Post-JGTRRA racehorse ownership.

• Author: Hereth, Russell H.
• Position: Jobs and Growth Tax Relief Reconciliation Act of 2003

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) increased the Sec. 179 deduction to $100,000 for 2003-2005 (adjusted for inflation starting in 2004) and allowed 50% additional depreciation under Sec. 168(k)(4) in the year of acquisition on most business property other than real estate. These provisions make it more tax advantageous to own a racehorse.

Overview

Under Sec. 168(b)(2)(B) and Regs. Sec. 1.263A-4(a)(4)(i), horse owners are deemed to be in the trade or business of farming; thus, their horses are depreciated over either a three-year or seven-year life, using the 150% declining-balance (DB) method. The normal recovery period and the applicable recovery percentages are presented in Exhibit 1 on p. 73 (see Rev. Proc. 8757, Sections 3 and 4 and Table A-14).

According to Sec. 168(b)(4), salvage value is ignored. Generally, unless the Sec. 168(d)(3) mid-quarter convention applies, the Sec. 168(d)(4)(A) half-year convention applies to reduce first- and last-year depreciation by 50%.

A taxpayer may elect to expense some or all of the cost of a horse under Sec. 179. For 2003, the maximum cost that could be expensed was $100,000, provided the overall acquisition cost of eligible property for the year did not exceed $400,000; see Sec. 179(b)(2). If expenditures exceeded $400,000 for 2003, the $100,000 amount had to reduced, dollar-for-dollar, for the excess; the expense deduction fully phased out at $500,000 of costs.

Example 1: T purchased a three-year-old horse, not yet raced, for $200,000 in December 2003 and elected Sec. 179; thus, the maximum depreciation deduction is as follows, using the 150% DB method and assuming the half-year convention applies. For 50% bonus depreciation, T must be the original user of the property and the horse must have been acquired after May 5, 2003, under Sec. 168(k)(4)(B)(i). If the horse were acquired after Sept. 10, 2001 and before May 6, 2003, bonus depreciation would be only 30%.

Sec. 179 deduction $100,000 Bonus depreciation ($200,000 - $100,000) x 50% 50,000 Regular depreciation ($200,000 - $100,000 - $50,000) x 25% 12,500 Total 2003 depreciation $162,500 For subsequent years, the depreciation calculation is as follows: 2004: $50,000 x 37.5% = $18,750 2005: $50,000 x 25% = $12,500 2006: $50,000 x 12.5% = $6,250 If T had already used the maximum Sec. 179 deduction for 2003 or was ineligible to do so, the total 2003 depreciation would be $125,000 (($200,000 x 50%) + ($100,000 x 25%))...