How to deduct winnings/expenses on taxes?

Julie Jordan · 01-04-2010, 02:55 PM

Quote:

Originally Posted by treessavoy

Julie,

What is the difference between Hobby and business? How does the irs define each?

JimR

Well, similar to how the NHRA rulebook can be grey, the determination of whether a taxpayer’s racing activity is a business or a hobby is very subjective. So recordkeeping becomes very important; not just to justify income and expenses, but to document the extent you are involved in the activity. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of making a profit.

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year.

If you don’t make a profit then you should be prepared to prove why this activity is “for profit”. IRS has some factors that they look at to help them make this determination. These are:

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Does the taxpayer depend on income from the activity?
3. If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
4. Has the taxpayer changed methods of operation to improve profitability?
5. Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
6. Has the taxpayer made a profit in similar activities in the past?
7· Does the activity make a profit in some years?
8· Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

If you can successfully defend your position through the above factors then the activity will be treated as a business, whether you are profitable or not.

In my experience, the more you are involved in racing-related ventures the more successful you will be in treating your racing as a business. For example, if you build race motors and race, the IRS will be more lenient with the racing end of things as you would be able to prove that being at the racetrack is necessary in order to sell your motors. If you are a CPA like me, and the racing is not profitable, it becomes a harder sell with the IRS. ;-)

Like tech officials, every IRS auditor looks at things differently. What flies with one auditor may not with another. If you get audited and don’t like the results you have the right to appeal.