Sponsor or self-owned business and tax advantages

[gran racing]

Yes I know…here’s the disclaimer: consult a tax advisor and strictly do what they say not what is suggested here. That said, what are people’s experience using racing as a tax write-off? I would imagine one could use it as a marketing expense but am not sure just how beneficial it is. And I also realize it varies from case to case.

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Dave Gran
NER ITB #13
'87 Honda Prelude si

[joeg]

Hobby Loss rule--Section 183 of the Internal Revenue Code--a tough nut to crack.

There are many, many cases of racers being denied deductions in excess of the income from the activity.

Actually John Menard (yes the big IRL Entrant) is one of the most recent losers in this area of the Tax Law.

If you are not in a professional series (with excellent prize money--not wooden plaques and merchandise contingency awards) chances are good you would lose in a focused IRS examination. You can lose even in a pro series.

[Fred]

As a CPA and an avid racer (both professional and amature) I have a fair amount of experience in this area. I even have a IHRA Pro Mod team as a client (over $1.0m of assets).

Joeg is correct in his assessment. Let me add a few observations. First - the IRS will look at a profit motive - if there is little or no chance of a profit in the near or even distant future that is a strike against you. Second - you must run it like a business - keeping adequate books and records, separation of personal and "business" assets and a general for profit approach. Third - the IRS will look at the expenses that are incured even if there is a profit for the year. As most of the positions taken are that the expenses were for advertising on the race car the nature of cost vs. reward will weigh the decision one way or another. If a company spends $25,000 on a club racing sponsorship versus lets say a NASCAR Bush series sponsorship there is more likely that the IRS will allow the NASCAR deal over the club deal this is especially true if the sponsor is also the car owner and driver (see Lange Chevrolet vs. commissioner). In addition if the person has sponsorship income and related racing expenses you pick up the inome on page one of the 1040 and report the expenses on schedule A as miscellaneous itemized deductions subject to the 2% limitations.

I have to say that it is almost impossible for someone to argue that their club racing program is a business. The best bet is to say that by club racing I was able to get x dollars worth of business directly related to my racing activities and as a result I am treating y dollars of racing expenses as an advertising expense in my business.

This information is off the top of my head so there may be some inaccurate statements but the main point I am trying to make is that if it "walks like a duck, quacks like a duck, looks like a duck - it must be a duck".

Regards,

Fred

[SilverHorseRacing]

On the other hand, if your business IS racing and marketing solutions for your sponsors, and ONE of the marketing venues you use is a race car, even with zero prize money, it is possible to be legal. The trick though, as stated above, is to treat it as a business, show a profit motive, and also be able to track the value of the advertising to the sponsors. Now if you are advertising your OWN business, I'd suggest a seperate LLC or Inc. for the racing from the business, or at the very least, do some data tracking of what advertising rates are both trackside and "on the road" to and from the events. This will give you a ballpark of what you could write-off and be legit on.

My business IS marketing solutions for my sponsors, and the profit motive comes from the related activites that make a profit. The racing is an expense, and part of the "big picture" marketing we offer to our sponsors.

IT can work, but it is not easy.

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-Marcello Canitano
www.SilverHorseRacing.com

[bldn10]

Our local paper used to have a tax law column and I recall one a few years ago re an SCCA racer who went to Tax Court over deductions for expenses incurred in his racing. I don't recall what his business was but he advertised it on his car, trailer, etc. He was not trying to write off his entire racing budget but just included some "reasonable" expenditures as business marketing expenses. The court ruled that as long as he had a legitimate expectation of receiving business through the racing exposure [and he actually had], the expenses would be allowed. Of course, they had to bear some correlation w/ the degree of income expected. Although I have not done so, if I had my business name on my car I would not hesitate to expense an amount of my racing costs equal to the income directly attributable to my racing exposure.

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Bill Denton
87/89 ITS RX-7
02 Audi TT225QC
95 Tahoe
Memphis

[ITANorm]

In my case, I own an S-corp. I also jointly own an auto parts business with my wife. It owns the race car. (I just happen to drive it. )

I do a small chargeoff for advertising from the corporation to the business (not nearly what a year's racing costs), which helps, a little. My accountant has assured me that fully funding the racing effort would not stand a chance in an IRS audit, because of it being unreasonable to expect a reasonable return on the investment (instead of a "gift").

The only way I've figured out to write off ALL your expenses (and possibly not all the car expenses, even then) is to have a business that markets (and sells products / services) at races, and is advertised on the car.

[whenry]

There was a very good pamphlet written a number of years ago about the subject. I have never tried to write off my business since my racing is done out of my practice area and has little if any relationship with my practice(except to help burn off excess fees). We did expense out some of my wife's income several yrs ago when she was working as Regional Mgr of clothing business. The President of the company even had a picture of the car on his desk(to counter his in-laws who owned the Goodie's Headache business). We kept records of expenses, used the car in promotions and model shoots and entertained customers and other company types at races. We didnt get greedy and the statute of limitations has now run.
The only way that I can see club racing as business expense is if the racing was the income producer such as rental business and your racing was in promotion of the base business(ie my cars are good stuff). YMMV

[Bryan Watts]

Originally posted by whenry:
The President of the company even had a picture of the car on his desk(to counter his in-laws who owned the Goodie's Headache business).

I grew up going to school with a lot of that family! Are you from the Winston-Salem area?

I can't really add much to the thread other than what has already been said. If there's a way to do it, we've probably tried it and been shot down by our accountant.

[This message has been edited by Bryan Watts (edited May 10, 2005).]

[Bryan Watts]

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[This message has been edited by Bryan Watts (edited May 10, 2005).]

[jc836]

Great question-and I ask my accountant every year. Answer is NO. He cannot find a way for me to write off any of the cost of racing. Not even the "special fuels tax" is applicable. As he states and others here have-there are only a few who truly qualigy under the rules that the IRS imposes.
If any of us were Petty, Hendrick, Penske, Newmann there would be a strong case for the allowance as these are true businesses. The purpose may be that of a rolling billboard or a testing operation of some sort. If you provide a service using a car that actually has the potential of making its operating cost you may qualify.
So I motor on as though I were at the weekly Bingo game where I cannot write off the cost, since I am not a professional gambler. Go figure.

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Grandpa's toys-modded suspensions and a few other tweaks
'89 CRX Si-SCCA ITA #99
'03 Dodge Dakota Club Cab V8-Patriot Blue gonna tow

[gran racing]

O.k. What about for a sponsor? For example, I have a body shop that helps me out. Or if another business were to give something of value towards my racing efforts.

Again, I'd tell them to consult their tax advisor. Just curious what others have experienced.

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Dave Gran
NER ITB #13
'87 Honda Prelude si

[whenry]

Arguably, the help provided to you by the local body shop/parts store/whoever is income to you and you are still involved in hobby business with no hope of deducting the expenses or at best, offsetting the income with the expenses.
I used to rent out my SR(back in the days when it was a Sport Renault, not SpecFord) and my accountant said that we could write off passive losses against passive income ie dividends. YMMV

[gran racing]

I'm not talking from my end rather from the sponsor's perspective.

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Dave Gran
NER ITB #13
'87 Honda Prelude si

[bldn10]

Dave, you indirectly made my point. If the sponsor has a reasonable expectation that it will get business from the exposure it receives from sponsoring your racing, I think that is a legit marketing expense. It should be no different if your own business is the sponsor.

On the other hand, if we are talking the average amateur driver who does not run a business, the hobby rules apply.

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Bill Denton
87/89 ITS RX-7
02 Audi TT225QC
95 Tahoe
Memphis

[joeg]

A free (or reduced rate) pull on a "sponsor's" frame machine does not generate significant tax issues. He has no income and gets no deduction. Any "income" you perceive for yourself is easily offset by other expenses of your activity.

Keep records, but don't get too concerned about income.

The "hobby loss" rules are designed to go after individuals (or pass through entities) that have a lot of income from other sources--a physician, lawyer or accountant, for example,-- who have rather expensive hobbies (horse breeding, car racing, yacht chartering, etc.) that realistically cannot generate profits, either because of economics or amatuer management.

Regards.

[Tyson]

could creating a business for racecar track rentals be a more practical way of utilizing the hobby rule? there of course would be a lot of expenses involved in operating a rental car, including travel and even parts like tires, which all or part could be deducted according to the law. and maybe some of the expenses would be shared by another car you yourself race that same weekend, or not. so couldnt that be a viable way to create a business and reduce the cost of racing, and even make profit?

[joeg]

You loose half of your travel, lodging, etc. expense deductions off the bat if you are talking one car for you; one for your lessee--personal use element.

You certainly can engage in race car rental as a business. However, with one car and a hobby-shop spirit involved, one or two crashes or blow-ups would put it out of business even with damage deposits.