Auto Racing Hobby vs. Business

[Delta]

A client and his two sons have a auto racing "business". All income is reported through the father's return which includes sponsorships and winnings. They grossed $40K last year. Their expenses are $65k (due to new motors/tires). My initial thought is to report it as a hobby...expenses to the extent of income deducted on Schedule A. However, this creates an AMT problem for him. He has other income from retirement and rental property, soc. security, etc.

However, if we reported the income on a schedule C and we showed a profit of $10k, he would have to pay more in s.s. tax, but no AMT and their tax bill is 1/2 what it would be as a hobby.

My instincts tell me this is pushing the envelope too much, but of course the taxpayer wants to call this a business rather than a hobby and we have been debating this issue for several months.

Any thoughts on how to handle this one?

[BOB W]

Hobby....

... I will have to lookit up but, why are you using Schedule A misc for the expenses. I would use Schedule C and limit expenses to income.

I could be wrong but that would be my approach if it were me. My problems is that the father is reporting this income????? And why is there a profit of $10,000 ?????

[Bird Legs]

Hobby/Business

Is your client operating this as a business with the intent to show a profit?
Then, if so, it should be reported as a business.
If the gross income is $40,000. and expenses are $65,000. how will it show a profit of $10,000.?
Also, on a business you deduct all expenses, not pick and choose which ones you
want to deduct.
You cannot have gross income of $40,000. and say I am going to deduct only $40,000.
of expenses, when the expenses are actually $65,000.

[BOB W]

Losses.....

... How many years has this been going on and how was it reported previously?

If this is the first year and the client is trying to make it a business for profit you must report it as a business. If you read TTB 5-22 there is very detailed rules to help the client conform to "for profit" rules. If he follows all the rules he should have no problem.

[geekgirldany]

Like was said before as long as it is run as a business there will be no problem. After 3 years I would start looking at it as turning into a possible hobby if there is no profit being made. I'm not sure if this was in TTB or another book. But it told how a guy was doing racecars. IRS said he was a hobby because of the losses. But tax court disagreed because he ran it like a business. Plus he closed it down and stopped racing because of the money he was losing.

[Delta]

profit motive

The family would like to make a profit, but in all likelihood they said with the tough competition and high cost of maintaining the race car, they probably will never make a profit.

Previously the two sons would report their own race income/sponsorships and father would loan them money now and then. This past year the father decided to take over and manage everything thus the reporting becomes his repsonsibility.

All the periodicals I read about auto racing and those who do it, maintain it as a hobby rather than a business. Even some accountants across the country do this as a hobby.

If we could qualify as a business that would be great, but I am not sure it will make a profit in the 3/5 year rule just by looking at the expenses of the past year.

Thanks for everyone's input on this subject.

[oceanlovin'ea]

Not 3/5 rule

As has been stated in other posts, IF someone is trying to make a go of a business, has a business plan, is advertising and seeking clients, it would appear that he is trying to get a business going.

The 3 out of 5 rule is not an absolute rule. If it can be established that this man is in this to make some money, he will be okay.

Sometimes a loss is a result of depreciation deduction or mileage deductions. Which could mean that the business is making some money.

You can also tell a lot in talking to a client. Since we haven't had that opportunity to talk to him face to face, you will have to make the decision. Personally, if I felt he was sincere in his efforts to make a profit, I would put it on a Sch C for now.

Linda F

[jainen]

Sincerity

>>if I felt he was sincere in his efforts to make a profit<<
Sincerity is a wonderful thing. But it isn't a business motive. Of course we all WANT to support ourselves from our hobbies. But that's not a business motive either. There has to be a realistic expectation of profit. At least a possibility, and NOBODY makes money running race cars. Nobody. Even the top winners don't show a profit, although they can branch out into related activities like teaching and modeling.

People with a SINCERE profit motive about racing own the tracks and the parts stores or use it for publicity about other products. That's a business motive.

[BP.]

the little things

Modeling?? I tell you, it's the littlest things you slip into your posts sometimes that I just find so hilarious. But that's just me.

[ecb34691]

Does that mean that all the NASCAR and other series (Busch, Truck, AMS, etc.) are just hobbies? All the top racers started at the lowest rung-of-the ladder and pursued their "hobbies" mostly with family backing until they made it "big time". Yes it can be a costly business but every little decal on a car means there is money behind to help.

[jainen]

Yes, modeling

Yes, modeling. Posing for ads and commercials. Nice work if you can get it.

All those little decals help pay for equipment. It's never enough, and there is nothing for the owners and drivers themselves. You don't make money running or even winning the NASCAR circuit, but sometimes it will open other doors where you can make money.

[JON]

Menards

When you got the time go look at the case. Menard Ddd is a bizzillionaire both sons raced around here in the 1990s, now one of them is in Nextel/Busch-Paul Menard-Dad may still be appealling, but he evidently was getting the tax benefit of some loses and IRS has thrown them out and won at some court level. I am sure the retail business was sponsoring too, but I do not think they were challenged.

[Jesse]

Earlier Post

Someone posted earlier in the season about Menard Racing and an audit in the 90's in which they lost out on a million or so in deductions. Does anyone know where I could find any information on this case?

My kids race motocross and supposedly there is a CPA pushing some type of license for $675 that will turn all of your racing costs into a business!?! I don't know if he's setting up a LLC or a Corp or what. These people do not know either BUT they know it's legite because they do it!!!!

These kids win Trophies - how can you turn that into a profit!?!

Hey Jon you must have posted while I was typing.