"I am often asked The biggest pitfall owners are not aware of and that is the Passive Activity rules, also known as IRS code section 469. Essentially the passive loss rules limit passive losses from being deducted against anything but passive income (interest, dividends and similar payments). Passive activities include trade or business activities in which you do not materially participate."

You materially participate in an activity if you are involved in the operation of the activity on a regular, continuous, and substantial basis. In the racing world this pretty much means you do a lot more then come out and jog on weekends, watch the races from the grandstand and attend several horse auctions each year.

"Partnerships and S Corporations usually have one or at most two general partners who usually by definition handle the day to day operations of the venture; the limited partners fall into the passive category by default in most cases I have seen. This pitfall is rarely known until an enrolled agent or CPA makes a client aware of the rule."

You can use any reasonable method to prove your participation in an activity for the year. You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary.

With the IRS having a new multi-year game plan for potentially passive entities, it’s a very good time to evaluate one's racing ventures; then consider and assess one's risk of prevailing if the IRS comes to call.

For further information, contact The Equine Tax Group at (888) 338-2999 or at equinetaxgroup.com.