racing as a business

Whole lot easier to have a business and use the car as an advertising vehicle.

You do not have to show a profit in order for it to be considered a business. You have to show an "intent" to make a profit. Obviously, if you are profitable the odds are more in your favor with the IRS. The presumption is if you are profitable in a 3-out-of-5 year period, it is a business. The IRS can still challenge your activity even if you meet the 3-out-of-5 year rule.

We had a big-time comp racer out here lose his advertising/racecar deductions as the IRS didn't consider it to be an ordinary and necessary expense for his line of business. So be careful in going that route.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers’ expertise); the time and effort you expend in the enterprise; whether there’s an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.

Keep point is that to be considered a business..
Racing needs to show a revenue income flow, if the business only shows losses/expenses and no incoming $ the IRS will shred it..

Just my ...

WHO was it that said ? ......

Want to make a small-fortune racing ? ...

START with a large fortune.

The number of people in the good-ole-USA that can actually make-money racing(without any "outside help") .... is few and far between.

If you go into racing as business then don't forget Tow rig needs comerical plates-DOT number, log book and up to date medical info along with you have to stop at all DOT stops and weight checks.
This is all per US DOT regulations
To me it is easier to have it as a hobby

A very small percentage have made money racing. Some think they have but if they showed a wage for their time and the actual cost of everything involved they lost by a lot.

If you go the route of showing your racing as a business you will soon see how much you are really spending. It may depress you so much you quit racing. That is unless you have an overtaxed career and the racing business offsets it to get a decent refund.

I have been selling parts for years. Sometimes on a large scale and sometimes going months without even turning any sales tax money in for lack of sales. Most of that is not the fault of the business I am in but the time it takes to do it. Working a full time job and being on call 24/7, this is where the real money is made, takes a lot of time. So do you take the call or wait for a customer to show up when promised or take the trouble call at work that pays a guaranteed $100. Then the IRS and other taxes takes $50 dollars out of that $100. Well then that race car you have been sporting all over the country trying to solicit business pays off and gets some of that tax money back. It's not intended to happen that way but sometimes that is what it appears to be. If my day job were cut off today at least all the equipment I have purchased and written off will be used to keep the bills paid and the profit will turn in to tax paid to the IRS. This is the area most screw up. They write everything off then they sell out and don't want to pay the tax. Several I know had $30,000 appear from no where and did not show the income. Funny they wrote it all off when they purchased it.

I suggest to be honest about it. And the same as paying tax on those 1099's the track gives out you should be able to write off the expenses to offset the tax on those. Buy a set of valve springs write them off. Sell them to someone later for 25 cents on the dollar show it as a sale. Just like if you get $100 bucks from the track for a round win show it it may help legitimize your cause later.

Thanks for the info Julie. That is good info to have. Its actually a heck of a lot less hassle to claim it as a hobby. Fed doesn't punish you for it but try that in Indiana and you get reamed. Made $15,000 in a year had $14,000 in expenses. $1000 profit if I am running as a business. Looked at it and either way I pay taxes on $1000 for Fed. Now Indiana steps in and if I run as a business I pay tax on $1000. If I run it as a hobby I now have $15000 more income that I have to claim and Indiana does not care if I have expenses to offset it.
Running it as a hobby is not as easy as just keeping receipts either. Julie could fill us in on that. I have my CPA working on mine right now and I had questions that even he could not answer and is now researching. For instance, claiming income for parts received from sponsors. Sponsor is writing that off, so you need to claim it as income. Only problem is that there is no income; just parts.
I am confused just talking about it.

Setting your racing activities up as a business sounds good----but requires a lot of time, record keeping. Get a GOOD accountant to help you, one that has been though it before---that has survived audits of racing businesses.

We have been doing it for ten years---an oval track operation. You will be amazed at what you spend and what you must claim as income. Setting up a business does help, especially if you are in the upper income level(tax wise). But you must do it correctly---if you don't the IRS will have no sympathy.

And, if you decide to "get out"----you may have a very large "back side" to pay tax on. Once you buy haulers, trailers, engines, chassis---all depreciated---and you then sell all of it---that is gains---and taxable. A friend sold out last year and now faces a $175K taxable income.

Decide how serious you really are before getting into it!

Those parts the sponsors give away are hard to put a value on. Their is three different cost figures. Which one are they using. Not that I don't like free stuff but. I would much rather get a price break than a one item hand out.

A tip I can tell you do not let your accountant or CPA depreciate every thing on a schedule. This makes a mountain of paperwork. I had one depreciate everything on a schedule one year. Drill bits, rod bearings, gaskets, you name it. The best thing is those parts that can break like driveline parts depreciate the full value in one year. On a drag car you can depreciate things like chassis work and/or anything that is gonna last a while and cost a lot. You never want to be in a cituation where you are depreciating a part that broke three years ago. CPA's are famous for this as this gaurantees repeat business because you can never figure out everything they did.

Leon

I switched from a hobby to a business about 5 years ago. I keep receipts and reord everything in a spreadsheet as the years go. It is not bad to do if you stay on top of it. I try to claim a profit every three or four years if possible. I know people that have claimed a loss for over 10 years. It might catch up to them but if you keep good books it should not be a issue. In this economy I don't think anyone will question a loss.

Me thinks the advantages of claiming racing as a business are not worth the pain that you will suffer if and when they drag you in for an audit.....

I write off right up the amount of the 1099s I get from the tracks every year and that's it....