A budget reconciliation bill—also known as President Donald Trump's "Big Beautiful Bill"—being considered by United States Senate and House Republicans could have negative consequences for the Thoroughbred industry.
Set to be voted on as early as next week, the bill, as it is currently composed, would strip away industry-friendly tax provisions. These provisions are not equine-exclusive.
Trump, during his first term as president, passed the Tax Cuts and Jobs Act of 2017. As part of the TCJA, it granted 100% bonus depreciation on qualifying purchases from roughly late September 2017 through Dec. 31, 2022. Every year since then, the bonus depreciation has been reduced by 20%. Qualifying purchases normally would see the depreciation deduction on the purchase price spread out over several years. Instead, 100% bonus depreciation allows for a full tax deduction in the year that the purchase is put into service.
The proposed bills would reinstate the 100% bonus depreciation, but also would separately cap the amount of business losses (both equine and nonequine) that can be deducted annually by individuals (including individuals who conduct their horse businesses through flow-through entities, such as single-member limited liability companies, partnerships, and S corporations, for example).
The proposed bills limit the amount of total business losses that individuals, trusts, and estates can deduct year over year to roughly $300,000 individually or $600,000 for couples. Any excess business losses carry forward indefinitely until there is enough business income in future years to offset them. Under current law, these excess business losses convert to net operating loss carryovers and can be used to offset taxable income (business and nonbusiness) in future years.
This proposed update was not present in 2017, but was first proposed during the Joe Biden administration and then ultimately removed from the Inflation Reduction Act of 2022. Republicans then added the language back when crafting the so-called Big Beautiful Bill.
Possible Effects on Horse Industry
For some in the industry, the annual impact could be in the millions of dollars.
Jen Shah is the tax director at Lexington-based consultancy Dean Dorton where she leads the firm's equine practice. She is advising industry stakeholders on the ramifications of the bill. She said what is now on the table separates the excess business losses, and for the taxpayer to be able to use these losses beyond the $300,000/$600,000 limit, they must have net business income.
"I think there are some people that will be able to use the 100% bonus depreciation, and it won't be limited, but for a majority of investors in the industry, this provision would actually significantly limit what they can currently claim," she said.
Many in the Thoroughbred industry found their initial success elsewhere and have sold their businesses and possibly have retired. They fund their racing-related operations via investment interest, dividends, and capital gains. Because of this, the proposed bills would not allow them to take advantage of the deductions. This limitation negates the benefit of the bonus depreciation.
The level of urgency is significant on all sides. Republicans up for reelection during the midterm elections would certainly face pressure should the bill not pass.
"I'm pretty sure this bill is going to pass in some form or another, and they're going to try to pass it next week, and that's why we're scrambling a little bit, because, I think there's going to be a conference committee with the House and Senate tax writers to hammer out a final bill," said Shawn Smeallie, founder of ACG Advocacy, a consulting firm that is working on behalf of the Thoroughbred industry. "But there's a slight chance that if the Senate passes this bill with changes that the House can accept, the House may just take up this bill. And it just depends if they put enough changes between now and when they bring the bill to the floor in the Senate that the House can live with that it may pass and go to the House to be passed, and then off to the president."
National Thoroughbred Racing Association president and CEO Tom Rooney, who served in Congress from 2009-19, believes if he can tap into some of his preexisting relationships, there is a better than 50/50 chance at removing the elements harmful to the industry.
"If you're asking me from 30,000 feet, whether anything is going to get to the President, that the House and the Senate are going to agree on ... I like to think that my chances are good, at least getting through to the members of Congress that matter," he said. "A lot of my friends that I served with are now chairmen of these committees that are relevant, so they'll at least know whether or not they're able to get them out of there or not."
Rooney said elements of the bill detrimental to horse racing are worth approximately $25 billion in revenue to the government. If those elements are removed, that money needs to be found elsewhere.
"There is a cost. ... It's revenue in a sense, but it's not necessarily spending," Rooney said. "It's just revenue they're not getting from the taxpayer, which certain Republicans would say, 'Well, that's the taxpayers' money anyway. So it's not government revenue.' It's sort of how you look at it."
Regardless of whether someone runs a large or small operation, the implications can be significant.
"It hurts everybody, because the bigger horse owners, I think, would just buy fewer horses because they can't write off the losses as much," Smeallie said. "So they may just buy fewer horses. There's a zero-sum calculation when I buy this horse and it doesn't pan out, at least I will be able to write most of it off. They can't make that assumed calculation anymore, so they may just say, 'Well, instead of five horses, I'm going to buy three.'
"The mom-and-pops that maybe buy one or two or three horses at the lower end, it may be tougher for them, because they may not have that surplus where they don't care, they can't write off the loss. So there's a chance that some of those may get out of the business altogether."
In the House version of the bill, these changes would take effect Jan. 1, 2027. But the Senate draft version would have the changes becoming effective a year earlier, leaving little time for the industry to prepare for such changes.
"It's very highly complex," Shah said of the bill provision. "There's not really good, sound economic policy behind this. I can't explain why someone would propose this other than it's a revenue raiser, and so it helps the numbers."
Organizations such as Godolphin are not impacted by this because they are incorporated and these measures apply only to individuals/couples.
But what if individuals decide they want to set up a C corp, which would tax the company separately from its owner? The losses in a C corp can't be used in a corporate entity and don't apply against your other income. In other words, the persons involved would be in the same situation or worse.
Efforts already are under way to try to change the language in the bill. Kentucky Senator Mitch McConnell and Congressman Andy Barr, as well as Senate Majority Leader John Thune of South Dakota, are working toward that cause.
"We haven't used all of our ammunition, so to speak, yet, but now we have to be very specific about what we're asking," Rooney said.
One of the approaches being considered is to expand the definition of farmland. Smeallie said that agricultural businesses are exempt from the proposed changes, and if the definition of agricultural business can include those associated with horse racing, it might provide relief.
"Putting ourselves into that may not be the way we decide to go as a particular exemption, but it is definitely an aspect we're looking into," he said.
Smeallie recommends reaching out to elected officials and let them know how these bills will impact lives.
"People have to be made aware of it, and they really have to reach out and tell people how important this is," Smeallie said. "There's a lot of noise out there because there's a lot of people impacted by this bill, so we've got to get through the clutter."
