Running the Numbers: How to Show Horse Racing Is a Business and Not a Hobby
Getting a horse to the track is no small feat. Growing up near Santa Anita Racetrack in Arcadia, I’ve seen firsthand how even a well-bred horse, carefully selected and trained by a top trainer, doesn’t compete on race day or finishes last. Months of preparation, training, boarding, veterinary care, and travel all go into getting a horse ready, yet the outcome is never guaranteed.
Even with that level of commitment, the IRS may still question whether your racing activity is a true business or just a hobby. That distinction matters. If it is treated as a hobby, your expenses are not deductible. If it is treated as a business, you can take the deductions that help you manage costs and protect your bottom line.
What the IRS Looks At
The IRS uses a nine-factor test to decide if your activity qualifies as a business. No single factor is decisive, but together they help prove your intent to make money. Some of the most important factors include:
Profit Motive – Show that your primary goal is to make money, not just enjoy racing. Careful horse selection, strong breeding, and working with top trainers all demonstrate a focus on profitability.
Businesslike Manner – Keep separate accounts, track income and expenses, maintain contracts and records, and operate professionally. This reinforces that you are managing a business, not a hobby.
Expertise – Document your own knowledge and the credentials of your trainers, veterinarians, and advisors. Using professional guidance to improve results supports your profit intent.
Time and Effort – Attend morning workouts, monitor your horse’s progress, and make adjustments as needed. Active involvement shows you are putting in the work required to run a business.
Expectation of Asset Appreciation – Horses may increase in value beyond racing through breeding or resale. Planning for this potential shows you are considering long-term profitability.
Success in Similar Activities – If you have successfully managed other businesses or ventures, it reinforces your ability to build profitability in horse racing.
History of Income or Losses – Start-up losses are common. Tie any losses to your long-term strategy and show they are temporary, not permanent.
Financial Status – Your other income sources may be considered, but they do not disqualify your activity. The IRS looks at this in the context of all the other factors.
Elements of Personal Pleasure – While enjoying horse racing is natural, the activity’s profit motive must be primary. Showing organized operations and strategic decisions emphasizes the business intent.
The Safe Harbor Rule
The IRS offers a safe harbor for horse racing. If you show a profit in at least two of seven years, your activity is presumed to be for profit. That shifts the burden to the IRS in the event of an audit.
You can also file Form 5213 to delay a determination if you are in your early years. However, this filing may increase your audit risk, so it should only be used with careful consideration.
What can you Deduct?
When you are treating horse racing as a business, it is important to keep clear records of all income and expenses. A profit and loss statement is your foundation for showing the IRS you are operating with a business mindset. Common expenses to consider include:
Training and boarding fees
Veterinary and farrier costs
Transportation and race entry fees
Feed, tack, and equipment
Depreciation of horses, trailers, and other assets
Professional fees for your CPA, attorney, and advisors
Insurance coverage
Travel to races and sales
Industry memberships and subscriptions
Keeping these organized in your P&L not only strengthens your position with the IRS but also gives you better insight into the financial health of your operation.
The Bottom Line
Just like preparing a horse for the starting gate, proving your racing operation is a business takes planning, documentation, and persistence. With the right framework, you can protect your deductions and strengthen your case with the IRS.
If you are in the horse racing industry and want to make sure your operation is treated as a business, let’s talk. I help owners put the right structure in place so they can focus on their racing goals while I handle the tax strategy. Schedule a time with me here or reach out to Michael@Bottalacpa.com.