I think there’s a more important point here than just, “Here’s another rich guy thing.”
As I understand it, the horse is part of an LLC owned wholly or partly by the Romneys, and the deduction arises as a business loss. Now, there really was not a $77,000 deduction but rather a passive activity loss. That means that the Romney’s are not allowed the deduction because they were not actively involved in an managing the business in question. But the deduction does not disappear. It is caried over, and can be used to reduce gains from other profitable business activity in the future. It will also, as I understand it, be deductible when the LLC ceases to operate, or liquidates.
So what? Well, there are businesses and there are hobbies, and some hobbies generate income.
If you’re an amateur photographer, for example, and occasionally sell a print or get paid for photographing an event, photography may still, under IRS rules, be regarded as a hobby rather than a business. That means you get to deduct expenses - cameras, etc. - only up to the amount of income you earn from photography. Spend a couple of thousand on workshops, equipment, etc., and earn $500 and you can take a $500 deduction. That’s all.
But if photography is your business, and you lose money at it one year, you are allowed to deduct that loss fully, against any other income you might have.How to distinguish? The general rule is that the IRS will consider an activity for profit if it makes money three out of five years, except for horse-related activities, where the rule is two out of seven. (Definitely a “rich people” exception.)
So Romney is treating the horse show hobby as a business by taking the deduction even as a passive loss. Maybe it makes money two years out of seven, but it’s hard to see how. So it would be nice to have a look at the returns and see about this, and whatever other ridiculous fudges, that is, lies, are in there.
BTW, I’m not a CPA or tax lawyer, so I welcome correction on any of the above from those more knowledgeable.
You pretty much have it right. About the only thing I’d add is that when the LLC ceases to operate, they can only take the deduction up to their actual gains they have at liquidation. Basically, it means that they won’t ever have to treat money made off of the horse as income unless it exceeds the amount of money they spent on the horse.
In terms of all of the things to have fun with in Mitt’s taxes, this one has been vastly overblown because it’s a horse. There’s really not very much to see here.
FWIW, we have Romney pretty clearly misrepresenting a hobby as a business venture. That seems significant to me, both in itself and in what it implies for other issues that might arise from a close examination of the returns. Mostly, I think this ought to be treated as a serious matter, not just another cartoon.
Getting back to this late, but if anyone sees this, Romney isn’t misrepresenting anything. Any hobby from which one can derive revenue can be accounted for this way. If he were misrepresenting it as a business that was intended to turn a profit, then he could go ahead and take the loss as a deduction against other income. (I think. It depends upon how it is structured and I haven’t looked that closely. There are mechanisms designed to try to ensure that deductible losses are really losses and not just on paper.)
In fact, if you generate revenue from your hobby, you’re required to fill out Schedule C and report its income as a business.
You freaking tell me there’s not that much to see??! I busted my hump to make two-sevenths of that deduction amount as my total annual income, and paid 450/month for health insurance so if something should happen to me my elderly parents would not have to cash in their life savings to save my life, and @/$87!3′su]*%>{*%>*%>{ someone gonna tell me there’s nothing to see here? That mothermucker didn’t even pay social security taxes over what I did last year, 297$3{+^€{^!!!!!!! Drinking sociopathic lying blundering piece of Mitt!!!!!! Do I embarrass anyone here? Cause shit yeah, I’m angry.
You freaking tell me there’s not that much to see??! I busted my hump to make two-sevenths of that deduction amount as my total annual income, and paid 450/month for health insurance so if something should happen to me my elderly parents would not have to cash in their life savings to save my life, and @/$87!3′su]*%>{*%>*%>{ someone gonna tell me there’s nothing to see here? That mothermucker didn’t even pay social security taxes over what I did last year, 297$3{+^€{^!!!!!!! Fricking sociopathic lying blundering piece of Mitt!!!!!! Do I embarrass anyone here? Cause shit yeah, I’m angry.
Checking, I don’t think you’ve got it right. See here.
Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. Disallowed passive losses are carried forward to the next taxable year. A similar rule applies to credits from passive activities…..Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
So the passive loss becomes fully deductible against any passive gain, and fully deductible at liquidation regardless. You don’t actually ever need to make money at the passive activity.
Another thing worth remembering is that the $77K is only one year’s deduction. We don’t know about previous years. So, while it’s not a bonanza in relation to Romney’s wealth, it does represent a large sum of money. Take it for three years, say, and deduct it against income taxed at ordinary income rates, and you get a tax savings of about $75-80K.
I don’t quite understand this business deduction. Aren’t these horses supposed to be off limits from criticism because they are therapy for Ann’s MS? If so, shouldn’t they be a medical deduction, if not a non-deductible personal expense? And the poster should read: “You PEOPLE wouldn’t understand.”
Byomtov explains the tax law in his comment above. Romney had a net loss of $77,731 but the amount he can deduct is limited to the amount of income he earned from the horse.
It is not inconceivable that the horse in question could earn a substatial amount of money. If the horse shows well in the Olympics earnings from stud fees of $5,000-$10,000 a pop and sale value $1,000,000+ are certainly within the relm of reality.
One question in this is, how many other horses do the Romneys own? If they have twenty horses and only two show a profit then the whole thing could be a loss. By the time you pay for the barn, indoor arena, trainer, stable hands, hay, farrier, vet bills, transport, tack,… oh crap I just realized why I’m so poor!
Seems to me that the horse business is a business in the same way that playng poker at the cassino is a business. You could make a lot of money. There once was a guy who won big, they say.
Oh dear. Well that’s how much attention I’m paying to this issue.
Of course the horse can be a brood mare. Not quite as profitable.
My point is that while Romney is as much of a cynical opportunist as you could imagine, high priced perfomance horses really can be a business investment. If he invested in a football team nobody would think it strange.
I know if Obama owned a dressage horse we would never hear the end of it but don’t ya think Romney has enough baggage to sink him without beating this none issue to death?
Besides, I know some owners of dressage horses and they put their jodpers on one leg at a time like the rest of us.
Romney will borrow millions from gullible lenders on the idea that Rafalca will be able to collect stud fees after a sex change operation. He will pay himself most of that in dividends and management fees, and when the project proves impractical, take the LLC into bankruptcy and, since the retirement fund will be gone, Rafalca will have to be sent to the glue factory rather than out to roam pleasant pastures for the rest of her life.
I think there’s a more important point here than just, “Here’s another rich guy thing.”
As I understand it, the horse is part of an LLC owned wholly or partly by the Romneys, and the deduction arises as a business loss. Now, there really was not a $77,000 deduction but rather a passive activity loss. That means that the Romney’s are not allowed the deduction because they were not actively involved in an managing the business in question. But the deduction does not disappear. It is caried over, and can be used to reduce gains from other profitable business activity in the future. It will also, as I understand it, be deductible when the LLC ceases to operate, or liquidates.
So what? Well, there are businesses and there are hobbies, and some hobbies generate income.
For an explanation of the difference, see here.
If you’re an amateur photographer, for example, and occasionally sell a print or get paid for photographing an event, photography may still, under IRS rules, be regarded as a hobby rather than a business. That means you get to deduct expenses - cameras, etc. - only up to the amount of income you earn from photography. Spend a couple of thousand on workshops, equipment, etc., and earn $500 and you can take a $500 deduction. That’s all.
But if photography is your business, and you lose money at it one year, you are allowed to deduct that loss fully, against any other income you might have.How to distinguish? The general rule is that the IRS will consider an activity for profit if it makes money three out of five years, except for horse-related activities, where the rule is two out of seven. (Definitely a “rich people” exception.)
So Romney is treating the horse show hobby as a business by taking the deduction even as a passive loss. Maybe it makes money two years out of seven, but it’s hard to see how. So it would be nice to have a look at the returns and see about this, and whatever other ridiculous fudges, that is, lies, are in there.
BTW, I’m not a CPA or tax lawyer, so I welcome correction on any of the above from those more knowledgeable.
All I know is that the horse made too much money to deduct the interest on its student loans.
I’m guessing the horse probably took out a few IRAs as well
You pretty much have it right. About the only thing I’d add is that when the LLC ceases to operate, they can only take the deduction up to their actual gains they have at liquidation. Basically, it means that they won’t ever have to treat money made off of the horse as income unless it exceeds the amount of money they spent on the horse.
In terms of all of the things to have fun with in Mitt’s taxes, this one has been vastly overblown because it’s a horse. There’s really not very much to see here.
JMN,
Thanks.
But I disagree that there’s not much to see.
FWIW, we have Romney pretty clearly misrepresenting a hobby as a business venture. That seems significant to me, both in itself and in what it implies for other issues that might arise from a close examination of the returns. Mostly, I think this ought to be treated as a serious matter, not just another cartoon.
Getting back to this late, but if anyone sees this, Romney isn’t misrepresenting anything. Any hobby from which one can derive revenue can be accounted for this way. If he were misrepresenting it as a business that was intended to turn a profit, then he could go ahead and take the loss as a deduction against other income. (I think. It depends upon how it is structured and I haven’t looked that closely. There are mechanisms designed to try to ensure that deductible losses are really losses and not just on paper.)
In fact, if you generate revenue from your hobby, you’re required to fill out Schedule C and report its income as a business.
You freaking tell me there’s not that much to see??! I busted my hump to make two-sevenths of that deduction amount as my total annual income, and paid 450/month for health insurance so if something should happen to me my elderly parents would not have to cash in their life savings to save my life, and @/$87!3′su]*%>{*%>*%>{ someone gonna tell me there’s nothing to see here? That mothermucker didn’t even pay social security taxes over what I did last year, 297$3{+^€{^!!!!!!! Drinking sociopathic lying blundering piece of Mitt!!!!!! Do I embarrass anyone here? Cause shit yeah, I’m angry.
You freaking tell me there’s not that much to see??! I busted my hump to make two-sevenths of that deduction amount as my total annual income, and paid 450/month for health insurance so if something should happen to me my elderly parents would not have to cash in their life savings to save my life, and @/$87!3′su]*%>{*%>*%>{ someone gonna tell me there’s nothing to see here? That mothermucker didn’t even pay social security taxes over what I did last year, 297$3{+^€{^!!!!!!! Fricking sociopathic lying blundering piece of Mitt!!!!!! Do I embarrass anyone here? Cause shit yeah, I’m angry.
In which case, the only thing to see here is that Mitt Romney is rich. I didn’t need to see the schedules on his income tax to know that.
What gains? Endorsements? Dressage cards? Mating fees? Sale of the horse above the cost basis? Rubber dressage circuit? Turn pro? What?
JMN,
Checking, I don’t think you’ve got it right. See here.
So the passive loss becomes fully deductible against any passive gain, and fully deductible at liquidation regardless. You don’t actually ever need to make money at the passive activity.
Another thing worth remembering is that the $77K is only one year’s deduction. We don’t know about previous years. So, while it’s not a bonanza in relation to Romney’s wealth, it does represent a large sum of money. Take it for three years, say, and deduct it against income taxed at ordinary income rates, and you get a tax savings of about $75-80K.
I don’t quite understand this business deduction. Aren’t these horses supposed to be off limits from criticism because they are therapy for Ann’s MS? If so, shouldn’t they be a medical deduction, if not a non-deductible personal expense? And the poster should read: “You PEOPLE wouldn’t understand.”
According to the following link, Romney only got a $50 deduction:
http://www.buzzfeed.com/nycsouthpaw/romneys-olympic-dancing-horse-didnt-get-him-much
Byomtov explains the tax law in his comment above. Romney had a net loss of $77,731 but the amount he can deduct is limited to the amount of income he earned from the horse.
It is not inconceivable that the horse in question could earn a substatial amount of money. If the horse shows well in the Olympics earnings from stud fees of $5,000-$10,000 a pop and sale value $1,000,000+ are certainly within the relm of reality.
One question in this is, how many other horses do the Romneys own? If they have twenty horses and only two show a profit then the whole thing could be a loss. By the time you pay for the barn, indoor arena, trainer, stable hands, hay, farrier, vet bills, transport, tack,… oh crap I just realized why I’m so poor!
Seems to me that the horse business is a business in the same way that playng poker at the cassino is a business. You could make a lot of money. There once was a guy who won big, they say.
Stud fees? The horse is a mare.
Oh dear. Well that’s how much attention I’m paying to this issue.
Of course the horse can be a brood mare. Not quite as profitable.
My point is that while Romney is as much of a cynical opportunist as you could imagine, high priced perfomance horses really can be a business investment. If he invested in a football team nobody would think it strange.
I know if Obama owned a dressage horse we would never hear the end of it but don’t ya think Romney has enough baggage to sink him without beating this none issue to death?
Besides, I know some owners of dressage horses and they put their jodpers on one leg at a time like the rest of us.
You don’t understand.
Romney will borrow millions from gullible lenders on the idea that Rafalca will be able to collect stud fees after a sex change operation. He will pay himself most of that in dividends and management fees, and when the project proves impractical, take the LLC into bankruptcy and, since the retirement fund will be gone, Rafalca will have to be sent to the glue factory rather than out to roam pleasant pastures for the rest of her life.