This Should be Required Reading for Every Trainer and Owner

by Andrew J. Mollica, Esq
and Len Green, CPA

What an industry!

The recent, well-publicized ongoing legal sagas of both Ahmed Zayat and Ken Ramsey have brought issues surrounding owner-trainer financial relationships into clear focus. Yet, the truth is that no-pay or slow-paying owners probably have been a small, but existing part of racing since the game was invented.

Despite its topical nature, the problem is not going away anytime soon, and the reason is simple: horse racing is a 21st-century industry that is based on an 18th-century business model. At this late date, virtually all owner-trainer relationships are still based upon oral contracts.

While established contract law renders verbalized agreements legally binding, the pragmatic reality is that oral contracts are not easy to enforce and are even more difficult to litigate. In this regard, the words of the late, great movie producer Samuel Goldwyn ring true: “Oral contracts are not worth the paper they are written on.”

Consider that for any contract to be enforceable in court there must be a “mirror image” displayed between the offer of one participant and the acceptance of the other. Agreement terms reflect one another very well when they are written down and subscribed by each party. The establishment of an oral contract almost always degenerates into a he-said/she-said scenario and eventually turns on the credibility (or lack thereof) of the respective parties.

It's for this reason that judges and juries look askance at purported contracts not memorialized in writing and often refuse to find for the litigant (in this case the trainer) who is seeking contract enforcement.

Coady

Suggested Solutions

Clearly, written contracts would make things much easier, both to abide by and to litigate, but a future proliferation of written contracts between owners and trainers would be sea change that is nowhere in sight. Why? The reason is simple: most racetrackers (and people in general, for that matter) hate change.

This said, many would argue that mucking up the existing system–in place for decades if not centuries–with written contracts and more lawyers is not worth the effort. Ironically, it's exactly the opposite; where a writing is missing, it actually encourages non-performance by the owner, and actually clogs the system with more cases, more lawyers, and big problems.

Let's take a common example. An owner and trainer orally agree upon a $100 per-horse day rate–at many tracks, today's standard of what trainers charge.

The question posed is whether a written agreement or an up-front retainer is really necessary for such a simple, straightforward agreement. Consider that by the time a trainer gets her first check from the owner, she has already fronted that owner the training fees for about 45 days. If our hypothetical owner gave our imaginary trainer 10 horses, by the time the trainer bills the first $30,000 at the end of the first month, she is in serious trouble if the owner fails to make timely payment. Worse, the owner might send a check for less, claiming that the day rate verbally agreed to is much less than what the trainer is claiming.

In businesses like law, construction or big-ticket specialty retail, up-front payments, deposits or retainers are the norm. But it is not the standard in the horse industry.

Why are they virtually nonexistent in our industry? The answer is simple. Most successful trainers would tell you they could never ask for either a retainer or a written contract for fear they would not get the horses offered by the owner into their barn, and therein lies the rub.

The late Hall of Fame trainer P.G. Johnson used to say, “An empty stall is better than a no-pay horse.” What Johnson was saying is true: an empty stall does not cost the trainer any money, but the horse of a no-pay owner triggers the same care, custody and control responsibilities (and costs) of any other horse in the barn. Of course, that's when the downward spiral begins.

Coady

The simple fact is that obtaining clients and horses to train is very competitive.

Many times, new owners, who can afford to spend large sums of money on purchasing horses, are greatly influenced to select their trainers based on which trainers win the big races.

Trainers increase their opportunities to win these big races based on the number and quality of the horse they train.

Trainers need horses to train, so when an owner falls behind, the trainer is put in an even more unenviable position. The options are limited: demand payment and most likely lose the horses, or stay the course and hope for a miracle.

The clear answer is demand payment, and don't get further behind. Yet, trainers often keep their no-pay owners on an ever-elongating leash in the faint hope the horse will earn money and the bill will be paid. The consequences of this decision are evident in the headlines today.

Bottom Line

Is there any tax benefit for writing off the accounts receivable as a bad debt?

No.

Most trainers are paid on a cash basis. They only record income as they are paid.

Therefore, they receive no tax benefit for not getting paid.

The Legal Remedy

In every state in the Union except one (Vermont), trainers, or stablemen, have the protection or remedy commonly referred to as an agister's, or stablemen's, lien. In New York, the law is codified as 183 of the New York State Lien Law and in New Jersey it is codified in 2A:44-51.

Under these statutes, a trainer having care, custody and control of a horse has an automatic lien on the horse against unpaid bills. To perfect the lien, the trainer must both formally notify the owner of the indebtedness and the intention to satisfy the debt by selling the horse at public auction. The power of the tool is obvious, because if the horse is worth appreciably more than the bill owned, the wayward owner will usually run to the barn, cash in hand, rather than lose his valuable, income-producing asset in an agister's sale.

Sarah Andrew

Despite this potent legal remedy, most trainers never utilize it.

For one, they often receive bad advice, sometimes from the stewards, who inform them that they had better give up the horse to the non-paying owner lest they be sued and that they should instead sue the owner to get a judgment or, worse yet, they are encouraged to hold the foal papers. None of these “steward tips” have any validity under the law.

First, if an owner is going to sue a trainer, she will do it whether the trainer has possession or not, so the advice is simply bad.

Second, if the trainer turns possession of the horse back to the owner, the trainer loses possession, hence his statutory lien is now forfeited and the trainer has lost the remedy and most likely any chance of recovering her money.

Third, holding the foal papers is an illegal act and, moreover, foal papers are soon to go the way of bobby socks and land-line telephones, as electronic papers become the norm. This is very bad advice as well.

Aside from this, trainers who are owed vast sums of money often don't perfect their liens because they are afraid they will be looked at as bad guys in the industry, while others simply don't want to pay the legal fees to get their money.

Whatever the reason, trainers who are owed money have a legal recourse, but they have to make the hard decision to perfect their liens and sell the horse. If they don't, we have seen the results.

In sum, although it may be unlikely to ever become a reality, all agreements with owners involving the trainer's care and custody of the horse should be expressed in a clear, concise, comprehensive, straightforward writing signed by the parties, and one of the terms that should not be left out is the payment of an up-front training fee.

Lastly, the question should not be whether to auction off the horse of a non-paying owner, but rather how quickly it can be done after the first training bill is more than 30 days late.

The post This Should be Required Reading for Every Trainer and Owner appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

Source of original post

Proven Strategies: End-of-Year Tax-Saving Tips

In horse racing, the contest is not over until the horse crosses the finish line.

The same is true with maximizing your tax deductions and minimizing your taxes.

For those who think it is too late to save on your 2020 taxes, we are here to tell you, it is not!

With over 40 years’ experience saving our clients taxes along with our knowledge of the new tax laws, we are confident the following information will help you as you approach the 2020 home stretch and allow you to hit the wire a winner.

Current Tax Act and What it Means to The Horse Industry

The Current Tax Act contains favorable developments for depreciating and expensing yearlings, breeding stock, farm equipment and other property.

Bonus Depreciation: An increase in bonus depreciation allows a write-off to increase from 50% to 100%. Accordingly, you are now permitted to fully expense purchases in the first year for yearlings, breeding stock and farm equipment. Used property can now qualify also. A few weeks still remain for 2020 asset additions with the potential benefit of a full tax write-off.

IRC&179 Deduction: The maximum amount that may be expensed has been increased from $500,000 to $1 million. The phase-out threshold has been increased from $2 million to $2.5 million.

Farm Equipment: The useful life has been reduced from seven years to five years and the 200% declining balance method can now be used.

Racehorses: Certain Thoroughbreds can still be depreciated as three-year property.

Even if business equipment (or horses) is purchased before year-end, they still qualify for these tax benefits.

2020 Year-End Tax Planning Strategies

Due to the transition of administration in our nation’s capital and the uncertainty of whether or not proposed tax law changes will be forthcoming, year-end tax planning for 2020 is more important than ever.

Steps Available for Individual Taxpayers

  1. Capital Gains: President-elect Biden is proposing an increase from 20% to 39.6% on capital gains for taxpayers with income above $1 million. Accordingly, if you are contemplating a sale of horses or real estate, you should consider accelerating the transaction into 2020 rather than waiting until 2021.

Even for taxpayers with income below the $1-million threshold, if you have realized capital gains in 2020, along with unrealized losses, you might want to trigger those losses before year-end to offset your gains, thereby reducing your tax liability.

On the flip side, if you have realized losses, consider taking some gains, as the deduction for capital losses is limited to $3,000 in any given year.

  1. Retirement Plan Alerts: Several relief measures are included in recent tax legislation to help individuals who are approaching retirement or facing financial concerns.

First, required minimum distributions are suspended for Year 2020. As a result, if you do not have a financial need to take a distribution in 2020, you do not need to do so. Leave the money in the Pension Plan and continue to have it accumulate value, tax free.

Second, plan participants who turn 70 1/2 in 2020 or later do not need to take required distributions until the year in which they turn 72.

Third, you are now permitted to contribute to a traditional IRA after age 70 1/2 as long as you have earned income.

Fourth, the 10% early withdrawal penalty for distributions of up to $100,000 from workplace retirement plans will be waived for individuals who either become ill or lose their employment. These distributions can be spread over three years, and individuals can recontribute all, or a portion, to avoid a penalty.

Fifth, contributions to a Keogh plan or a one-person 401(k) plan can be significant and save you substantial 2020 tax dollars if set up before Dec. 31, 2020.

A SEP-IRA is another flexible alternative. A SEP can be set up before the filling date of your 2020 tax return, yet still provide you with a 2020 deduction.

  1. Avoid the Underpayment of Estimated Tax Penalty: If you have not prepared a 2020 income tax projection, you should have your advisor do so. If your 2020 projection shows a balance due, request that a disproportionate amount of withholding be taken from your December paychecks, year-end bonus, or retirement plan distribution, rather than paying a comparable significant amount with a fourth-quarter estimated tax voucher.

This withholding approach is more favorable than writing a check because taxes that are withheld in December are deemed to be “thrown back” and treated as evenly spread through the calendar year. This enables you to catch up on any shortfall and still avoid a penalty for the first three quarters.

  1. Net Operating Losses (NOLs): Recent tax legislation temporarily reverses the rules enacted in 2017 which preclude the carryback of NOLs. Individuals with NOLs arising in 2018, 2019 and 2020 can now carry back their NOLs five years.

Of great importance, business losses, which had been capped at $250,000 for single taxpayers and $500,00 for joint returns, can be deducted without limitation through 2020!

  1. Maximize the Pass-Through Business Income Deduction: This tax-saving deduction allows certain taxpayers to deduct 20% of their qualified business income. To maximize the deduction, you should take action steps to qualify your taxable income so it is below this new provision’s phase-out thresholds.

Steps Available for Business Taxpayers

  1. Tax Treatment of Losses: Corporations can once again carry back NOLs, at least for losses arising in 2018 through 2020. Tax rule changes in December of 2017 had put a stop to this practice. Recent tax legislation reinstates this benefit and the carryback period is five years. Another temporary change is that corporations can now use NOLs to offset their entire taxable income through the 2020 tax year. The 2017 Tax Act’s 80% limitation has been temporarily removed.
  2. Maximize Available Depreciation: Businesses should consider making expenditures that qualify for 100% first-year bonus depreciation. Generally, both new and used depreciable assets are eligible. The full first-year write-off is allowed even if the asset is purchased late in the year and even if the deduction gives rise to a taxable loss.

Also, make sure you are taking bonus depreciation on all assets that are eligible. Many times assets are missed as to leasehold improvements on horses purchased in overseas sales or horses put into training but not yet raced.

An alternative is Section 179 depreciation, where for 2020 the expense limit has been raised to $1,040,000 if the investment purchases do not exceed $2,590,000. Keep in mind that Section 179 expensing cannot give rise to a loss.

  1. Qualified Business Income (QBI) Deduction: Certain business owners may be entitled to a deduction of up to 20% of their qualified business income. You should take whatever steps are possible to keep your taxable income below the phase-out thresholds. The rules are complex, so contact your tax advisor so they can help you maximize the use of the QBI deduction.

Possible Tax Law Changes Proposed by the Biden Administration

The best way to sum up President-elect Joe Biden’s tax plan would be to say he wants to raise taxes on high-income households and corporations.

  • Increase the corporate tax rate: The existing tax plan lowered the corporate rate from 35% to 21%. While Biden’s camp generally agrees 35% was too high, their proposal is to raise it to 28%.
  • Increase taxes on high earners: Biden would restore the 39.6% top marginal tax rate that was in effect prior to the 2018 tax year.
  • Phase out the pass-through deduction: Biden would phase out the 20% Qualified Business Income (QBI) deduction for taxpayers earning $400,000 or more.
  • Increase capital gains tax on high earners: Currently capital gains enjoy lower tax rates than ordinary income, but Biden’s proposal would change this for taxpayers earning more than $1 million.
  • Increase Social Security taxes: Biden would increase revenue to Social Security by imposing the 12.4% payroll tax (half of which is paid by the taxpayer) on all income above $400,000 in addition to the current structure of the tax.
  • Changes in estate planning: This portion of the proposed plan is less straightforward. On the one hand, you have the estate tax exemption of $11.58 million being reduced by 50%. On the other hand, there is less clarity regarding important items such as step-up in basis, business asset exemptions, capital gains, etc.

Clearly there will be changes, adjustments and alterations during the negotiation period prior to any changes being implemented. Also note that it is highly unlikely that any new laws will be made retroactively to 2020. Our best advice is to keep an open line of communication with your tax and financial advisors prior to making any updates to your estate planning.

The Green Group welcomes the opportunity to discuss your 2020 year-end tax-saving strategies with you by phone at 732.634.5100. In the meantime, stay well.

The post Proven Strategies: End-of-Year Tax-Saving Tips appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

Source of original post

Proven Strategies: If You are an Independent Contractor, What Tax Deductions Are You Entitled to?

COVID-19 has changed the way we go about our daily lives. It has also increased the number of individuals who are self-employed and have no other employees, also known as independent contractors.

The formal definition of an independent contractor is a person or entity contracted to perform work for, or provide services to another entity as a nonemployee (meaning that the employee is “at will” and not eligible for an employer’s health or retirement benefits). The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to self-employment tax.

Self-employed professions such as jockeys, jockey agents, confirmation videographers, bloodstock agents, blacksmiths, veterinarians, exercise riders, equine chiropractors, bid spotters/auctioneers, sales short listers, etc. are all possible examples of horse-related independent contractors.

Prior to the enactment of the new tax act in 2017, if you operated your business as a sole proprietor, you could still take advantage of many of the tax deductions that you incurred. With the adoption of the new Tax Act came a limitation on the deductibility of state income taxes, real estate taxes and the elimination of all personal business-related expenses.

Expenses that Could Become Tax Deductible

There are a number of expenses, if you are in the above categories, that can be tax deductible such as the following:

a. Training–training expense whether for racing, shows or for sales become deductible
b. Professional fees
c. Veterinary fees
d. Vanning and other transportation expenses–if you own racehorses and/or consign horses at sales, you should be sure to include all transportation expenses
e. Work clothing–all of you involved in the training side of the business, including jockeys, should deduct any garments/outfits that are primarily worn while riding, breaking or training horses
f. Barn and stable supplies
g. Feed and shavings; as well as removal expenses
h. Books, magazines, online subscriptions and/or sales analysis reference guides
i. Breeding fees
j. Broodmare leases
k. Meals for employees who were taking care of the horses
l. Equine therapy
m. Depreciation (including bonus depreciation)

In order to ensure that you are maximizing the above deductions, be sure to communicate with your tax provider. Have your accountant confirm your status as an independent contractor and indicate that status on your tax returns. If you want additional legal protection, you may want to either form an LLC which provides you with additional liability protection or a Subchapter S Corporation.

Important Additional Fact

The deductions listed above are, in most cases, equally tax deductible for partners in an LLC or shareholders in Sub Chapter S corporations.

Increasing Your Retirement Contributions

Most independent contractors can make retirement contributions into an IRA. The annual contribution limit for 2020 is $6,000 or $7,000 if you are age 50 or older. If you have a Roth IRA, the 2020 contributions may also be limited based on your filing status and income.

However, there is a plan that will allow you to greatly increase your retirement contributions and simultaneously reduce your taxable income. A Solo 401(k), also known as a Self-Employed 401(k) or Individual 401(k) is a 401(k) qualified retirement plan that was designed specifically for employers with no full-time employees. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s), thus, not subjecting the 401(k) plan to the complex ERISA (Employee Retirement Income Security Act of 1974) Rules which sets minimum standards for employer pension plans with non-owner employees. Independent contractors who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan but without the employer being subject to the complexities of ERISA.

The contribution limits for the Solo 401(k) are the same as a standard 401(k). They are broken down into a profit-sharing contribution, which comes from the employer and a salary deferral contribution which comes from the employee. However, due to the fact that in a Solo 401(k) the plan holder is acting both as employer and employee, the actual percentages assume a more meaningful role. If the plan holder is filing as a Sole Proprietor or Single Member LLC, which is true in most cases, then the limit is capped at 20% of the self-employed income, plus $19,000 for 2020. IRC Section 401(a)(3) states that the amount of employer contributions is limited to 25% of the entity’s income subject to self-employment tax. Schedule C sole proprietors must do an added calculation starting with earned income to determine their maximum contribution which, in effect, brings the maximum 25% of compensation limit down to 20% of earned income.

In both cases, the IRS has declared an upper limit for total employer and employee contributions to a plan, the IRS Section 415(c) limit which may not be exceeded. As of 2020, this upper limit is $56,000 for those under 50 and $62,000 for those 50 and older.

Other contribution limits may apply so we highly recommend that you discuss your options with your tax professional and/or investment advisor.

There may be alternative retirement plans such as SEP which you may be eligible for.

Bottom Line

The Thoroughbred horse business is like no other business when it comes to its complexity, challenges and strategies.

The same can be said as to how to maximize your tax deductions.

If you have any questions, please contact Len Green lgreen@greenco.com or Jim Benkoil jbenkoil@greenco.com at The Green Group or call us at 732.634.5100.

The post Proven Strategies: If You are an Independent Contractor, What Tax Deductions Are You Entitled to? appeared first on TDN | Thoroughbred Daily News | Horse Racing News, Results and Video | Thoroughbred Breeding and Auctions.

Source of original post

Verified by MonsterInsights