b'on purchase price amounts). If the pur- he actively participates and generates 2018Since most Thoroughbred owners conduct chase price of $3.5 million was instead $3.2income of $300,000. His net business lossoperations as sole proprietorships or via flow-million, then the taxpayer would still have ain 2018 is ($200,000), which is less than thethrough entities, this QBI deduction may be $300,000 Section 179 deduction limit.($250,000) limit and, as such, may be fullyvaluable to those with profitable businesses As before, both new and used horses areclaimed for 2018.while requiring others with business losses to included and may be purchased at any timeExample 2A married horse ownerreduce this deduction.during the year and still qualify.filing jointly who is an active participant inThis QBI deduction is one of the most Another important Section 179 change2018 generates a ($2,000,000) loss from thatcomplex provisions of the TCJA, in part expanded Qualified Real Property. Itbusiness (principally by maximizing 100%due to the multiple limitations when certain now includes interior improvements of anbonus depreciation). In 2018 she also haslevels of income are exceeded. This article existing non-residential building, including$3,000,000 of investment income. Whensummarizes the general mechanics of the de-roofs, heating, ventilation, air-condition- this income and the horse business lossesduction and the respective limitations with-ing, fire protection and alarm systems, andare netted, the preliminary result is taxableout, however, providing an in-depth analysis security systems. But improvements such asincome of $1,000,000; however, she is limitedof the computations. The QBI deduction elevators, escalators, and the internal struc- to using only ($500,000) of the net businessmay be less valuable to those Thoroughbred tural framework, are still excluded.losses (here from her horse business). Thus,owners who utilize tax incentives such as the her 2018 taxable income will be $2,500,000,new 100% bonus depreciation to minimize II. ExcEss busInEss lOssEsand she will have a NOL carryover to 2019taxable income. Effective for calendar years 2018 throughof ($1,500,000) (the deferred portion of theThe overall limitation to the QBI 2025, TJCA adds new Section 461(l) limit- horse business losses).deduction is that it cannot exceed 20% of ing the annual net business losses generatedIII. sEcTIOn 183 hObby lOssEstaxable income in excess of net capital gains by non-corporate taxpayers. They can now(calculated prior to the QBI deduction). deduct losses of only ($250,000) annuallyanD sEcTIOn 469 passIvE acTIvITyIf 2018 taxable income exceeds $157,500, (or ($500,000) if married and filing jointly).lOssEs or $315,000 if married filing jointly (fully These loss limitations will be adjusted for in- There are no changes to the Section 183phased in at $207,500 or $415,000 if mar-flation after 2018. Business profits and losseshobby loss rules or the Section 469ried filing jointly and indexed for inflation must be netted by a non-corporate taxpayerpassive activity losses. But they remainafter 2018), then two additional limitations to determine if the applicable limitation hastwo of the most problematic statutes forwill apply. The first focuses on wages paid been exceeded. If it does apply, the excesshorse owners. In fact, Section 183 may beand/or the original cost of qualifying depre-loss is suspended as discussed below.an even greater problem because taxpayersciable assets. The second involves whether a This new law applies to all the taxpayersmay choose to utilize beneficial depreciationparticular business provided specified ser-pass-through businessesnot just to farm- under TCJA, thereby increasing tax losses.vices, defined as a business that (a) includes ing or horse activities. The limitation is alsoservices in these specified fields: law, health, calculated after applying the passive lossIv. ThE nEw 20% QualIfIED accounting, actuarial science, performing rules of existing Section 469. The new rulebusInEss IncOmE DEDucTIOnarts, consulting, athletics, and financial and will adversely affect those owners who pres- Effective for calendar years 2018 throughbrokerage services. ently utilize large losses (for a horse business2025, a new deduction may be availableMany Thoroughbred operations includ-or any other business) to offset investmentfor sole proprietorships, partnerships, or Sing breeding and sales might fall outside the income such as interest, dividends, or capitalcorporations, including LLCs taxed as flow- definition of specified services and qualify gains. This new law will require tax plan- through entities, but it is not available tofor the QBI deduction. However, given the ning on the timing of purchasing expensiveregular C corporations. This new deduc- broad and vague definitions of athletics Thoroughbreds, the costs of which may betion is intended to compensate businessesand consulting contained within the reg-immediately deducted as bonus deprecia- that do not benefit from the sharply de- ulations issued in January 2019, a particular tion. The bonus depreciation can cause orcreased corporate tax rates. The new SectionThoroughbred racehorse owner, sales agent, increase an overall loss, which may no lon- 199A provides a 20% deduction of qualifiedtrainer, jockey, bloodstock agent, or veteri-ger be fully usable in the year of purchase.business income (QBI) and includes or- narian may fall under the specified service While business losses greater than thedinary dividends received from a real estatelimitation and be ineligible for the 20% QBI above limits are currently disallowed, theinvestment trust and income from publiclydeduction, but only if taxable income then good news is that the unused losses aretraded partnerships.exceeds $137,500 or $315,000. A non-cor-converted into a net operating loss (NOL)QBI is the net income, if any, afterporate owner with taxable income less than that rolls forward into the following taxablecalculating all income, gains, deductions,these amounts who has a profitable business year(s). NOLs generated in years 2018and losses with respect to each of that(horse business or otherwise) will, we con-through 2025 can be used to offset up totaxpayers U.S. businesses. But, except asclude, be entitled to the QBI deduction. 80% of overall taxable income, includingprovided above, business income does notAs we stated in last years article, TCJA investment income, in subsequent tax yearsinclude investment income such as interest,should benefit the horse industry tremen-and the remaining NOL, if any, continuesdividends, and capital gains, nor does it in- dously. But for an effective plan, complex to roll forward indefinitely as a NOL carry- clude wages earned by a taxpayer-employeedecisions must be made in order to avoid over available for future years. or guaranteed payments by a partnership tosome new pitfalls. As regulations are issued Lets review a couple of examples tothe taxpayer-partner. A business owner maythat may provide further clarification or illustrate: be active or passive under the passive activitycause additional consternation, horse andExample 1A single taxpayerloss rules and still qualify. farm owners will benefit by actively tracking actively involved in a horse racing operationThe QBI deduction is calculated at thethese changes and updating business plans generates a ($500,000) loss in 2018. He alsoowner, partner, or shareholder level; indi- accordingly. Good luck to all who use these operates another business venture in whichviduals, trusts, and estates may also qualify.new opportunities to succeed.US-BRED96 12_Taxes.indd 96 3/20/19 4:41 PM'