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Tax Court Halts Horse Roping Deductions

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The Tax Court is littered with cases where taxpayers try to deduct expenses relating to personal pursuits as business expenses. The IRS does not always agree with the write off.

May 19th 2021
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In one of the latest examples (Gallegos, TC Memo 2021-25, 3/2/21) a taxpayer tried to deduct expenses related to team horse roping contests to offset income from an insurance business. But the IRS argued that the team roping was a mere hobby.

Generally, you can deduct the “ordinary and necessary” expenses of operating a business, even if it results in a loss for the year. But expenses from an activity are deductible only if they are incurred with the intent to turn a profit. You can’t simply write off personal recreational expenses attributed to a business.

Facts of the new case: The taxpayer, who grew up on a large ranch in New Mexico, developed a new way to hire and train field agents to represent insurance companies and sell their policies in new markets. His agents earn commissions when they make sales and then the business shares in their success through override commissions. The business was, as characterized by the Tax Court, “a galloping success. “

Although the taxpayer credibly testified that the insurance market could be extremely volatile, the business earned a net profit of over $360,000 in 2009 and close to $500,000 in each of the following two years. With some extra time on his hands, and with supposed concerns about continued success in the industry, the taxpayer decided to focus his energy on team horse roping.

His team started competing in team-roping competitions in 1989. The taxpayer had been somewhat “around it” as a child, but received a more formal introduction when he bought a horse from a team-roping producer.

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