How to deduct winnings/expenses on taxes?

[cad]

Hello all,
A friend of mine that races T/S was audited by the IRS last August. He had a hired accountant/CPA doing his taxes year after year. The CPA made mistakes which caused him to owe the IRS for back taxes. He hired a new CPA and is working through the details of getting his situation turned around.
His new CPA stated that race winnings can be offset by expenses up to the amount of the winnings. In other words, you cannot claim a loss while racing as a hobby.
My question is, what form(s) are used to enter racing expenses to specifically offset winnings?

Thank you,
Clark Doukas

[Philip Saran]

Hopefully our own Julie Jordon will chime in on this...she and her husband
are CPA's and own an accounting firm in Modesto CA. Also helps that
she has a racing background.

[Julie Jordan]

If the activity is classified as a hobby the gross earnings are shown on Form 1040, line 21. The expenses, not to exceed the amount of gross income, is reported on Schedule A, line 23.

If the activity is considered "for profit", then the income and expenses are reported on Schedule C. Expenses exceeding income is allowed and offsets other income the taxpayer may have.

[cad]

My racing is just a hobby. I made enough that I need to account for the expenses related to it this year. I have been using TurboTax since the most complicated part of our family return is Goodwill donations and the occasional ESPP stock sale.
TurboTax doesn't break this item down well.
Do I just need to keep copies of my checks that I paid for entry fees, etc?
How about fuel and mileage on the truck/trailer?
Can we track anything related to food, pop, water?
I have my racing log book that shows where we raced and when. Can I estimate the mileage?
I pay cash for racing fuel through a friend.
Is there anything that I can estimate within reason?

Thank you, again.
Clark

[Julie Jordan]

Originally Posted by cad

My racing is just a hobby. I made enough that I need to account for the expenses related to it this year. I have been using TurboTax since the most complicated part of our family return is Goodwill donations and the occasional ESPP stock sale.
TurboTax doesn't break this item down well.
Do I just need to keep copies of my checks that I paid for entry fees, etc?
How about fuel and mileage on the truck/trailer?
Can we track anything related to food, pop, water?
I have my racing log book that shows where we raced and when. Can I estimate the mileage?
I pay cash for racing fuel through a friend.
Is there anything that I can estimate within reason?

Thank you, again.
Clark

Ideally, receipts are needed in the event of audit. Your log book, NHRA schedule, qualifying sheets will document you were there so it's reasonable you would incur mileage, race gas, etc. Most auditors will allow that if your other records are in shape.

As far as food, etc. goes...only your portion of those expenses. As you have no employees you can't deduct expenses paid for others.

[treessavoy]

Julie,

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

JimR

[Myron Piatek]

Originally Posted by cad

My racing is just a hobby. I made enough that I need to account for the expenses related to it this year. I have been using TurboTax since the most complicated part of our family return is Goodwill donations and the occasional ESPP stock sale.
TurboTax doesn't break this item down well.
Do I just need to keep copies of my checks that I paid for entry fees, etc?
How about fuel and mileage on the truck/trailer?
Can we track anything related to food, pop, water?
I have my racing log book that shows where we raced and when. Can I estimate the mileage?
I pay cash for racing fuel through a friend.
Is there anything that I can estimate within reason?

Thank you, again.
Clark

I use the flat rate mileage while keeping track of each round trip mileage.
I keep food receipts, but usually use an average estimate 3x per day. Then they only allow 50% of that.
Don't forget motels and tolls.
Also race car related parts, service and mileage for them.

As for mileage to places you've already been...it might take some time, but using Mapquest can help you get a better estimate.

[Bob Pagano]

This is a reminder, if you claim it have it backed up and laid out for them to see. If you get audited and cant show what you claim they will sit and go thru ALL receipts until they find something that they can charge you for, the guy I had sat for 7 hrs till he picked out one thing to disallow, they will not leave till they do. I had a business plus hobby racing, they came to the house to do it and I had my CPA there also, believe me you do not want to get in that situation they are relentless. 7 hrs for an increase of $250 in taxes, what a crock.

[Julie Jordan]

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.

[mtkawboy]

Isnt there a limit to how long you can run it as a business and not make a profit ? Writing off racing is an "Audit me " red flag to the IRS