Horse breeders should be aware of a new tax advantage that begins in 2005 and increases over the next five years until fully implemented in 2010. The deduction can shelter up to 3% of 2005 profit from the sale of horses that a breeder has bred and sold.

The American Jobs Creation Act of 2004, passed by Congress at the end of 2004, provided a new tax benefit which lowers the tax on income from U.S. production. Specifically, it applies to income from the sale of property that was "manufactured, produced or grown" by a taxpayer in the U.S. Although enacted to compensate American companies for export incentives ruled illegal by the World Trade Organization several years ago and repealed by Congress, the provision applies to all "qualified production activities income," including income realized by breeders from breeding and selling horses.

The deduction is 3% of profits in 2005 and 2006, 6% in 2007 through 2009 and 9% in 2010 and thereafter. For example, if a breeder makes a profit of $100,000 in 2005 from the sale of horses bred, the breeder can deduct $3,000 on his or her tax return. This is in addition to any other deductions to which the breeder is entitled. That deduction rises to $6,000 in 2007 and tops out at $9,000 in 2010 and thereafter.

The new deduction applies to sales of horses by an individual, partnership, proprietorship, corporations, S Corporation or Limited Liability Company. But it is limited. It cannot exceed the profit from breeding sales, although it appears that a breeder could get a deduction even though the overall horse business incurs a loss. In addition, it cannot exceed 50% of wages paid to employees. "Wages" are the sum of wages and deferrals required to be included on IRS Form W-2.

This explanation is based on a preliminary analysis of the new provision. The American Horse Council recommends that horse breeders consult with their tax advisors to see how this new change affects their specific breeding activities.
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