December 2015 Issue - page 10

Page 10
December 2015
By John Alan Cohan,
Attorney at Law
In any IRS audit of horse
activities, one issue will be the
extent to which the taxpayer
has advertised horses for sale.
Advertising is considered to be
an effective type of promotion
to attract customers, and if you
do not advertise or otherwise
promote the sale of your horses,
the IRS will argue that you
are not engaged in a business
because you don’t care about
selling your product. This is
true whether your field involves
race horses, show horses, or
stud services.
There are so many modes
of advertising that it can be a
daunting consideration. Ad-
vertising is more ubiquitous
and intrusive than ever before,
especially on the internet. Many
believe that in order to capture
attention, ads need to provide
useful content that will generate
For advertising to be effec-
tive, the ads should be colorful,
interesting and need to be repeat-
ed over time. Magazines usually
will provide a discounted rate for
a series of ads.
Again, getting back to the
IRS audit issue, it is important to
keep copies not only of the print
ads, but also backup invoices
issued by the magazines, for
substantiation purposes.
The IRS might scrutinize
particular ads and argue that
they don’t adequately connect to
the horse activity itself, and that
the costs should be disallowed.
For example, sometimes ads
can be a simple announcement
or so-called “vanity” ad, and
this may be subject to scrutiny
by the IRS. In the IRS Audit
Technique Guide, revenue agents
are advised as follows regarding
section 183 audits:
The examiner needs to
review the actual copy of any
advertising in instances where
the taxpayer has deducted such
expenditures. Many taxpayers
will buy advertising space for
“vanity” ads. These spaces are
frequently purchased to place
photographs of their children
and the children’s horses. The
ads wish the children “Best of
luck” prior to upcoming show
competitions. The examiner
should use professional judg-
ment to determine whether the
advertisements truly represent
promotion of the taxpayer’s
horse activity.
Advertising is also important
as a way of protecting existing
customer good will. Expendi-
tures of this type are designed to
maintain good relations between
your horse activity and those who
are already familiar with your
business. Goodwill advertising
can extend to things such as
sponsorship of horse events, ad-
vertising in horse show programs,
The Importance
of Advertising
From the IRS’
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