Race Car Driver Hobby Or Business?

[Super Mom]

I Have A Man That Drives A Race Car And Has 1099 Income To Report. All I Have Is His 2006 Return That Showed That As Business Income With A Small Loss. I Reviewed The Info And It Appears That There Is A Potential For Big Winnings And He Has Expertise And That Would Prove A Profit Motive. However, He Talks As If He'll Probably Never Really Make Any Money At It, He'll Probably Always Spend More Than He'll Make. I Don't Know About Any Past Returns, How It Was Handled, He's Been Doing This Since 1999. He Wants To Show A Small Loss This Year. Are We Ok?

Thanks In Advance For Your Help, Lots Of 10/15 Stimulus Deadline Folks!!!!!!!!!!!!!!!

[solomon]

I would want to see what happened prior to 2006. A loss in 2006 and "wants" to show a small loss for 2007 does not sound like a business to me unless pre-2006 returns give some indication of making money.

[Super Mom]

Don't know

He Says He Doesn't Know What Was Shown Pre 2006, He Says The Accountants Never Told Him Anything!?! He Wanted To Show It As A Hobby, I Thought He Had To Show It As A Business, But From Reading Other Posts On The Subject I'm Thinking Hobby Is Our Best Bet Because He Doesn't Have Good Business Records And He Says He's Not In It For The Money. I Can Do That If I Should, What Should I Do?

[Super Mom]

Hobby

Ok, Since My Post, I've Decided This Must Be A Hobby. However If I Show The Income On Line 21 Of 1040 And Deduct Income Only From Scedule A, He Actually Has To Pay More Tax Becuase The Standard Is Still Higher. So I'm Thinking Of Suggesting That He File A Shedule C This Year Limiting His Expenses To The Income (even Though He Has More) And Try To Do The Hobby Next Year When He Files Jointly With His Wife And Maybe The Scedule A Will Then Be Worthwhile? Good Advice?

Thanks For Your Help!!!!!!!!!!!!!!!

[solomon]

Ok, Since My Post, I've Decided This Must Be A Hobby. However If I Show The Income On Line 21 Of 1040 And Deduct Income Only From Scedule A, He Actually Has To Pay More Tax Becuase The Standard Is Still Higher. So I'm Thinking Of Suggesting That He File A Shedule C This Year Limiting His Expenses To The Income (even Though He Has More) And Try To Do The Hobby Next Year When He Files Jointly With His Wife And Maybe The Scedule A Will Then Be Worthwhile? Good Advice?

Thanks For Your Help!!!!!!!!!!!!!!!

Seems to me you are opening yourself up to preparer penalties on an audit. Reread the Regs. on reasonable basis and substantial authority.

In other words, if it is a hobby then you should not decide to file a Sch C this year because it is more advantageous.

[DaveO]

I can't see this is anything but a hobby

But I understand your clients problem. The hobby loss rules result in a whole bunch of money losing "businesses". This is an area that begs for an overhaul. A simple check the box election to show proceeds from a hobby in which expense would be limited to income and no SE tax would be accessed on a profit would solve the whole thing.

Maybe Nina Olson would like to champion this one?

I have 1 race car driver but he owns a machine shop that caters to racers. On audit he was allowed race car expense to the extent of winnings as a promotional expense.

[Lion]

He Says He's Not In It For The Money.

He Says He's Not In It For The Money.

It's a hobby. With a capital H. But since you're capitalizing everything, I'll leave the small h! No reason his hobby should be beneficial to his taxes. My hobby doesn't help my taxes at all. And, tell him he's actually getting MORE of a deduction than his hobby would allow by taking the standard deduction this year instead of itemizing with his hobby expenses. Next year, his MFJ return will have an even higher standard deduction, so itemizing will be even less beneficial.