Taxes and Racing

[dundeedm]

I was having a discussion with someone today on the discussion of gifts, gambling, and money. It was mostly talking about game shows and such. But I started thinking about racing. And I wondered how most drivers and tracks deal with "winnings".  I'm sure most drivers can prove they didn't make a profit over the season. But for some who race more and win more often I wondered how they dealt with taxes.

 

Do the tracks have hand out a form when a driver wins a large amount of money?

 

Who is responsible for the taxes on winnings paid out?

 

I think unless you can prove a profit for so many years you can no longer claim racing as a business, and it's considered a hobby by ny state & the federal government. (ok not positive on that)

 

I was wondering if a few people could enlighten me on this subject.

[The Wee One]

I know a ton of drivers have incorporated or turned their racing operation into a business entity, to help with tax and such.

[timdurland]

Anytime I made over $600 for the year the track or series I ran sent me a 1099 for the amount and I had to claim it as income.I ran Accord and the CNYMS Tour and both told me it is mandatory if you make more than that amount.You can write off all expenses such as tires, fuel, parts, entry fees, travel money etc. so you end up ahead.You can write any business off as a loss for 3 out of 5 years I believe?Not sure how it would work for someone who has been at it for several years unless you just keep changing the name of the race team every few years.I only ran for 3 years.I ended up with a big tax refund every year.

[MikeMallett]

I run Dirt Track Digest Motorsports Media as a business.  As long are you aren't over zealous with the numbers and are legit you are usually okay.  Well according to my tax guy who does an awesome job for me.

[BigFeet13]

I know a ton of drivers have incorporated or turned their racing operation into a business entity, to help with tax and such.

Just had that discussion last week. That way you can also write off expenses and some losses.

[Short Track Super Series]

Durland17 is correct. Any driver earning more than $600 from a speedway receives a 1099 for their earnings. That is essentially 'independent contractor' earnings.  You can write off mileage, supplies, advertising, certain meals, lodging, etc., etc. against that. 

[dundeedm]

So really if you keep the paper work straight, and run your team as a business. You can actual recoup a lot of what you put in to racing. That's very good. I'm wondering how many drivers are really missing out on this. Not keeping attention to the receipts and what they actually put in to the team.

[DougieRacer2]

How much is "a lot"? The expenses you can write-off are not recouped dollar for dollar. But the expenses that can be written off certainly do help at least a little.

So really if you keep the paper work straight, and run your team as a business. You can actual recoup a lot of what you put in to racing. That's very good. I'm wondering how many drivers are really missing out on this. Not keeping attention to the receipts and what they actually put in to the team.

 

 

So really if you keep the paper work straight, and run your team as a business. You can actual recoup a lot of what you put in to racing. That's very good. I'm wondering how many drivers are really missing out on this. Not keeping attention to the receipts and what they actually put in to the team.

[TL97x]

I have a funny feeling that it's not that easy to do here in Canada...

[ndenyse]

yea but most race teams would show a huge loss every year , usually its a big time business for example gypsum wholesaler, logistics, trucking etc looking for a write off for a tax break and decrease overall income like lets say gypsum racing. so gypsum wholesalers, logistics, trucking makes a million a year profit, gypsum racing is showing a loss of $300,000 a year between 3 drivers,haulers , equipment, mileage etc.... i know there separate entities but in the end hes paying tax on 700, 000 rather then a million which is probably a huge amount, and he gets to have some fun!

[dundeedm]

I read an article many years ago about how some of the professional drivers would just have their main sponsor or car owner make them an employee of whatever business they had. That way they also received insurance and so on.  If I'm not mistaken and I can be easily corrected on this I think one of the people interviewed in the story was C.D. Coville.  

 

I know a few guys who have their own carpentry or logging business who have added their race team to their business. And these guys were just racing pure stocks.

[Mustangbru8]

In the above example with profiting 1 million dollars in business and spending 300k in racing as a business (advertising expense) the numbers would play out like this.  Assuming the person is married and not counting the new medicare payroll tax and they spent no money on racing they would pay out 343,646 in federal tax so they would net out 656,354.  Now if they spend 300k on racing they would have to pay out 224,846 in federal tax and net out 475,154.  So the difference in the bottom line is 181,200 which means the 300k spent in racing is really only costing that person 181,200 and uncle sam is paying the other 118,800.

[banana cognac]

Also, I was under the impression that you could consider a race car a company vehicle. That means that you could write off up to the total amount of profit that business makes. If you were to exceed that amount, you could try to cover the rest of the cost by claiming it as advertising expenses. 

[Andrew61]

There is no right answer. Actually 99% of the answers have some kind of hole in their logic.

 

The best answer is probably Greg's. Incorporate. IRC Sec 183 "Activities Not Engaged in for Profit" or more commonly known as the hobby loss rules, do not apply to regular (often referred to as "C") Corporations. The advantage of using a corporation (“C”) is that it will let you deduct expenses up-to the income generated. The use of a corporation will not allow you to deduct expenses in excess of your income against other income (a regular job or business). An S-elected corporation will allow you to do this but S-Corporations ARE subject to Sec 183 rules. The problem with the “C” corporation is that if the corporation is performing business activities…. the owner is an employee of the corporation and therefore has to be paid a reasonable salary for the time and effort he/she expends on the corporations business. These wages are then taxable as wages and employment taxable (DAMN).

 

If you are not incorporated, and cannot prove your racing operation is indeed a business, (the IRS and courts are very strict on the business criteria and the fact it is auto racing is the first and biggest strike against you), only the cost of goods sold are deductible for most taxpayers (racing has no cost of goods sold that I can think of because there is no good sold). The remainder of your racing expenses are itemized deductions subject to the 2.5% limit of AGI (for most people, that means they are not deductible).

 

Other theories:

The 3 out of 5 year rule – The most common misconception; this only serves to shift the burden of proof away from the YOU and to the IRS. If the argument comes up about who has to prove you are operating a business and not a hobby, and the business/hobby has been profitable for 3 of the last 5 years, the burden of proof shifts to the IRS. The criteria for business vs. hobby remains the same (too much to go into here) and a court can still side with the IRS and call your racing a hobby.

 

The marketing expenses for your business theory - I read (and saved) several tax court cases on this topic. In one case, the racer owned a Dodge car dealership and had a sprint car. The sprint car was 100% of his marketing expenses (not a reasonable business person's approach to marketing). He lost. In the second case, the racer had an asphalt road car. He sold private jets. His racing was an EXCELLENT source of marketing for his business and he could show how it generated sales leads for his business. BUT, he did not properly separate his racing business from his jet selling business. He lost. The common theme here, the IRS hates auto racing on your tax returns and will find a way to get you if they want you.

 

Who has a racing business? I'm sure the IRS would find that BH has a racing business. I'm sure they would say that Super Matt has a racing business (although I have no information about their specific finances). The difference is that they depend on racing income to feed themselves. A racing loss to them means a change in their lifestyle. The rest of the guys/gals who have regular jobs and businesses (weather winning races or not) enter the certainly grey area.

[The Wee One]

There is no right answer. Actually 99% of the answers have some kind of hole in their logic.

 

The best answer is probably Greg's. Incorporate. IRC Sec 183 "Activities Not Engaged in for Profit" or more commonly known as the hobby loss rules, do not apply to regular (often referred to as "C") Corporations. The advantage of using a corporation (“C”) is that it will let you deduct expenses up-to the income generated. The use of a corporation will not allow you to deduct expenses in excess of your income against other income (a regular job or business). An S-elected corporation will allow you to do this but S-Corporations ARE subject to Sec 183 rules. The problem with the “C” corporation is that if the corporation is performing business activities…. the owner is an employee of the corporation and therefore has to be paid a reasonable salary for the time and effort he/she expends on the corporations business. These wages are then taxable as wages and employment taxable (DAMN).

 

If you are not incorporated, and cannot prove your racing operation is indeed a business, (the IRS and courts are very strict on the business criteria and the fact it is auto racing is the first and biggest strike against you), only the cost of goods sold are deductible for most taxpayers (racing has no cost of goods sold that I can think of because there is no good sold). The remainder of your racing expenses are itemized deductions subject to the 2.5% limit of AGI (for most people, that means they are not deductible).

 

Other theories:

The 3 out of 5 year rule – The most common misconception; this only serves to shift the burden of proof away from the YOU and to the IRS. If the argument comes up about who has to prove you are operating a business and not a hobby, and the business/hobby has been profitable for 3 of the last 5 years, the burden of proof shifts to the IRS. The criteria for business vs. hobby remains the same (too much to go into here) and a court can still side with the IRS and call your racing a hobby.

 

The marketing expenses for your business theory - I read (and saved) several tax court cases on this topic. In one case, the racer owned a Dodge car dealership and had a sprint car. The sprint car was 100% of his marketing expenses (not a reasonable business person's approach to marketing). He lost. In the second case, the racer had an asphalt road car. He sold private jets. His racing was an EXCELLENT source of marketing for his business and he could show how it generated sales leads for his business. BUT, he did not properly separate his racing business from his jet selling business. He lost. The common theme here, the IRS hates auto racing on your tax returns and will find a way to get you if they want you.

 

Who has a racing business? I'm sure the IRS would find that BH has a racing business. I'm sure they would say that Super Matt has a racing business (although I have no information about their specific finances). The difference is that they depend on racing income to feed themselves. A racing loss to them means a change in their lifestyle. The rest of the guys/gals who have regular jobs and businesses (weather winning races or not) enter the certainly grey area.

 

Holy crap.... thats a heck of a 1st post here.... Very informative and right in line with what I thought/knew but was unable to adequately verbalize it. Very glad you did though!

[dundeedm]

I agree, very informative Andrew, thank you. 

 

I still think it would be in a car owners best interest to (even if not officially). Look at their team as a business. In the long run it has to help recoup some of the money you spent. Especially in racing, every penny counts.

[JoeT76]

With the percentage of my income I spend on racing, I am much more afraid of my wife finding out than I am of the IRS.....

 

 

If she ever learns what a RCU ( Race Car Unit ) represents in terms of real dollars, I am a dead man.

[JPPatterson]

 I agree, that's a great first post by Andrew61 and super accurate, too.  With that said, I believe I'd like to nominate JoeT76 for a possible post of the year! Good luck keeping that under wraps, man!

 

Best, JP

[groundpounder]

Another thing to consider before you turn your race team into a business - if you do that, you might need a CDL to drive the hauler, as now there is no question that it's a commercial vehicle being used in a "for profit" enterprise.

[Bob Krummel]

Another can of worms....DOT and race car haulers. At least with the IRS, it's April 15th you worry about. With the DOT it's potentially every time you go to the races.

A DOT person told me that if you race for any amount of money or any form of compensation that has monetary value, racing is no longer a hobby, but is considered a business by the DOT. Have sponsors written all over your trailer, you got a business! They are after all contributing money or things of value toward your racing "hobby", are they not? The list goes on...and on.... And it has nothing to do with whether you have an official racing business or not, or what the status is with the IRS. You may (depending on the experience, mood, interpretation of the rules by the DOT person) fall under all sorts of state and federal DOT stuff. That stuff can run into $$$$$.

That's why you see some "plain jane" rigs, toterhome tractors, and not for hire on the cabs.

This info is not gospel, just what I've heard or read about. Fell free to set the record straight if need be.

[dundeedm]

I always wonder why people started putting "Not for hire" on their haulers. 

 

It would make sense that two different Government Department had different standards. IRS doesn't want to give any money back, and DOT wants to make sure they can grab as much as they can.

[Andrew61]

For those of you that have an interest in the 3 of 5 year rule, I found this on the IRS website. It is the auditor's guide to these rule. The funny part is, they specifically use auto racing as an example (because they know this is a high risk area).

 

Presumption that Activity is Engaged in for Profit

IRC § 183(d) provides a presumption that an activity is engaged in for profit if the activity is profitable for 3 years of a consecutive 5 year period or 2 years of a consecutive 7 year period for activities that consist of breeding, showing, training, or racing horses.

This presumption rule applies only after an activity incurs a third profitable (or second) profitable year within a 5 year (or 7 year) presumption period that begins with the first profitable year.

Note: Treasury Regulation § 1.183-1(c) has not been updated to reflect the 1986 amendment increasing the number of profit years required from two to three out of five years for activities other than horse racing, breeding or showing).

Example 1 – A taxpayer has the following profits and losses with a car racing activity (5 year presumption period):

Example 1 profits and losses Tax Year Gain or (Loss) 2000

(30,000)

2001

5000

2002

(60,000)

2003

2,000

2004

5,000

2005

(70,000)

2006

3,000

2007

(63,000)

The first 5 year presumption period begins with the first profit year of 2001, but the benefit of the presumption does not begin until the third profit year of 2004. The presumption is not available for 2001 through 2003 because it does not apply until the third profit year. The presumption is available during the first presumption period only in 2004 and 2005. The second five year presumption period begins with the 2003 profit year and runs through 2007. The presumption applies to the third profit year of 2006 and will be of benefit to the taxpayer for 2006 and 2007.

If the taxpayer meets the presumption rule, the Service can still argue that the activity is not engaged in for profit; however, the burden of proving that the activity is not engaged in for profit shifts to the Service. In addition, examiners cannot use IRC § 183(d) as the sole basis for disallowing losses under IRC § 183 even if it is shown that the taxpayer has not met the presumption rule.

Examiners should be alert for situations where the taxpayer may have manipulated income and or expenses to meet the presumption rule determination.

[dundeedm]

I barely understood any of that.

 

I would think they would have a bunch of loop holes for Horses, considering how many politicians own show horses.

[paulgarrow]

For those of you that have an interest in the 3 of 5 year rule, I found this on the IRS website. It is the auditor's guide to these rule. The funny part is, they specifically use auto racing as an example (because they know this is a high risk area).

 

Presumption that Activity is Engaged in for Profit

The first 5 year presumption period begins with the first profit year

 

What does profit have to do with racing?

 

Losses from your racing(independant contractor) business can be deducted from your regular job gross.