Race Car Audit

[DaveO]

I’m working an audit of a machine shop specializing in rebuilding engines particularly for stock car and modified stock car racing. He also races a car of his own. I didn’t prepare the return and the person who did has refused to assist the taxpayer in any way. It seems that the previous preparer took much of the expense of racing as advertising expense and some as parts. The income he earned racing is claimed on the return. The auditor would like to throw out all the racing expense. My position is that you can look at the racing as a separate business or as an advertising expense in the machine shop business. His reputation as an engine builder is enhanced by his success as a racer. The purchase of the cars was not deducted or depreciated. The previous preparer took some indefensible deductions so I know I’m going to have to give up about $10k or so of expense in other areas. Has anyone had experience with this type of small time racing in an audit situation?

[DTS]

Racing

Dave,

Personally, I have never been involved in this line of business, but I have a good friend who is very involved in racing and has a couple of racing schools. I will contact him and see how his stuff is setup and how he files. This may give you some direction.

I will let you know as soon as I find out something. Hopefully, good news for you.

Dennis

PS: Dave, I just called my friend a few minutes ago and he is gone for the day, but will be in early tomorrow and I'll try him then.

[jainen]

you will feel the same way

>>Has anyone had experience with this type of small time racing in an audit<<

I haven't, but the IRS has. You have a tough fight ahead. The basic reality is that racing is not a business because there can be no expectation of profit. Expenses will always exceed income, even with major sponsors.

Calling it advertising has some validity, but only in reasonable amounts related to the amount of extra business that can be generated. That's mighty hard to document without some heavy-duty market research to point to!

You need to form some realistic audit goals with your client, a painful process. Your best approach might be encouraging the examiner to compromise in exchange for a speedy agreement. Generally, getting all the expenses onto Schedule A (not exceeding income, subject to 2% limit) would be considered a successful representation on your part.

>>I didn’t prepare the return and the person who did has refused to assist the taxpayer in any way<<

Don't forget to get your retainer up front--when you are done with this audit, you will feel the same way!

[sea-tax]

>>The basic reality is that racing is not a business because there can be no expectation of profit. <<


I disagree , racing can if done right turn a profit and I have a client who has. Furthermore I think that a small company by the name of NASCAR might disagree. Or how about NHRA?

In my clients case I have never been audited but I went through the Hooby Loss rules and guidlines and he seemed to fit in the category as a business.

DaveO I would try to first separate the business out. Machine shop versus racing. Then go through the steps of hobby vs business. see where you are.
Look closely at the 9 factors the IRS uses to determine profit motive how does your client fair. First I think you need to establish if the racing business on it own would win as a business if so then I think you have some leg to stand on.

[Black Bart]

Racers: Winners 'n' losers

I turned one down in '95 -- a carpet cleaner/racer.

CCR: I want to write this stuff off (box of auto parts invoices) for my business.
BB: And your business is...?
CCR: Carpet cleaning. I race in my spare time. I spent $10,000 for a car and those parts. It's advertising.
BB: How so?
CCR: I painted the name of my company on the hood.
BB: Any wins last year?
CCR: $300.
BB: Are you going to quit?
CCR: No! I like to race cars.
BB: Sorry, it's not deductible.
CCR: (Picking up box) I'll check around.

I ran into him a couple of years later and he claimed somebody did it for him. I kind of believe him -- he was a little crazy, but wasn't known to be a liar.

[geekgirldany]

The tax office I worked at before the accountant would write off racing expenses as advertising. I always thought this was correct... and is to an extent. But when I started out on my own I had customer doing the racing and having another business also. I told them they had to set up a separate racing company, that if they wanted to deduct as adverstising off the corporation then they must write checks from corporation to racing company, and that within three years if it wasn't making money they need to look at the possibility of shutting it down.

The result was when the corporation paid the racing company this became income to the racing company and the coporation deducted it as advertising. The racing company was paying out way more than it was making for two years. Then on it the third year I told them what to expect as far as taxes. The racing company was actually making money... huh? what? this is suppose to help me on my taxes!
Plus they were doing extremely well in their other business and there had to write offs somewhere else. They started talking about forming other corporations to shift money from their other business into so the taxes could become lower. Someone told them to do this. I told them it didn't smell right and in the end they left me.

Didn't a major racing team get audited recently and they disallowed alot of deductions on it?

[jainen]

I don't believe you

>>racing can if done right turn a profit and I have a client who has<<

At first I saw ignorant and did not like it, but then...I discerned a vague trope in your missive that called up both time and space meanings of past probates. Therefore I, both literally and metaphorically, concur with your synopsis of your summation.

>>NASCAR might disagree. Or how about NHRA?<<

How about it? NASCAR and NHRA aren't racing teams. Certainly there is big bucks in the racing industry, but it doesn't go to the racers. Maybe if your client's name is Earnhardt, but even then the main money comes from modeling and endorsement and licensing fees, not racing.

You are offering a false hope that Dave can separate out the racing activity as a business. If he has to separate it, then it clearly is not operating on it's own as a business. Maybe you can justify that in preparing the return, but how in the world are you going to get an auditor to buy it?

[Snaggletooth]

Going to be Tough

Causes me great pain, but I have to agree with Jainen 100%.

The big bucks at NASCAR result in a profit to a maximum of 100 drivers. The rest of the money goes to various elements, sponsors, investors, promoters, and NASCAR itself.

NASCAR sanctions perhaps hundreds of race tracks, ranging from a dirt track in Winchester, TN to a truck track in Dalton, GA. The Nextel circuit only involves some
30 tracks for big-money races.

The other tracks, PLUS even more tracks NOT sanctioned by NASCAR, provide an avenue for literally thousands of Earnhart wanna-bes. A typical such driver may earn $500 per year and spend ALL of his disposal income - thousands of dollars - on expenses such as buying and customizing his vehicle, maintaining his vehicle, tires (one set per race), and legitimate advertising.

This scenario harbors virtually zero chance of turning a profit, and is the hobby for erstwhile dirt-track champions. Years ago, I claimed a loss for an Alabama driver and told him he would be expected to make a profit in future years. The second year he lost even more money and I wouldn't take his losses. He ended up going to the "guy across town."
Later, I had an auditor tell me that a race car taking these big losses was a "slam dunk" for the IRS.

[Black Bart]

Personal Foul

>>racing can if done right turn a profit and I have a client who has<<

With all due respect, sea-tax, I don't believe you.

Give the guy a break, j.c. You're hitting below the belt with a statement like that. Opening it with "all due respect" isn't actually showing much respect when it's followed with what amounts to "you're a liar."

Sea-tax's posts have always had the ring and tone of sincerity which usually originate only from actual in-depth experience. He's been a worthy contributor to this board -- as you have -- and doesn't deserve such a remark which amounts to an ad hominum attack without foul language.

My experience and your experience, plus that of Snaggletooth, tells us that profitable racing is a long shot, but NASCAR Earnhardts, although rare, do exist. Sea-tax's experience is different from yours, but that doesn't make it untrue. What about dany's story? Her client made money in the third year, which doesn't jibe with your experience. Would you call her a liar? Who's to say any of us here (including you and me) aren't telling the truth?

I think you're wrong about this.

[Jiggers]

Race Car Loss = Race Horse Loss

I encountered a similar situation several years ago with a good farmer who got hoodwinked into investing a large amount of money $XX,XXX into a promising young race horse. He kept putting more and more of his farm profits into this dud, borrowing more and more against his farm, and the bank loaning him the money because he was a good ol' boy and his wife worked there. Bankruptcy followed and he lost his farm and all farm assets. The first year he showed a loss, second, the same. The partner at the firm that I worked for at that time started warning him. But, "he knows better than us".

[jainen]

more acceptable language

>>Her client made money in the third year<<

The Geek's client showed a profit because they counted the advertising expense as income! Neat trick, but not one that led to a successful relationship with their accountant.

>>an ad hominum attack<<

Yeah, you are right about that respect stuff. It sounds nice but is dangerously close to violating my pledge, for which I sincerely apologize both to sea-tax and to the forum. I was confused about his reference to the hobby loss rules when apparently there was no hobby, no loss, and no rules--but that was all my own shortcomings. I have therefore edited that post with more acceptable language.

[sea-tax]

Well it appears I missed a lot while I was dosing off last night.

BB thanks for coming to my defense, you are truely a gentleman and a scholar.

AS to Jainen I really wish you had not deleted or edited your thread. I would have preferred to understand your complete animosity for me on my own. Instead of having to sift through others posts to get an understanding .
If in fact you called me a liar then so be it , I know the truth . I do have a client a partnership two brothers who own a racing team and have filed three years worth of returns loss in year 1 $3750 gain in year 2 $6400 and gain in year 3 $2685.

[Snaggletooth]

With All Due Respect

Sea-Tax, the statement as shown "With All Due Respect, Sea-Tax, I don't Believe you."

That was the extent of it, and when I read it, it didn't register with me as being anything other than Jainen's usual demeanor. However, Bart read the message for what it really said, and upon reflection, I don't know how else it could have been interpreted except with the liar connotation. To his credit, Jainen retracted from his statement, but not from his logic.

Sea-Tax, the Jainens of the world are just out there and they'll be around after you and I are dead and gone. I try to look at the expertise he brings to the board, and tell myself that there are more positives than negatives. In the past, he has brought very incisive and direct answers to some of my more difficult questions. I'm sure he acts differently to his clientele than he does to us, or he wouldn't have any.

I have also benefitted greatly from your own discussions, particularly in the area of investments, and am quite happy you've hung around and become one of our most familiar names. Have a great tax season!

[sea-tax]

Well Snaggs thanks for the kind words And trust me I do not let people like that get me down it simply rolls off my back.

As for Jainen having clients , if he does I would be surprised not because of his attitude although I do find it rude, but because he says that he is 103 . Sorry but that is knid of old for conducting a tax practice , I mean Teddy was Pres. when he was born. But good for him if he can still keep up with the daily grind. I personally hope that I will have planned and saved enough so that I need not work when I am 103.

[DaveO]

Thanks for all the advice and insights

The idea about separating the racing was a good one. Had this person came to me for the return I would have had some serious questions and it would have looked much different. I'll let the board know how it went.