This weekend at the 150th Belmont Stakes, a lot of bettors will be wagering on Justify to become the 13th horse to ever win the coveted Triple Crown. But the truly smart money in the racing game isn't focused on favorites or long shots at the track. It’s riding on a sure thing: Uncle Sam.
In recent years the “sport of kings” has evolved into a sport of partnerships that rewards business-savvy people intimately familiar with the ins and outs of the tax code. It favors diversification as a path to profits – or at least as a way to allay risk – so that most thoroughbreds do not have owners but shareholders, giving a new meaning to the term racing stock. This allows them to enjoy many of the tax benefits accorded to businesses.
In some ways, though not all, President Trump's new tax law further favors horse racing as a business. Buyers, for example, can now depreciate in the first year 100 percent of many newly purchased horses, including yearlings and breeding stock, double the previous rate of 50 percent.
The result of such provisions is a two-fer for rich and status-conscious owners. They can run with racing's social set, and just maybe bask in the winner's circle, while avoiding a traditional hazard of monied swells who aspire to reach the pinnacle of the game: taking a beating at the bank.
Today the rarefied cachet of elite horse racing belongs less to those who inherited great fortunes such as the late Paul Mellon and more to those who made their own money, including Under Armour founder Kevin Plank, 45, or celebrity chef Bobby Flay, 53.
Even more significant, the game's driving force is ownership arrangements like the one behind Justify. The 3-year-old chestnut colt is co-owned by four entities: WinStar Farm, Head of Plains Partners, Starlight Racing and the China Horse Club. And Justify's is hardly the only such setup: All told, nine of the 20 horses that ran in the Kentucky Derby last month were owned by partnerships.
Head of Plains Partners is led by the hedge fund executive Sol Kumin. Starlight Racing is a syndicate run by Jack Wolf, an ex-hedge fund manager for Columbus Partners, and his wife, Laurie. WinStar Farm is owned by Kenny Troutt, who founded the long distance telephone company Excel Communications.
The fourth owner, China Horse Club, is an exclusive group of about 200 members, according to the New York Times, which cited reports saying membership costs a minimum of $1 million. The club does not divulge the identities of members, who include wealthy citizens from China’s mainland and beyond. (Related: George Soros has quiet stakes in China Horse Club -- and Justify's breeding rights.)
As Justify’s ownership lineup suggests, horse-racing’s fast runners today are at least as much attuned to the complexities of tax write-offs as they are to the numerology of the Daily Racing Form.
They can receive tax code succor as long as their accountants can show that they are engaged in a business rather than a hobby. “You need to get with your advisers and make sure you understand those provisions and how you maintain yourself as an active trade or business," said Alex Waldrop, president and CEO of the National Thoroughbred Racing Association. "The new tax act completely eliminates itemized deductions for hobby expenses.”
Businesses, on the other hand, enjoy a range of benefits. Under the general property-acquisition provision that covers purchases of everything from photocopiers and airplanes to horses, the maximum amount that may be expensed or deducted has been increased from $500,000 to $1 million, and that will be indexed for inflation.
The tax law also creates on individual tax returns a 20 percent deduction on qualified income from “pass-through” entities such as partnerships, sole proprietorships and S corporations. The deduction comes off the first $315,000 of income for joint tax-return filers, or $157,500 for individual filers – making the sport especially conducive to partnerships.
Partnerships work like this: Management firms like West Point Thoroughbreds, Team Valor International, Centennial Farms, Donegal Racing and Eclipse Thoroughbred Partners set up limited liability companies to sell individual shares of crème de la crème thoroughbreds to investors, generally starting at stakes of 5 percent with an investment that ranges from $15,000 to $35,000, but can jump higher.
A Team Valor racehorse, for instance, costs between $120,000 and $2 million, according to its website. Usually there are between six and a dozen members per partnership, which are set up as limited liability companies. Team Valor investors plunk down as little as $6,000 per share, with a median of $15,000 and may go as high as $100,000 to $150,000.
The size of syndicates and partnerships varies, but most have eight to 15 members, and the length of the investment normally runs two to five years.
Waldrop is generally upbeat about the new tax law's impact on racing and the wider horse business, calculated by the American Horse Council Foundation to be a $50-billion-a-year business in the United States directly employing nearly 1 million people.
“While the overall impacts on each individual will vary, in general many of the provisions should have a positive impact on the economics of horse racing and breeding,” he said.
Although the tax benefits are considerable and can be locked in, realizing the prestige of elite winners-circle status is another matter. The odds of owning a horse that runs in the Triple Crown races are razor slim. There were approximately 21,421 thoroughbreds foaled in the United States in 2015, according to the Jockey Club Fact Book. Only 20 horses raced in the Kentucky Derby; eight ran in the Preakness Stakes; and 10 are slated to run in Saturday’s Belmont Stakes.
Nowadays, the chances that a yearling bought in a partnership will run in or win a stakes race like Belmont are almost negligible.
No, you can't win 'em all. But at the betting windows, there’s a consolation prize, again thanks to the feds. Punters have long been allowed to deduct their betting losses up to the amount of winnings. However, from January of this year through Dec. 31, 2025, they will also be allowed to include expenses such as travel and lodging as part of their losses.
The new tax law also helps “C corporations,” which include racetracks and large breeding operations governed by officers and a board of directors. They pay the corporate tax rate, which has been dropped from 35 percent to 21 percent. Corporations are also subject to state taxes.
That’s good news for the financial viability of many tracks around the country and may even encourage them to boost their philanthropic efforts. Churchill Downs Incorporated Foundation, for instance, has donated more than $2.2 million to nonprofit retirement organizations for thoroughbreds, provided health services to stable hands and other support employees, backed Louisville’s thriving arts community and contributed to education and prevention of breast cancer. It adds up to a lot of goodwill status for the industry.
The new tax law isn’t a complete winner for the industry. For example, entertainment expenses can no longer be deducted by corporations and other business entities. The old law allowed for a 50 percent deduction for business-related expenses for “entertainment, amusement or recreation.”
That makes luxury boxes at racetracks costlier for those who use their corporate trappings to entertain. Businesses still have a 50 percent deduction for clients’ meals — whether catered or at a restaurant.
“Derby Experiences,” as Churchill Downs calls them, now on sale for 2019, are lavish ticket packages that the well-to-do can buy to impress their family, friends or clients with elite seating and perfect views of the races. A table for the Millionaires Row dining room, for example, can be reserved for up to eight people and includes access to private wagering stations, non-alcoholic and alcoholic drinks, and a gourmet food buffet. The price? $36,000 per table of eight and up. It’s unlikely that the cost of the ticket is deductible, but it’s arguable that the dining experience is a reasonable write-off.
Under the new law, wealthy hippophiles operating under the auspices of a business structure could have expensed a classic mint julep at the Kentucky Derby – including the $1,000 Woodford Reserve Mint Julep Cup, a collectible pewter tankard, filled with two ounces of Woodford Reserve Kentucky Straight Bourbon, two leaves of “Kentucky Colonel” mint, one teaspoon of Kentucky sorghum syrup from Woodford County, Kentucky, and crushed ice made from limestone-filtered water sourced from the Woodford Reserve Distillery. The drink is garnished with three small red roses, a sprig of mint and a single rose petal from the actual Garland of Roses draped on the winning Derby horse. Woodford Reserve bourbon said it made 105 such special edition cups, with the net proceeds going to charity.
It would be remiss not to mention the transportation of choice for the moneyed racegoer – the hoofless private jet. At this year’s Derby, they were parked bumper to bumper at Louisville International Airport. That was somewhat surprising considering that their wings have been clipped from a tax write-off standpoint.
Corporations can no longer use luxury private jets for entertainment purposes. This means that the cost of flying a jet in connection with entertainment that’s directly related to a business is no longer deductible.
Nonetheless, as many as 800 private aircraft flew into and out of the airport for the 144th edition of the Run for the Roses.
Perhaps that argues for eliminating tax subsidies for status pursuits like horse racing that people will engage in anyway.
Indeed, many in racing insist that they aren't in it for the money or the tax breaks, though more than a few enjoy the psychic benefits of status, of being part of a rarefied world that evokes ancient images of aristocracy.
Owning racehorses is rarely represented as a tax write-off, or a way to make money, but the opportunity to do so is an added and perhaps unnecessary bonus.
Yet for true horsemen and -women, regardless of the size of their pocketbook, their hearts have drawn them to more than the charm of the sport and there’s no price tag for it.
Rather, it’s the pleasure and privilege of owning a champion, coupled with the wonder of being witness to his pure courage as he storms down the stretch stride-by-stride, head-and-head and eye-to-eye with his challenger, as Justify did in the Preakness.
That experience is transcendent.
Businessman Ahmed Zayat accomplished his dream with 2015 Triple Crown winner American Pharoah, the first such winner since Affirmed. “Life is about moments, moments that go beyond,” Zayat, now 56, said in an interview for The New York Times.
Winning the Triple Crown, and then lying down on his back in the stall with American Pharoah a few weeks later, cuddling with him while the horse licked his face, was one of those, he said.
