By Karen E. Klein Q: My mother, who lives in Miami, bought property in Virginia through her trust. The land was purchased with the sole intent of my using it to expand my horse-boarding business. I am getting a loan to have the land cleared and buildings erected, but my accountant says I can't write off any of those costs because I don't own the land. Is he correct? I am a sole proprietor. Can I change my business status to qualify for these tax advantages? -- P.M., Chesterfield Co., Va.
A: Your question is simple and straightforward, so it's surprising that your accountant's advice was dead wrong, says Mark A. VanDeveer, a CPA with Thatcher + Benson PC in Virginia Beach. You can deduct the expenses you're incurring in connection with your horse-boarding business, as long as the loan is in your name and the proceeds can be shown to be used in the business. You should also be able to deduct the accompanying interest paid on the loan.
TOO MUCH FUN. "The costs of clearing the land will have to be capitalized and then recovered over time," VanDeveer says. In the same manner, the cost of the buildings will be recovered over time through depreciation. But there's no problem with you remaining a sole proprietor in terms of your business entity.
VanDeveer adds one general caution: "Horses and the IRS usually don't go well together. Many times, an IRS audit will reclassify a horse operation as a hobby and disallow any losses," he says. If the IRS judges that the element of personal or pleasure use of your horses is too great, you'll have to prove your outfit's profit-making motive, potential future profits, and other factors that indicate it is a genuine business and not a hobby. "There have been many cases decided on these issues over the years, both for and against taxpayers. In this particular case, the taxpayer should be ready to explain how this expansion will lead to increased business and the basis for making this business decision," VanDeveer says.
Have a question about your business? Ask our small-business experts. Send us an e-mail at email@example.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.