The importance of advertising from the IRS’ perspective
October 1, 2015
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. Advertising 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 discussion.
For advertising to be effective, the ads should be colorful, interesting and need to be repeated 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 judgment to determine whether the advertisements truly represent promotion of the taxpayer's horse activity.
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Advertising is also important as a way of protecting existing customer good will. Expenditures 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, advertising in horse show programs, or having promotional give-away items, such as hats with your name or business logo.
People who are audited by the IRS must realize that revenue agents often are not familiar with the horse industry and the difficulties people face, and the Audit Technique Guide encourages agents to be skeptical towards the horse industry, particularly if the taxpayer has a history of losses. Advertising is one of numerous other elements that will help support the argument that your activity is engaged in for profit, not as a hobby.