class racing as a business?
 

Ok, I know that we aren't going to make money ... not the point. But we need some business/tax advice. I'm a HS math teacher/coach and my wife is an elementary school principal. We've both been educators for 20 years to give you a rough idea of our income. We race a Pure Stock C5 in IHRA and recently purchased a motorhome. Is there a tax advantage to starting our own business and writing off racing expenses including the RV? Any advice on the topic would be helpful.

Thanks!

Wendy & Scott

Re: class racing as a business?
 

I would talk to your tax person
What you asked of people on here wont matter its you tax people who can advise you
Now that said I assume you will get many people here giving advise....

Re: class racing as a business?
 

Hey Scott....first of all, scratch your first sentence.....To start a business, your intent is to make money and you invest accordingly. You could have to show that your business could make money.....I don't know what pure stock pays, but in the case of NHRA, if you win a couple of National events, you could generate around $30-$40,000. IMO, that would be reasonable if your depreciation, expenses are something less than that.
In our case, we set up a LLC and raced 15-20 events a year, therefore, reasonable that we were in it as a business and not as a hobby.
Best advise is to talk with your tax person.

Re: class racing as a business?
 

huh?

Re: class racing as a business?
 

Pure Stock runs in Stock in IHRA and yes, with contigency money, the potential is there to make that much money. Good point; thank you! We don't have a tax person as we've always done them on our own since our taxes are very straightforward and simple to do. It sounds like I need to contact someone about starting our own business and then asking them if there will be any tax advantages to doing so. I thought someone may have been in a similar situation with their income and what they spent on racing.

Re: class racing as a business?
 

Well.......you won a couple.......am I way off? The last time I figured contingency for Super Stock, it would have been around $25,000 per event. That was several years ago and I know it is significantly less now, but figured around $17,500. Please correct me.

Re: class racing as a business?
 

Hey Scott, I asked my CPA about it last year and was advised against it as the IRS has been very critical of these business arraignments of late in her opinion. She told me I just as well start a non-profit with the words Tea Party in it when I asked her again this year. I would contact a tax professional in your area and get an opinion based on your income and plans though.

Re: class racing as a business?
 

Scott...........thinking about it a little bit more and I believe you would have a really difficult time convincing the IRS that you are running a business......Since both you and your wife have full time jobs, I would not even consider it.
That doesn't mean that you can't go out and have a good time......Have fun drag racing, with your family, It is expensive but probably the best value for "family time"

Re: class racing as a business?
 

look for Julie Jordan her Dad/Grandpa is an original SS/S hemi racer goes way back ot the early 60's-- anyway she is an Accountant might be able to advise you --Regards FED387

Re: class racing as a business?
 

Hi Scott
You will probably find that IRS will want you to show them the reasonable ability to make a profit - you can usually write off winnings against costs, but they will take a hard look at losses, I've heard that losses over $6,000 trigger automatic reviews, and also 3 or more losses in any 5 year period do the same. Find a good tax guy with automotive experience and ask a pile of questions first. In the meantime, have fun racing - that's the whole idea, isn't it?

Re: class racing as a business?
 

Thanks guys for the advice. Of course we race for fun and will continue to do so. We were just making conversation on our way back from Dallas tonight after we went up to pick out our new motorhome. The thought was hey, we spend all this money to race (and enjoy it and will continue to) I wonder if we are missing out on a tax opportunity. If not, so be it. We look forward to meeting new people and making new friends.

Re: class racing as a business?
 

John Brimer (A/SA) Julie Jordan both are CPA they are on this forum. Ask them. John is my CPA

Re: class racing as a business?
 

Years ago, we were audited and were successful in defending our racing expense deductions. However, we had a shop that was about 75% racing and was our sole means of support. The race car was used for R&D, advertising at the races and we also were soliciting sponsors for a revenue stream as well as trying to win money at races that paid well.

Start a race related business or one that depends on racing for customers.

Talk to a tax person familiar with racing. With the government that we have now, I would not invite the man into my life by trying to claim anything that's not a legit business that exists to make money.

Re: class racing as a business?
 

I can't resist........If you are a conservative, don't let the IRS know or you will be audited for sure.

Re: class racing as a business?
 

National events pay nowhere near what they used to .
In '96 I made $13,000 for a r/u at Virginia , in '08 I made $8,000 for a r/u at Maple Grove.
This years win at Englishtown will only be worth about $11,000.
I am finding that the checks are coming a little slower than in the past ,but I've already recieved more than half of the checks .
I might have made about $1200 more ,if I played the decal game to the fullest, but I didn't, so my loss.
I'm finding it very hard to keep more than 30 legitimate decals on the car.
As far as the original question, keep detailed records of all your expenses for every race. ....You can legitamately deduct reasonable travel ,food , entry, membership and other expenses , such as race fuel incured at the event you recieved winnings from.
You should also be able to deduct interest paid on your motorhome loan since it can be considered a second home.

Re: class racing as a business?
 

Hey Scott:

It would be a lot easier if you already had a profitable business.
I had a racing business in the 80's and won a good bit of money but more losses which reduced my taxes, a lot !
But the laws killed off a lot of public deductions such as interest on all loans.

Today my company DanSources sponsors my car and use the advertising deduction as key tool.
Since I also Referee Soccer those earnings are reported too.

The IRS does look for people abusing the system.
When caught you can see them whine and cry about it.

The IRS will allow you to deduct against what you won and avoid paying taxes on the earnings.
If you are out for blood they will visit you.

Got audited 3 times 1983, 1984, and 1990, twice in 2002 and 2004.
The last two were very thorough but each were done in a day.
2002 ended up getting a small refund.

If you do it with the intent to stay honest, keep good records there will be few problems even during an audit.

Be Square Play Fair.

Dan

Re: class racing as a business?
 

don't forget one important item, if you are doing this as a business the dot will require you to have a cdl if you are over 10,000 lbs. and we all are obviously, as far as the coach, i believe you can get a home type mortgage for a new one and enjoy the same interest deductions as your home......JULIE? JULIE??

Re: class racing as a business?
 

A few years ago my accountant set my racing up as a business. At that time you had to show profit 1 year out of 5. As said before, keep really good records and keep it legit.

A good accountant is your friend.

Re: class racing as a business?
 

Read something on a past post

In some states the State Troopers will pull you over and ask if you are operating as a business or just for sport, and if you won any money.

Hope this is not true.

D

Re: class racing as a business?
 

There's a guy who advertises news letters and such, Ernie Saxton. I'm not sure if it's worth it or not (never used his services). Maybe someone else can comment? He has a web site.

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.