Anyone here using a racing business as a tax deduction? Read this article

http://moneycentral.msn.com/co...2.asp

In the article, they describe a situation that is similar to what most of us are in.
Just wondering if anyone here is already doing this, if it's worth the time and effort?

From the article......

For example, one of my clients raced stock cars as a hobby. When he came to me, we converted his “hobby” into a business. He had cards and stationery printed. He ran ads looking for a sponsor. He gave what once was his hobby the image and appearance of a business and he demonstrated a real profit motive. He wanted to make money.

This client had a salary from his primary job of $40,000 a year. When his new business expenses were deducted, not only did he pay zero taxes but he qualified for the earned income credit, so the IRS actually paid him.

Two years later, he was audited for that year’s return. The law requires that you prove your business expenses, with receipts, checks or a journal that’s regularly updated. Unfortunately, he had none of these for the first year. His expenses, however, were legitimate, and he had the receipts for the subsequent two years. On the basis of the receipts for the two subsequent years not in question, this taxpayer with $40,000 in other income and no receipts, after an IRS audit, paid less than $100 in taxes, including penalties and interest. Had he kept the records for the first year, he would have paid nothing.

 

I do.

 

But aren't you actually selling product?

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by drkarrow &raquo;</TD></TR><TR><TD CLASS="quote">He had cards and stationery printed. He ran ads looking for a sponsor. He gave what once was his hobby the image and appearance of a business and he demonstrated a real profit motive.</TD></TR></TABLE>

From the article:

"The test for deductibility is whether you have an actual and honest profit objective"

directly conflicts with

"He gave what once was his hobby the image and appearance of a business.."

If you have actual product to sell, start a business. I have owned a business in the past, and have pondered starting a racing business, but my tax expert says beware. The IRS frowns upon "hobby" businesses.

 

How about the tax benefits of sponsoring a race car? If you own your own business and also race, it would make sense to be one of your sponsors. I would guess that it would fall under "advertising expenses". Anybody care to share the ins-and-outs of that scenario?

 

You have to prove that you have the potential to profit. This is quite doable in circle track racing, where every Friday night you have the chance at a pay-out. Not so easy in club racing, where there is no pay-out beyond a $4 trophy.

 

I could maybe deduct autocrossing as a necessary theraputic treatment.

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by rickpeak &raquo;</TD></TR><TR><TD CLASS="quote">But aren't you actually selling product?

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Yeah, but my business did start out as a hobby! (but I didnt start it for the purpose of tax write-off)

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by Agent Smith &raquo;</TD></TR><TR><TD CLASS="quote">How about the tax benefits of sponsoring a race car?
</TD></TR></TABLE>

I know poeple who do this.


Thinking out loud- If I didn't own a business and wanted to write-off my racing as a justifiable tax deduction, I would think I could start a sole proprietorship called "Acme Racing Teams", with the profit potential of becoming a large team (someday) when the time comes. Profit can potentially come from cash sponsorship, or payouts. Racing teams are a legitiimate business, right?

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by Crack Monkey &raquo;</TD></TR><TR><TD CLASS="quote">You have to prove that you have the potential to profit. This is quite doable in circle track racing, where every Friday night you have the chance at a pay-out. Not so easy in club racing, where there is no pay-out beyond a $4 trophy.</TD></TR></TABLE>

But if you prove your potential for sponsorship then the "potential sponsorship" money could be considered the "income" for your business.

I'm considering doing this very same thing seeing as how my roomate has done it and it has paid off for him VERY well.

You "business" doesn't just have to be the race car... it could be the Expertise of the driver/business owner that generates revenue... You don't have to sell products. Business also sell services. You could be a "racing advisor", a "financial racing advisor"... As long as you have reciepts, be they big or small, they just have to prove your "potential profit motive".

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by rickpeak &raquo;</TD></TR><TR><TD CLASS="quote">
If you have actual product to sell, start a business. I have owned a business in the past, and have pondered starting a racing business, but my tax expert says beware. The IRS frowns upon "hobby" businesses.
</TD></TR></TABLE>

Mine has said the same. Besides, if you follow the differences between it being a hobby and a business, are you not racking up some significant tax and insurance expenses? I know about the tow vehicle expenses - yes you get a tax break but on the back end, higher insurance and commercial tags year over year may errode that savings (plus the taxes you must on selling it when you do). Hold on to it long enough and its a worthwhile deal, sell it after a year or two and you may be upside down on it. I am pretty certain that insuring a trailer is different if being towed by your personal vehicle vs. a vehicle DBA [your company] also (something about liabilty IIRC). Obviously you could write these additional expenses off but you have to have something to write them off against no?

I would think if you sold (related) product(s)/service(s) to racing (cars, tow vehicles, trailers, car parts, racing equipment/gear, professional instruction, etc ...) then yes, its a great idea because it seems rather easy to justify it as part of promoting your product, if not, I personally would be scared to do so.

Are there any on-going tax ramifications of running a business in the red for 3 years and disolving it? Can it affect things like your credit score?

 

I think there is a misconception on how you can "race for free" by starting a business enterprise.

The problems associated with operating a race car for business purposes is that there are limitations to how much can be deducted as a percentage of total income. And, here's the biggie - expenses can only be deducted from the revenues actually generated from the business - not from personal income earned elsewhere. (This is where I have heard significantly different from the above article since the IRS doesn't allow much Hobby-business deductions anymore)

To really make this work one must have a business that generates more income then it claims as expenses.

I've looked into it and can't find a way to make it work on my shoestring ideas...

Anyone have the secrets to successfully doing this?

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by bulldog_RS20 &raquo;</TD></TR><TR><TD CLASS="quote">To really make this work one must have a business that generates more income then it claims as expenses.

I've looked into it and can't find a way to make it work on my shoestring ideas...

Anyone have the secrets to successfully doing this?</TD></TR></TABLE>

Yes. Give up on club racing and get used to only turning left. Carroll Smith said it years ago, and it still holds true.

If you're a real budgeting wizard, I suppose you could build 3 cars, rent 2 and break even at the end of the day. But then you've gone beyond "hobbyist" and entered the realm of "entrepreneur".

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by bulldog_RS20 &raquo;</TD></TR><TR><TD CLASS="quote">And, here's the biggie - expenses can only be deducted from the revenues actually generated from the business - not from personal income earned elsewhere. (This is where I have heard significantly different from the above article since the IRS doesn't allow much Hobby-business deductions anymore)</TD></TR></TABLE>

Beat me to it.

A related question: Are good, services, or money provided by a sponsor considered income to an individual in a tax year? If they could take the deduction it seems you would have to claim that as income. I wonder if you could then deduct expenses to the extent of that income (like gambling losses)?

 

If you continue to run your "business" and make tax deductions, when that "business" is losing money, then it will be labeled a Hobby-business by the IRS and not much if any deductions can be made, and they will keep a closer eye on you.

I don't see how you can have a business that makes profit if you chalk up all your race expenses as losses. If you don't make a profit and you continue with it, then it's a hobby not a business.

You might get away with it for 1 or 2 years, but expect some trouble from the IRS after that.

 

I asked my accountant about this and his answer was very simple-forget it. There are those out there like Jeg's Coughlin that have taken a hobby and created a successful business with racing as a means to advertise it. That does work for the IRS. You must be in the business of racing for profit such as NASCAR, IRL or CART before the IRS will be willing to consider you more than a hobbyist. If you happen to own a speed shop that actually sells automotive parts on a regular=profitable basis and use a car to advertise the business then you may well qualify for the deductions as business expenses. One of the few special benefits for race teams is for taxes relating to fuels.
The question of sponsorship is one in which the IRS takes a view as well. You cannot sponsor yourself as such. You can ask your friends, neighbors, and others to sponsor you and they can use the expense as a deduction for their businesses-advertising expense. You can take certain deductions for your business as it relates to advertising and depreciation-if the race car is owned by the business and is used in the course of the business (JEG'S for example) activity of racing to promote products and services (ie-a rolling billboard ala NASCAR).

Hope this little bit helps

 

You can try....as long as you don't get caught.

I know it is a little different up here in Canada, but so far, I know of two people who have been audited while they were claiming their racing as a business. They got taken to the cleaners. Let's just say, they won't be doing that again any time soon.

 

having thought of this myself before, i considered a business plan of using my own racecar, or building another, for a rental program and on track race support, as well as sell services like paddock alignments and corner weighing. the plan is not to pay for my personal racing expenses, which cannot be explained as other than a hobby, but to create a legitimate business while using the common resources like buying scales and other various track equipment for my hobby and business that can be purschased as tax deductible, and any profit from the business would only supplement the cost of my hobby, which is normal (we all must work to play right?). and most of it doesnt require much more attention outside of the time im actually at the track.

until any of us goes pro, theres no way to actually make our hobby tax deductible, short of lying. but i think a major selling point of NASA's USTCC series is that it IS considered a pro racing event with actual payoffs. how successful you can be at earning a profit is up to your driving skills, but at least then its a legitimate source of income. perhaps those few who actually do race professionally here can elaborate.

 

Good discussion on tax issues, and I hope it continues and expands...

Generating and submitting a fradulent tax return is just plain stupid, and I am sure no one does that... However that said, there are many, many gray areas in the tax code and it's implemenation that have to be explored. If you as a business owner, always default to the most conservative, IRS favoring stance, you are loosing money and doing yourself and your business a disservice... There is room for reasonable interpretations within the law and the code. Just keep your documents and your logic in line. Audits are just a fact of life, as are penalties and back taxes when the IRS disagrees with you and can PROVE their point. My business partner is the one who deals with the IRS on our team. He has to handle an audit on average every 2 out of 3 or 4 years.... He typically "wins" with the IRS. The business is realestate and realestate development... and there are usually many "creative" financing methods, transfers, trades, barters, swaps, to keep the float going. He has it all documented, and can prove it all. There are typically no findings against us after the audit...

With respect to the other discussions, legitimate business deductions are a lot easier to "have" if you have a real profit generating enterprise on your hands. It "looks" more like a hobby if your W2 comes from someone else, and your business enterprise is all losses. You won't be able to have losses for very long, and if you get audited and turn to jello in the interview, you are skewered.

Now that said, everyone here should be striving for MSI's or multiple sources of income. If you have a day job, (like I do) great, now start thinking and working on another idea/endeavor that can grow into a real profit making enterprise. The more MSI you have the better! When you get one or more going, racing can make a nice advertising deduction. Back 20 years ago two of my friends Keith Black blown hemi creations were written off against their businesses. One against a chicken farm, one against an insurance agency.

 

I believe that there is still a test that requires that you show a profit in X out of 5 years. Failure to do so is prima facie evidence that your racing is a hobby.

What you can deduct is dependent on how the company is structured. If it is a sole proprietorship, you take the deductions (and show those revenues) on your standard itemized deduction schedule. If you are incorporated, it gets a little more complex and I don't know the current rules. I used to have an S corporation for our racing program, when we were actively generating sponsorship dollars and renting cars out. An added benefit was that personal assets were shielded from any threat of litigation.

At the end of the day, most of us would be money ahead just working more hours at our regular job (or taking another part-time gig) than we would be by playing this game.

K

 

sounds like the first h-t DIY start up your own business to race for free.

I'm going to really look into this for my advanced marketing class I'm taking. My job this semester was actually to start a business, but I backed out of it. I might re-propse that idea to her.

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by MrIllegalX &raquo;</TD></TR><TR><TD CLASS="quote">sounds like the first h-t DIY start up your own business to race for free.

I'm going to really look into this for my advanced marketing class I'm taking. My job this semester was actually to start a business, but I backed out of it. I might re-propse that idea to her. </TD></TR></TABLE>

Please offer up any valuable information to this thread that you may find in your new "business" venture. I'm sure we could all use some solid advice.

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote, originally posted by Knestis &raquo;</TD></TR><TR><TD CLASS="quote">I believe that there is still a test that requires that you show a profit in X out of 5 years. Failure to do so is prima facie evidence that your racing is a hobby.

At the end of the day, most of us would be money ahead just working more hours at our regular job (or taking another part-time gig) than we would be by playing this game.

K</TD></TR></TABLE>

i think you can only write off losses for 3 years and what most people do is get a new business tax id and basically start another business and start the process all over again.

I don't see why everyone says if you don't make a profit then it's a hobby. There's plenty of people out there that go ahead and start a full business be it a restaurant, race shop, bakery and have a solid business plan and just don't make money. It happens. Quite a bit of new businesses fail. I think it can be done. Would an CPA ever recommend doing it, probably not because they don't wanna be a part of it. I know of a few people that do it and I think you just need to be careful. If you have MSI like someone mentioned then I think you're in a good spot to be able to prove that it isn't a hobby and is a real business.

s

 

starting a business and losing money is ok, but if you keep the same business year after year, and your still losing money then it's a hobby. That's how the IRS looks at it.

 

<TABLE WIDTH="90%" CELLSPACING=0 CELLPADDING=0 ALIGN=CENTER><TR><TD>Quote &raquo;</TD></TR><TR><TD CLASS="quote">Not so easy in club racing, where there is no pay-out beyond a $4 trophy.</TD></TR></TABLE>

Crap... you get nice trophys! We get $2 ones in Ontario Region!

 

Interesting thread. I've actually thought about this. If you have a job that requires you to do highspeed and limit driving, I've wondered if you can chalk this stuff up to job training.