Come Shine View Post
                        Dumb question: Are there accountants that specialize in horse business?
                        Yes, I think Canterlope (who posts mostly on eventing) is one.

                        Originally posted by IronwoodFarm View Post
                        It sounds like the OP is and should be using Schedule F.

                        I would be very hesitant about incorporating and then paying myself. First off, you have to pay BOTH the employer and employee Social Security and Medicare contributions. Corporations have advantages, but keep in mind that both the corporation and the employees will pay taxes on the same money. There are some reasons why this makes sense for some businesses, but it's generally not for tax avoidance reasons. Also, whether a sole proprietership or corporation -- if you haven't been withholding and filing appropriate tax reurns in 2008, it's a little late to start now. In fact, you could be penalized.
                        As long as she has losses, it doesn't matter if she hasn't been filing quarterlies for her farm (schedule F) or sole proprietorship (schedule C) Certainly, which form to use is a question to put to the accountant ... as is the question of whether it makes sense to form an entity (LLC, S-corp, etc.). I don't think Aspenlucas has yet progressed to challenging Hilltop & Iron Spring, although she may someday! If we aren't talking big bucks income, taxes are less scarey.

                        Comment


                        • #13
                          Originally posted by aspenlucas View Post
                          Gotcha which makes me wonder, usually we take like a 2,000 loss. I think in the end it's hurting us with our normal taxes, as we have two dependents. Friends are getting 4,000 back with one child and we are getting that or less with taking a loss on the farm. I'm also not sure he's taking all the deductions/losses. I just need to sit down and talk to him.
                          The amount your friends are "getting back" probably has far more to do with what they put on their W4, and how much they are getting deducted form their pay checks. How much you get back is usually not correlated with how much total tax you are paying.

                          In addition, if they are getting back $4000, it means that they have effectively given the IRS an "interest free loan" of $4000. Your objecitve should be to arrange your deductions so you get back as small a refund as possible.
                          Janet

                          chief feeder and mucker for Music, Spy, Belle and Tiara. Someone else is now feeding and mucking for Chief and Brain (both foxhunting now).

                          Comment


                          • #14
                            You may want to get more involved, by keeping that daily expense journal mentioned above. If you are a business, you SHOULD have a business plan, written out. Updated yearly, with goals achieved, goals still working on and their progess. Then new goals set for the coming year.

                            We have had a horse lawyer writing a column over several years in the state horse magazine. She has covered several "horse farm" situations, in both winning and losing cases. Every time the farm won, it was greatly helped by detailed record keeping and having their Business Plan set out professionally. Plan showed goals, intent to act as a real business, long term goals and how they could be achieved.

                            Dropping a box of receipts at the desk of the IRS auditor was pretty much a guaranteed lost case. Owners could not explain them or reasoning behind their deductions and expenses. Auditor wants to see line by line, money flow. Dollars in on sales, lessons, board, line by line, dollars out on expenses (name each halter, bag of grain, EVERY ITEM) for keeping the farm going. And this means individualizing the details of keeping EACH animal. You don't buy 5 halters. You buy a halter for A-B-C-D-E horse and put that in each horse's record list. You buy grain for each horse, list it, not bulk 20 bags. Too messy for the auditor if you ever need to explain. They are not into time when unraveling your peculiar record keeping.

                            Running a business here, means monthly records to the accountant. This is where your small business accountant helps you out. The farm checks thru the local bank, expenses on the farm credit card, are ALL listed on the sheets. NEVER used except for the farm business. YOU can further break billing down with receipts, to show per horse expenses. Sure much easier to fish thru one months receipts than a years worth! Remember the details and note them on bills. The accountant with monthly records stays on top of things for you. They can spot patterns, trends, losses that may escape your notice. Accountant can pop up your information at any time, talk with you about it. You could have the same information and put it into your computer.

                            They can point out things you need to quit doing, work is actually costing you money. Some customers you may need to drop, because they are more money out, than they bring in, with time and expenses spent on them. That was a surprise to us! Hours spent on them, at XX dollars, was more than the cash they paid us. She said it would be cheaper for us to send them the cash they paid, instead of working for them! Save in time and $$ expenses. If you like them, just go visit, don't work for them!

                            Our accountant attends regular training sessions, learns the new tax laws, changes that affect our business. Accounting and details related to it is HER job, she is really good at it. Our job is being good at our business, keeping the money coming in. She again, stays on top of changes in laws, tells us about them. It is hard to be good at multiple jobs, working, accounting, updated tax law. Eats up any free time you have, and you will probably still miss details because accounting is not your specialty. I don't think any computer Tax program is going to be as beneficial as working with an Accountant. PLUS, you get to deduct the expenses of the Accountant on your taxes!

                            She has improved business for us, by a huge amount. Helps set the rates needed to pay and make a profit. Cash in, cash out, just moves money. You don't see the hidden expenses, your time, wear and tear on trucks, value of inventory. Money saved buying at certain times of the year or in bulk to restock inventory. Contracting with vendors for certain things. You both win on that, dependable price and income for him. Changed how we look at stuff, seems like everything is negotiable, in the business setting. BUT, you have to ask for the better prices. If they say no, you are out maybe 15 seconds of time. You can also look and ask elsewhere. Yes answer, could be a big savings in business expenses.

                            Personal taxes are totally separate. We always figure them itemized and simple. Some years we have enough deductions, that long way gets a better return. Other years we make more on the short method. You go with what makes the most return for you.

                            Depending on your yearly budget, getting money returned in spring can be an asset. Not much cash from other sources at the first of the year to pay in with. You KNOW you have held out enough money for yearly taxes already. Other times you have let the Govt. use your money for free for a year, maybe should change your witholding setup. Take same money quantity from paychecks, put that quantity in local savings for yourself. Get the interest off it. Don't spend it, save it, in case you need it for next year's tax changes. Always nice to have some savings.

                            We really are glad we have changed to the Accountant, saves a lot of grief.

                            Comment


                            • #15
                              Goodhors has a lot of good advice in that long post!

                              Originally posted by Halfbroke View Post
                              I actually do think your accountant will understand what you are talking about. . we arn't as naive as you may think! . . . . I really would suggest talking to your accountant, they can help you set up a method of how to do your books, and the more they know about you and your business, the more they can help you and ultimatly the more money they can save you.
                              Halfbroke, you have a lot more faith in accountants than I do, having met very few that would do an even 10% creditable job of preparing a horse business return. But, you ARE right about meeting with the accountant, setting up a method of doing the books, etc.

                              Originally posted by aspenlucas View Post
                              True she could be claiming "0". But so do my husband and I. We are just going to sit down and talk to the accountant. I have a lot of good information here now!
                              I'm not sure why you are so focused on her refund & no one can tell you why she gets that refund without examining her return. However, I am going to suggest some more thoughts for you - taxes are complicated & it is HARD to speculate about other's tax returns, unless they are willing to hand you the tax return & let you take it to a knowledgeable person to explain it.

                              She is not limited to "claiming 0". There is a line on the W-4 where you may request additional withholding - if you want an extra $100 a week withheld so you get $5,200 back when you file your return, you are allowed to do that. Stupid, but you can.

                              Even if your friend has the same total gross income as you & your husband, she may have less taxable income because she may have things that reduce her taxable income - maximum contributions to a 401k plan, contributions to a regular IRA, capital losses from the sale of stock or other business assets, rental losses if she owns a rental property, interest payments on student loans, all those & more can reduce AGI (Adjusted Gross Income).

                              Or, perhaps you have non-wage income that she does not have, for example, interest on a savings account or dividends from stock, or a rental property that is profitable, or income from the sale of stock.

                              She could have more dependents than you (dependents you may not know about, such as a parent).

                              She could have larger deductions than you if she itemizes deductions (larger charitable contributions or mortgage interest or real estate taxes).

                              As I said before, she may be taking advantage of tax credits that you are not eligible for. I already mentioned child tax credit & child care credit. I have not prepared personal taxes in recent years so I am not sure what credits are currently available but there used to be credits for adoption, credits for using renewable energy sources, credits for buying a hybrid car, all sorts of credits. Once upon a time there was a credit for buying a diesel vehicle.

                              Anyway, you need to review your own return line by line with your accountant ... & review the lines you don't use, too, to see if any of them apply to you. Maybe you are missing something. If you are, you can file an amended return within 3 years to get more money back ... that bigger refund you missed previously.
                              Last edited by Evalee Hunter; Feb. 16, 2009, 08:43 PM. Reason: to correct a typo.

                              Comment


                              • #16
                                Evalee- true, while I haven't met a whole ton of accountants who have extensive experience preparing horse business tax returns/books (because lets face it, they arn't really big money makers are they?!?), what the OP was posting about isn't neccesarily really complicated stuff! I would imagine her question is a fairly common one for ppl who run their own business.

                                Comment


                                • #17
                                  Originally posted by Halfbroke View Post
                                  Evalee- true, while I haven't met a whole ton of accountants who have extensive experience preparing horse business tax returns/books (because lets face it, they arn't really big money makers are they?!?), what the OP was posting about isn't neccesarily really complicated stuff! I would imagine her question is a fairly common one for ppl who run their own business.
                                  Regarding a horse business - accountants I have met don't think of such simple things as:

                                  they probably have a horse trailer & use it in the business, so we should ask about the trailer so we can depreciate it

                                  their truck is probably a 2500 or bigger so we should use the depreciation for heavier vehicles

                                  Those are two really simple things that I have seen missed time & again. I could name others with a couple minutes thought. Really, most accounting firms are totally hopeless at preparing the simplest horse business return in any manner even resembling correct & complete.

                                  Comment


                                  • #18
                                    distribution yes pay???

                                    if you pay your self a payroll check for work done from a separate entity, then you need to pay withholding/employment taxes and possibly workers comp insurance.

                                    for a short time we had other peoples horses staying with our own. we insisted they provide their portion of the labor and expense as our zoning and conditional use permit does not permit "boarding"

                                    renting space to the boarders may provide better deductions especially if your house is connected to the barn. check with both your accountant and insurance adviser.

                                    and check your zoning if you are in an incorporated area.
                                    more hay, less grain

                                    Comment


                                    • #19
                                      evalee- your probably right.. considering that at least at the CPA firm I work at we have interns still in college preparing returns, so even when they are reviewed, I'm guessing that reviews are not detailed (not that I really know.. I work on the auditing side and have no involvement with our small business/tax department). I think it goes to show that your advice on telling your accountant everything you know really does help with tax planning.. deductions/adjustments/ expenses can't make it on the return if they don't know about them..

                                      Comment


                                      • #20
                                        I came across the following information in Turbotax Business 2008 & I thought it was very interesting in light of all the discussions of taxation of horse businesses:


                                        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%

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