How do I Determine if my Horses are Fixed Assets or Inventory?

Let's start by taking a look at the difference between fixed assets and inventory.

A fixed asset is considered long-term tangible property that a company uses to run its business activities and generate a profit.

Inventory - while it is still considered an asset - is a current asset that can be defined as an array of goods, materials, or items that are held by a business to either create a finished product or do be sold in the market to earn a profit.

Knowing this, we can better understand which of these categories our business horses will fit into.

Let's take a look at some examples.

If we have mares and studs used for breeding purposes that we keep to generate a profit for our business by either stud fees or by producing our own foals for eventual sale, you can see how these horses would be considered a fixed asset of this business as we have the intention of keeping them for a while to use their abilities to generate income for us.

On the other hand, if we purchase yearlings with the intention of training and selling them for a profit, these animals are an inventory item that is essentially sitting on our shelf waiting to either be improved upon and sold at a profit or simply resold as-is at a profit.

In another scenario, if we have foals that are thrown from our own fixed asset breeding stock and we intend to sell these as yearlings for profit, these foals should be recorded as inventory items.

Now to address the more pressing question for many business owners doing their own books: WHY do I need to bother making the distinction in my bookkeeping between fixed asset vs inventory???

The biggest reason for needing to make this distinction is - as always - for tax reporting and IRS rules. However, let's drill down on this a bit further.

Fixed assets are recorded as an asset and their cost is depreciated over the useful life of the asset as set by the IRS. The IRS has charts to determine how many years a specific animal can be depreciated over. This means that only a portion of their cost is what you receive tax deductions on each year over a period of several years.

Inventory items are recorded as short-term assets, but rather than being depreciated, they are expensed and their full cost is deductible in the year purchased.

This can make a huge difference on what is reported on your taxes every year and how you benefit. We are required to make this very important distinction so Uncle Sam doesn't lose his mind and so that we can potentially benefit the most during tax time.

This is a topic that many tax professionals or CPAs don't even realize they're missing while doing your taxes. Not all tax professionals are understanding of the ins and outs of horse businesses and the various ways they can operate. It's really important to bring this up when having your taxes done so you don't miss anything!