Ownership :: Tax information
Tax Information
The tax considerations are directed primarily to investors who are non tax-exempt entities. Under the US Federal tax law, the losses incurred by an LLC member are treated as ordinary, rather than passive, losses only if the member "materially participates" in the business of the LLC. The material participation standard is applied to each member individually requiring regular, continuous and substantial involvement in the business activities of the LLC. The Operating Agreement of the LLC provides that all decisions affecting the company are to be made by the members by majority vote. In addition, company meetings will be held on race days and throughout the year via teleconference. All members are encouraged to participate, during these meetings minutes will be kept in order to document each member's participation.Since the existence of material participation is a factual question, the IRS may successfully assert that one or more of the members do not meet this standard. If this happened, the ordinary losses claimed by such member would be re-characterized as passive losses. Regardless of a member's active or passive income tax status during the life of the LLC, all current and accumulated losses can be used as deductions against active income once the assets are sold.
The Internal Revenue Code provides that a taxpayer cannot deduct expenses of an activity that are greater than income from that activity if the activity is "not engaged in for profit." Thus, losses from an activity not "engaged in for profit" is considered a hobby and cannot be deducted against income from other sources. If an activity is engaged in for profit, losses are fully deductible, to the extent of member's basis, against other income.
In determining whether an activity is engaged in for profit, all facts and circumstances are taken into account. Although a reasonable expectation of profit is not required, the facts and circumstances must indicate that the taxpayer entered into the activity or continued the activity with the objective of making a profit. Starview will supply, upon request, documentation of each member's participation in the LLC.
The acquisition cost of thoroughbred racehorses may be depreciated over a three (3) year period if placed in service after age two (2) and a seven (7) year period if placed in service prior to age two (2). All thoroughbred racehorses born in the Northern Hemisphere are assigned a birth date of January 1st.
The above is for informational purposes only. Each LLC member is strongly encouraged to consult with their personal tax advisor to determine whether such member has met the material participation standard and to determine the overall tax aspects of an investment in the LLC.
