Racing as a business Options

[mitchntx]

OK ... I think I have all the elements in place to call my racing a business.

I have been reluctant in the past because in CMC there is no prize money and therefore no attempt at income.

But now that I have landed this Texas Driving Experience driver/instructor gig, there is my avenue for income.

It is my undersanding that all expenditures that I incur to help me in my driver/instructor role can be deducted.

All my safety gear is obvious ... suit, helmet, gloves, underwear, shoes ...

But what about the CMC car itself? Could I not contend that without the car, I would have never gotten the job? And to increase or maintain my skill level, I must continue my education as a driver ... enroll in CMC hands on "seminars" ... al of which is deductible ...

Right now, I am being paid via a 1099 and as an individual. Should I set up a sole proprietership and have TDE pay the SP? Could I, as an individual, support that SP from my regular income and get a tax break that way?

What about my shop where I build and maintain the car(s) ... how would that figure into the equation?

[sgarnett]

I would look into setting up an S-corporation.

The tax rules do specify that the business must be run as a bona-fide "for profit" enterprise for expenses to be deductible. In other words, hobbies don't count. One of the litmus test "rules of thumb" is that a for-profit business must be profitable at least 3 out of 5 years. Obviously that is not a hard rule in and of itself or a lot of big corporations would be closed by now, but it's an important part of demonstrating that you really are running a business and not deducting a hobby.

Of course, it's up to you to decide what is paid by the business and what must be provided by the "employee", so it's not hard to turn a "profit".

[mitchntx]

thanks Sean ...

If this year is gonna be any indication, then I think I could, in fact, turn a "profit" ...

I have the initial start-up costs which I can depreciate over 5 years and then maintenance costs.

If I make $200 a day at the school and work just 10 days a year, that would buy my tires, brakes and fuel and have a few dollars left (profit).

[trackbird]

I have to talk to my accountant, but my autocross car is frrax sponsored (advertising) and I need to look at that stuff myself.

[Absolut Speed]

Mitch,

How do you look in an orange jumpsuit?

Regards,
IRS Special Agent #0597






hee hee

[35th_Anniversary...]

I'm going to be attempting to write off expenses as well... Kumho supposedly reports winnings directly to IRS, do not pass go. That and I received income from co-drivers. So if anyone has experience in doing this let us know what we need to know. Mileage should be very easy to prove, I have results from all the national events proving I was there. I need to figure out how to account for depreciation, and how to account for the sets of tires purchased for the car by co-drivers.

[rmackintosh]

I would look into setting up an S-corporation.

The tax rules do specify that the business must be run as a bona-fide "for profit" enterprise for expenses to be deductible. In other words, hobbies don't count. One of the litmus test "rules of thumb" is that a for-profit business must be profitable at least 3 out of 5 years. Obviously that is not a hard rule in and of itself or a lot of big corporations would be closed by now, but it's an important part of demonstrating that you really are running a business and not deducting a hobby.

Of course, it's up to you to decide what is paid by the business and what must be provided by the "employee", so it's not hard to turn a "profit".

...what he said...

For me...I have thought about it many a time...but with a CPA wife....she shuts me down EVERY TIME....not worth it for her/the few dollars one could get out of it.... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/rolleyes.gif)

[mitchntx]

Mitch,

How do you look in an orange jumpsuit?

Regards,
IRS Special Agent #0597






hee hee

Hey ... who stole my password and posted under my name!!!!

(IMG:http://www.frrax.com/rrforum/style_emoticons/default/rant.gif)

[mitchntx]

with a CPA wife....she shuts me down EVERY TIME....not worth it for her/the few dollars one could get out of it.... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/rolleyes.gif)

Probably right ...

But, I think it is feasible for me to deduct mileage and driving gear, at least ....

[mitchntx]

with a CPA wife....she shuts me down EVERY TIME....not worth it for her/the few dollars one could get out of it.... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/rolleyes.gif)

Probably right ...

But, I think it is feasible for me to deduct mileage and driving gear, at least ....

Damn ... he did it again!!!!

Where's that nazi-Mod when I need him (IMG:http://www.frrax.com/rrforum/style_emoticons/default/mad.gif)

[CMC#5]

If you're being paid then you are a business. If you didnt claim you're a business, you'd also be breaking the law! (IMG:http://www.frrax.com/rrforum/style_emoticons/default/laugh.gif) The fact that they are paying you and issuing a 1099 means that in the eyes of the law you already are a sole proprietor...you just havent registered as such yet.

There are several good books that guide the fledgling entrepeneur through the decisions needed to set up a small business, you might want to pick one up (cost will be deductable!! (IMG:http://www.frrax.com/rrforum/style_emoticons/default/laugh.gif) . We just did this because my wife works freelance in the tv ad business.

My quick opinion is that you set yourself up as a SP (yes you run a bigger risk in the case of lawsuits, but in this case I think the cost of setting up an LLC will be prohibitive and if you're really paranoid you can buy an insurance policy for less than it costs to create an LLC or an S-corp) and you deduct legitimate driving expenses. The business model is you are a consultant with expert driving, racing, and car setup skills that others will pay for. You set up a web page whoring yourself out for that purpose, and you proudly use your CMC car for advertising and to justify your rates. The car should have the business name all over it, and the web page should display it, experience, etc. The fact that most folks wouldnt hire you just yet is not the point....the government doesnt expect you to be a good business man, just a legal one.

With an expected income of ~$2k a year you can easily show 0 profit without getting into the more complicated details of trying to deduct part of your house (lots of rules about that) so I would stick to simple stuff like NASA license fees, entry fees, advertising fees (web site, decals), legal fees (state/county/city registration, fictitious name registration, business license etc etc) and other expenses required to maintain your status as a race car driver and bolster your credentials. I think if you set it up right and don't abuse the deductions you have a legitimate business. You could get away with deducting everything you spend in '06 and claim a huge loss (startup costs are a bitch eh?) but you might want to consider the cost of a major audit and simply deduct to essentially a $5 profit.

Another way of looking at it is that if you do nothing, you are breaking the law. You are required to at minimum register as a SP, and most likely pay state, county, and even city fees. At that point you might as well just keep going and deduct legitimate expenses down to a $5 profit, otherwise you're just giving the government money.

[rmackintosh]

Al is right in all the things you should do to "show" the business....if you can get the income part going....you can work to the zero profit level....my problem was ALWAYS the profit part....we would have to get "creative" to show that and she slaps me in the back of the head every time I come up with a new way to do it..... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/biggrin.gif)

Writing off mileage and consumables sounds like a no brainer since you are now a "pro-pesional" and all... (IMG:http://www.frrax.com/rrforum/style_emoticons/default/wink.gif)

[marka]

Howdy,

Someone else can probably confirm or deny, but I think the IRS now lets you deduct expenses you incurred to earn the income that got reported on a 1099 or whatever.

Didn't use to be that way... In '94 racing motorcycles, I ended up filing as a business because I won around $2k (I think... been a long time) in contingency and would otherwise have had to claim that $2k as income, despite having spent $5k to earn it.

In '97, I earned about $1k in prize money, but spent $10k to earn it. In that case my accountant didn't think I met the definition of a business, so I got to pay taxes on $1k extra income that cost me $10k to get. I _was not_ happy about it, but couldn't determine any clearly legal way to not do it.

I think now you can deduct hobby expenses up to the level of income from the hobby. But that only helps those that itemize.

Anyway, the basic deal for me is "go talk to an accountant". I don't think you need to do anything special to show it as income/loss from a business unless you want to insulate yourself from lawsuits or something like that.

Also... I've heard that various race teams have been hassled by the law regarding logbooks and driving time limits when towing... If you're filing as a business, that technically would apply to you as well.

Mark

[nape]

I've been wondering about the "rules" were too because my dad used to do it 25 years ago when he was racing stock cars. They were paid (feature finishing place) though, so it was a whole different ball game.

I know paid sponsorship is a rarity (from what I've heard), but would that allow you to establish a SP and run it as a business?

Also, I do in-home computer consulting on the side (cash), anyway I could work that money into the "race team" better then just setting the cash to the side for it?

[CMC#5]

A 1099 takes the place of a W2. Its a statement of income generated by the payer to show they paid and did not withhold taxes, social security, etc.

Nape...you can certainly run a business and use racing as a form of advertisement. Several people I know do this. You could end up getting into trouble if you get audited and cannot show that your racing ever resulted in revenue for the company though, so its not a slam dunk. In an audit, the IRS may decide to claim that your advertising is actually a hobby and is unrelated to the business. This is a difficult one for sure.

Paid sponsorship definitely qualifies the racing effort as a business. It is an advertising company, similar to a magazine.

Maybe I should set myself up as a racing business and tax consultant!! (IMG:http://www.frrax.com/rrforum/style_emoticons/default/laugh.gif) (IMG:http://www.frrax.com/rrforum/style_emoticons/default/laugh.gif) (IMG:http://www.frrax.com/rrforum/style_emoticons/default/laugh.gif)

[mitchntx]

Good discussion and I appreciate all the comments and input ...

I looked at this before and on the surface couldn't justify it because I had no way of showing or earning income racing in CMC.

But now things have changed ...

Racing is not the business, marketing my mad skilz is ... :drive:

I think this might be worth a consult fee with an accountant ...

[sgarnett]

As someone already touched on, claiming part of your house as an expense is a minefield. Just don't go there.

Also, depreciation is different for different things, so don't just assume all capital is 5 years (for example, PCs are 7). You can also take a section 179 deduction (up to a fairly high limit per year), which allows you to take the whole depreciation deduction in the first year, BUT you need to actually keep the capital for it's full depreciation period or you will owe some money back to the IRS.

[mitchntx]

I wonder how one would classify and depriciate an uninsurable asset, like a race car?

[tom97ss]

I work with a guy who is a stunt pilot. We had a conversation on sponsorship opportunities and obtaining them. His advice was to first establish yourself as a marketing type business / consulting type service. Especially if money exchange is involved . And get a good accountant

[TOO Z MAXX]

Wow this is very interesting. I own an electrical business and I sponser myself when I auto x. My business pays the entry fees so does this mean I can wite off the entry fees? This is what I planned to do so I hope it works. I have picked up a few jobs from people at an auto x so it should be legit.
Very good post