From the moment Dean Dorton Allen Ford opened its doors in 1979, it had clients in the horse business. The decision to get into the business was inevitable -- the firm is based in Kentucky, after all, home of countless horse farms and one of horse racing's most famous events, the Kentucky Derby.
"If you're going to be in practice in the Lexington area, you're likely going to get exposed to the horse business," said Doug Dean, the initial leader of the firm's equine practice, which is its second largest industry group, trailing right behind health care.
In the early 1990s, the firm decided to develop industry niche groups. "We formed half a dozen industry groups and equine was one of them," explained Dean. "It just so happened that we had a nice concentration of clients in equine businesses and thought that it was an area that we could develop further."
"We were and remain committed to learning not just the accounting and tax rules relating to them, but also to gaining an in-depth understanding of their business operations," said Dean. To keep up the momentum, the firm started to publish an annual thoroughbred business review. "We've been doing this for about 15 years. Nobody commissioned us to do it," noted Dean.
The firm performs annual surveys of equine farms throughout Kentucky. The topics, which vary year to year, include pay rates for different types of employees, benefit practices, commission rates for selling horses, daily rates for boarding horses, and a list of other subjects relating to the equine industry. "It is information that we think horse farms can use in their operations and know how they stack up within the industry in certain operating practices," explained Dean.
CLIENTS
Although a good portion of the firm's clients are situated in Kentucky, it also works with multi-state and multinational participants in the horse business. Some of its clients are spread throughout California, Florida, Maryland and Virginia.
"There are different ways that farms can participate in the horse business," said Jen Shah, a director at the firm and leader of the equine practice. The list of activities includes buying, selling, racing, boarding and breeding. "We also work with racetracks and equine insurance agents," Shah noted. "We work with large veterinary practices, bloodstock agents [sales agents who are intermediaries in buying and selling transactions], and related advisors. We often work in conjunction with attorneys and bankers."
The firm also makes room on its roster for clients who don't own a horse farm but own horses for breeding or racing that are kept on a boarding farm. For example, some of the clients own horses that are on the sports side of the business. Saddlebred, "warmblood" horses from Europe that are Grand Prix jumpers and participate in Olympic events are also on that list. "We've had clients whose horses have won the Kentucky Derby and other big money races," Dean said proudly. "Thoroughbreds have been the main focus of our equine practice, but we are seeing more and more [clients] coming to us with sport horses."
On any given day, the firm may be asked to present basic tax consideration to those new to the business at seminars hosted by the Thoroughbred Owners and Breeders Association. Attorneys turn to the firm's equine team to conduct presentations to potential investors. "Sometimes farms ask us to talk about the tax impact of horse ownership when they are hosting potential investors," Shah noted. "Our practice has grown quite a bit solely by word of mouth by current clients referring others to our firm."
SERVICES
Clients are able to get the standard tax compliance and planning services done, but some may require audited financial statements, which are usually for bank loans or absentee owners. "While we do provide attest services to horse farms, we find that tax and business planning and compliance services comprise a large part of our equine practice," said Shah. "There have been very favorable tax laws specific to those in the farming business. We help people evaluate whether to reduce taxable income -- by maximizing depreciation available or deferring income through involuntary conversion rules or like-kind exchanges -- or accelerate taxable income, in order to be efficient for tax purposes."
The firm takes its services one step further by acting as the farm office for some of their clients who don't have a full office staff. "When we act as the farm office, it's often for those who don't have much, if any, office staff, and new farms that don't quite know yet what they want to have," said Dean, explaining that some new farms can't justify a full-time employee where they can give them day-to-day oversight.
"We've gone in and functioned as our client's farm office where we do payroll, set up accounting systems, managed some HR policies and procedures and clerical functions," added Shah.
"Our IT group also provides ongoing accounting systems support for our clients and assists in choosing software that works best for a particular farm," said Shah. "Because of our operational knowledge of horse farms, we'll assist some of our equine clients with financial and business plans. We help with projections and review from an operational perspective to verify that these plans look reasonable."
PERILOUS BUSINESS
The firm has some hurdles to cross when it comes to handling tax and tax planning for its equine clients. The main obstacle is deciphering if their clients are in the horse business for actual business or if it's just a pastime. "If our clients want to operate as a business, we try to put them in the best position possible to be a business, because it is a risky business," said Shah.
"Owning horses can be a little bit like wildcat drilling for oil some time ago, meaning that you are investing in an unproven field (or racehorse prospect) and hoping that you'll hit the big one," Dean explained. "When you're dealing with horses, in many cases you can have fabulous success, but in the majority of cases, unless you approach it very conservatively, you may lose money. There's some element of personal pleasure to it -- not that the owners are riding these horses, they don't - but going to the races and being involved can be an attractive feature for some people."
At times, the firm's equine clients find themselves having to prove to the Internal Revenue Service that they are, in fact, in the horse business for business, and not as a hobby. When this happens, Dean Dorton's equine specialists are brought in, along with other industry experts, to help clarify matters.
EQUINE TALK
For firms interested in starting an equine practice, Shah advises that it's best to learn the language: "Knowing the terminology so you can speak to the clients about what they are doing -- and most importantly understand how they are participating in the industry -- is something that I think is essential." To stay abreast of what's going on in the equine industry, Shah makes it a point that team members visit a client farm every year so they understand how farms operate, because each one is run differently. Outside industry experts also participate in team meetings to educate team members.
Dean believes that for an accountant to be successful in serving equine businesses, they "must gain an understanding of different ways clients may participate in the industry, such as whether to focus on racing, breeding, or both, and whether to own a farm or to board their horses at someone else's farm." Also necessary is gaining knowledge of special tax rules that apply to equine businesses.
The equine industry is not immune to macro-economic issues. For example, buying horses is a discretionary expenditure, Dean explained. "If economic times are tough, like they have been in recent years, there aren't a lot of people who want to invest in horses and horse farms." However, there may be an upside for the U.S. equine industry during an economic downturn, given that it tends to be an international business. "If the economy is bad here and doing okay in other places, that can cushion the downside somewhat," Dean said.
Still, Dean said that it would be hard to dabble in the industry and be effective.
But "if you are passionate and have an interest in [the horse business], an industry niche is certainly worth pursuing," said Shah.
