Re: class racing as a business?
 

This is "copied & pasted" from the IRS website:

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Is your hobby really an activity engaged in for profit?

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

•Does the time and effort put into the activity indicate an intention to make a profit?
•Do you depend on income from the activity?
•If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
•Have you changed methods of operation to improve profitability?
•Do you have the knowledge needed to carry on the activity as a successful business?
•Have you made a profit in similar activities in the past?
•Does the activity make a profit in some years?
•Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

MY THOUGHTS:

You have a better chance of getting through an audit if you are employed or self-employed in an industry that is relatable to drag racing (i.e. engine builder, chassis builder, speed shop, etc.) That doesn't mean that your activity won't qualify. However, I believe you should maintain adequate time records to show the amount of time you are spending on the activity so you can show there is adequate time and effort with the intention to make a profit.

You should conduct it like a business. That means maintaining a separate bank account, adequate accounting records, adhering to tax reporting requirements (i.e. issuing 1099's to your service providers, W-2's to crew members, mileage records,etc.)

Maintain documentation to support the amount of earnings possible, how the points and year-end payouts work, why you purchase certain products in order to get contingency earnings and the sales activity of related cars (appreciation of assets).

I've found the big key with these sorts of audits is the auditor themselves. You could have two different auditors look at the same taxpayer and get different results. So it's important to educate the auditor on the structure of drag racing, the time it takes to do this well, the payout structures, etc. because their first inclination is going to be that it's a hobby.

One area that tends to get taxpayers quite frequently is deducting expenses for crew members or family. Unless they are employed by you their expenses are not deductible.

If you decide not to classify your racing operation as a business, your RV qualifies as a second home so the interest would be deductible if you are not already claiming that deduction.

Claiming business losses for a racing activity is a lot like speeding or running a red light. Many get away with it everyday. The first time you run a red light, though, you get a ticket! Audits are the same. So what happened to one person doesn't mean that the same would be for you. Keep the records, follow their guidelines and you'll have a better chance of getting things through.

Re: class racing as a business?
 

Julie,

Thank you for taking the time to post the information from the IRS as well as add your comments. That was very informative. Being that my wife and I are both full-time educators it doesn't appear as if it would be worth the time, effort, and possible risks to pursue this. Of course we would keep good records and keep everything on the up and up as we do our personal finances and taxes but the potential of us ever having a year where we actually make money would be very slim (especially if you've seen the way I drive ... ;)). We only do this for the fun, travel, and to meet new friends and don't want to risk an unneccesary audit or aggrevation if there isn't anything to be gained from it.

Also, thanks to those of you that have posted about having a CDL. I coach varsity softball and coaches in Texas (non-union state for teachers) drive their own buses and have to have a CDL. One nice thing about that is we get a discount on our RV insurance for having one.

Thanks again Julie for the help as well as everyone else for some great and informative comments!

Scott

Re: class racing as a business?
 

I wanted to add to what Julie posted and point out a few things about the importance of keeping records even if a racer continues to race as a hobby.

I have been in the private sector and out of the tax preparation part of things for about 7 years so Julie or John please correct me if things have changed.

First, keep records of all expenses related to your racing activities. Entry fees, fuel costs - both for travel and race car, hotels, parts, etc. the easiest way to do this is to do as Julie suggested and maintain a separate checking account for all racing related expenses. Deposit any winnings into that account too. If funds are needed to cover expenses deposit personal funds into this account rather than pay them from your personal account.

Secondly, the last portion of the IRS explanation is important too. You can deduct hobby expenses up to the amount of hobby income reported on your individual tax return. So, if you have a period where you do win some money and report that on your return, then you have a potential deduction of expenses equal to that amount. Hence the recommendation above to keep good records. I say potential deduction as there are several other factors of your tax return that will determine the amount of the actual deduction, if any, since the deduction is part of itemized deductions.

Lastly, as Julie stated, the auditor assigned to your case - and as she stated, many racers report their racing as a business and never have issues - or audits - and others have been audited - is just as important as the detail records you keep. Orderly records help show the auditor you are informed and have the intent of " following the rules". Again, you never know until you are dealing with an agent what will be important to substantiate your position.

Lastly - part 2.....consulting with a CPA - whether or not you use them at tax time - is probably a good idea to discuss how this topic fits into your overall tax situation.

Re: class racing as a business?
 

I have several friends that own logging companys. A lot of enclosed trailers seem to be offices, powerglides in log splitters, panella engines in generators etc. Where theres a will theres a way.

Re: class racing as a business?
 

You forgot stocker motors in crew vehicles. Got to get them boys to the woods as quick as we can.:D

Re: class racing as a business?
 

There is also a liability advantage when running your racing as a business.