The One Big Beautiful Act reinstated the notable bonus depreciation benefit from the Tax Cuts and Jobs Act of 2017, which was set to sunset in 2026. While a win for many business owners, one interesting industry that has really profited from the tax incentive is the racehorse market.
The world’s largest thoroughbred market, the Keeneland September Yearling Sale, which concluded last week, reported a record-breaking $531.5 million in sales. Priding itself as the preeminent destination for top racing talent, Keeneland saw 56 yearlings sell for at least $1 million (the top lot sold for $3.3 million) and 120 buyers spent at least $1 million, both record-breaking numbers.
Racehorse breeders told CNBC that they attribute the strong results to the tax breaks from the OBBBA. According to CNBC, despite other factors at play, including interest from younger buyers and a weaker U.S. dollar attracting international investors, industry experts attribute the significant boost to the racehorse market and the increased investment in the industry to the Trump administration’s bonus depreciation.
Tax Benefit
Instead of taking small deductions over many years, bonus depreciation allows businesses to take one significant deduction upfront, reducing the business’s taxable income and increasing cash flow. Absent any act by Congress, the bonus depreciation incentive is permanent for qualified property acquired and placed in service on or after Jan. 20, 2025.
Other OBBBA advantages include allowing horse breeders and owners to deduct losses against any type of income and allowing the carry-forward of excess business losses as net operating losses under the Restored Net Operating Loss Carryover under Internal Revenue Code Section 461(l).
While few of the horses bred and purchased for racing will ultimately go on to be the big winners at one of the major races, the favorable tax incentives for the industry in light of the OBBBA can be a potential opportunity for ultra-high-net-worth clients looking for a new passion project or venture.
Not Running Afoul of the IRS
To avoid scrutiny by the Internal Revenue Service, clients involved in the equine business must ensure they don’t violate the rules. Both yearlings themselves and equine-related expenses, such as two-year-olds in training, racehorses, broodmares, stallions, equipment, fencing, special-use barns and land improvements, qualify for the bonus depreciation. These assets must be used primarily within the United States to stimulate local economic growth.
Additionally, the taxpayer must be able to show that the horse-related business is engaged in for-profit activities and isn’t simply a hobby. If the taxpayer shows a profit in at least two out of seven consecutive years, the IRS will generally presume the taxpayer’s operation is a business. If they don’t meet this test, the burden of proof shifts to them to show a profit motive based on nine factors, including showing a business plan, separate business accounts and working with the proper experts to make the business profitable
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