Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. In today’s episode, we’re answering three listener questions that all came from the same business owner, a regular listener of the show who reached out with a few thoughtful year-end planning questions. As always, we value the privacy of our listeners, so we won’t be sharing any identifying details.
Each question touches on a different aspect of running and managing a business, from tax considerations to equipment purchases to employee benefits. We’ll take them one by one and walk through how to think about these situations from a planning perspective. So let’s go ahead and get started with question number one.
Question 1 – Tax Benefits for Working Animals
Listener: I’ve heard about tax benefits related to racehorses and farm horses. Do similar tax rules apply to other working animals, like reindeer used in a business?
Stephan Shipe: So when we look at the use of working animals, for instance draft horses or racehorses, those can get a little different, and we’ll talk about that too. Racehorses in particular are a common audit area for the IRS.
Where we want to start is whether or not this is a legitimate business or whether it falls into hobby territory. That’s generally the first question when you’re dealing with working animals or farm animals, because that’s where the gray area usually exists.
If you start naming your reindeer, for example, it becomes more of a gray area as to whether these are pets or a hobby, versus animals that are being used for a legitimate business purpose.
When we think about draft horses, and depending on how you’re using the reindeer, they would likely fall into similar categories. They’re not explicitly stated by the IRS, but draft horses generally fall under five-year depreciation. You still have to look at whether there’s a profit motive and whether the use is ordinary and necessary for the business.
The big factor here is recordkeeping. You need documentation showing that these animals are being used for actual work and not held for resale. If you were in the business of selling reindeer, that would be a different situation altogether, because they could be considered inventory and the tax treatment would change.
So what we really need to think about is how they’re being used and how often they’re being used. Is this an ordinary and necessary business use, or is there a more efficient alternative that would typically be used in this type of business?
If, for example, you’re only using the reindeer one day a year, it becomes much harder to argue that they’re an ordinary and necessary business expense.
The key takeaway here, and this applies to many different businesses, is that just because you enjoy what you do, or because there’s a novelty factor involved, that doesn’t change the tax treatment. As long as there’s a clear profit motive and the animals are being used in an ordinary and necessary way for the business, I don’t see an inherent issue.
That said, this is absolutely something to walk through with your tax team. They can help determine where these reindeer fall relative to draft horses versus racehorses, especially since racehorses are often scrutinized as potentially being hobby-related rather than true business assets.
So with that, let’s move on to the next question.
Question 2 – IRA Contribution Timing vs. Roth Conversion Timing
Listener: I recently invested in a very specialized piece of equipment for my business, a sleigh used exclusively for deliveries. How should I think about depreciation for something like that?
Stephan Shipe: When we look at sleighs, unfortunately they’re not considered vehicles in the traditional sense. Because of that, we’re going to treat this as business equipment rather than a vehicle.
The depreciation you’re eligible for will depend on how much of the use is business-related and whether there’s any personal use involved. From a tax perspective, there may be opportunities through Section 179 or bonus depreciation that allow you to depreciate the entire cost of the sleigh in the first year, assuming it meets the eligibility requirements.
Tax laws around depreciation change regularly, so depending on the year, it may make sense to complete the purchase before December 31 if timing allows.
That said, there’s another important consideration here that applies to any business asset purchase. You always want to ask whether the asset is truly needed for the business, or whether the business is being used to justify a purchase you already want to make.
In other words, is the old sleigh still doing the job, or is there a legitimate operational need for a new one? While depreciation can provide a tax benefit, tax benefits alone shouldn’t drive the decision.
So as you evaluate which sleigh to buy, it’s usually best to focus on what’s practical for the business rather than going for the Ferrari of sleighs just because it might be more fun or a little faster.
Question 3 – Evaluation Employee Benefits
Listener: I have hundreds of long-tenured employees, some of whom may work for centuries. Many have unusually high sugar consumption due to the nature of the job. How should an employer think about retirement plans, health benefits, and long-term sustainability for a workforce like this?
Stephan Shipe: This one’s a mess, and it’s definitely something that requires careful planning.
Starting with retirement plans, we really need to balance generosity with long-term sustainability. With extremely long employee tenure and significant longevity risk, traditional pension plans become very problematic. Pension benefits are typically calculated as a percentage of compensation multiplied by years of service, and when you’re talking about hundreds of years, that math stops working.
In situations like this, most employers shift the risk off the company’s balance sheet by using defined contribution plans. That structure puts more control and responsibility in the hands of the individual employee and is generally much more sustainable for the business.
On the health benefits side, costs tend to rise with longer tenure and lifestyle factors. This is where preventive care and cost-management programs become especially important. Encouraging healthier habits, maybe a little less cocoa and a little more cardio, could go a long way in managing long-term healthcare costs.
The biggest thing to keep in mind is the need for regular review. With such long-tenured employees and significant longevity risk, the entire benefits package should be evaluated periodically. That includes not just what’s being offered, but what it costs and how it impacts the long-term health of the organization.
The goal is to support employee retention and well-being while also ensuring the benefits remain sustainable for the business over the long term.
Outro
Stephan Shipe: That wraps up our questions for today. And if these questions felt just a little bit seasonal, we’ll say the episode came at a perfect time of year.
Thanks for listening. We hope you and your family have a great Christmas, and we’ll see you next week.
Disclaimer: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.