Racing Business

[OldJack]

Yes they can have a business in racing and depreciate equipment for the business the same as any other business. However, they can't depreciate a race care that they have built if they have already expensed all the cost of parts, labor, and supplies in the process of building. duh.

[Black Bart]

Catch 22 and Chicken or the egg

We were in a big discussion about a while back and I don't know if it was ever resolved. The question seems to be: does the fact that you're business-like in your approach qualify it as a business or do you have to make a profit to qualify?

I think RYlmanC's saying that good NASCAR drivers (who were amateurs starting out) obviously look at it as a business (like NBA players), but jainen's saying they're not really representative of the average driver and those mom & pop efforts are charging Hell with a bucket of water. Nobody can know if they're one of the few NASCAR-quality drivers or not until those thousands of wanna-bes either win or lose lots of races. Meanwhile, are you in business or not? What counts most, expenses or profits? Should we use GGD's hobby-loss approach?

From Joe Heller's novel "Catch 22" (paraphrased):
Pilot to flight surgeon: I can't fly B-29s anymore.
FS: Why?
Pilot: I'm going crazy.
FS: Why?
Pilot: I'm afraid I'll get killed.
FS: Sorry, you'll have to keep flying -- your request to be relieved proves you're sane. If you weren't scared you'd be killed, then you'd be crazy.

[sea-tax]

Well hello all! It has been a while.

I have one client who is in the sprint car racing business. This is just my 2 cents so don't jump all over me.

I first had my client form an LLC taxed as a partnership. Why ? because it is much easier to prove business vs hobby. Or at least that is what a Tax attoney friend told me. When some incorporates or becomes a LLC they are by their actions telling people they are in this for a profit.

Secondly I capitalized the costs of the motor and the car(s) and depreciated over 7 years.

All prize money and sponsor money was income. any costs like fuel, business cards, offfice expenses and the sort were expensed out.
Now this business has made small profits for the last two years which so far are their only two years. But when these clients race sprint cars against the likes of Greg Biffel and Casey Kane how can this not be a business.

Yeah up here in washington suposedly sprint car racing is big and the big wigs like Casey Kane have a whole team of cars including the one he races. And on any given Saturday or Sunday out of the NAscar season you can see them on the local tracks racing sprint cars.

[jainen]

ever heard this

I've never heard this comparison, but it seems rodeo cowboys have a similar situation. Lots of expenses (mostly travel for them), hope of a little income but no realistic expectation of making a profit. Vast amount of personal pleasure (in some weird, twisted way).

Yeah, yeah, you're never too small to hit the big time! If and when you do, you'll be in business -- most likely a corporation.

[Black Bart]

Well, I don't mean to jump

Well hello all! It has been a while.

I have one client who is in the sprint car racing business...don't jump all over me.

...When some incorporates or becomes a LLC they are by their actions telling people they are in this for a profit...how can this not be a business.
.

but I was trying to look at it like maybe an IRS auditor would. Couldn't the fact that you form an LLC or a corporation simply prove you're serious about writing off expenses for a pastime you really enjoy?

I can't think of any way to look into the soul of the person jumping into this "business" to discover their motives, but it seems to me the best solution is Dany's suggestion of using the hobby-loss rules for a few years to see how it goes and then, if it doesn't, to stop doing it. Then It's back to the Catch 22 situation -- if you keep losing money and you keep doing it, then you really are crazy or strictly in for a tax write-off.

[Joe Btfsplk]

Depreciate it when it is placed in service

I have a client who 'built' an airplane and gives flying lessons. He shows depreciation and has a loss every year and theoretically hopes to make a profit--but I'm skeptical.
I have another client

I have another client who is depreciating a race horse and has losses.

I had another client, a judge, now deceased, who owned and depreciated a race horse and showed a loss almost every year. One year he had a small profit.

[Luis Mopeo]

The question seems to be: does the fact that you're business-like in your approach qualify it as a business or do you have to make a profit to qualify?

No and No.

It's facts and circumstances, and no one factor controls.

Being businesslike in your approach can be a factor indicating a business. How you keep your books and records is considered in making the determination. If someone incorporates, but doesn't do anything else in a businesslike manner, it's not going to help. But if incorporation is one of a number of steps a taxpayer takes to operate in a businesslike manner, it could help.

You do not have to make a profit to qualify as a business. There's the 3 of 5 year test (2 of 7 for race horses), but that's just a safe harbor. I remember a court case years ago where a guy had a pet shop that lost money year after year after year. He had terrible records. But the Tax Court went against the IRS and said it was a business. They guy had real intent to earn a profit. Realistic intent is the main factor.

Level of expertise of the taxpayer is also a factor. I don't think there's much question that a husband and wife building a race car screams HOBBY! I've done some of these race cars too, and I've never had one where the purpose was really profit. Hoping you'll get lucky and win the big one doesn't make it a realistic business. Everybody says they're trying to earn a profit, but tell them they're subject to additional SE tax if they do earn money, and they'll all of a sudden say it's a hobby.

[Black Bart]

No and No..It's facts and circumstances, and no one factor controls...

Wrong on both counts, eh? Hmm, then I guess I'll just pick out the factor that he has available at the time and go with that.

They guy had real intent to earn a profit. Realistic intent is the main factor.

But look here Lou, how're you gonna know what his real intent is? It's not like asking him to empty his pockets for something and although I've looked into souls before, those souls occasionally change.

[Luis Mopeo]

Actually, looking into his soul is sort of what facts and circumstances tests are all about. Sorta like pilots from a state like Minnesota who rent a little apartment in Florida and call FL home, and whaddya know, no state tax in FL. You can't look into their soul either, but they see their big house, car registration, voter registration, all in MN, and they make the determination. It's kinda like Judge Judy figuring out who the liar is. She has a formula.

[jainen]

a decent lunch

>>how're you gonna know what his real intent is?<<

MY real intent is to win the California Lottery -- in fact, it's pretty much my whole retirement plan -- but does that make it a business? There must be some standards for the difference between hopes and expectations, intentions and goals.

How come they don't have any good CPE classes on THAT? I'm totally burned out on Moving Expenses and Classification of Entities (although the all-day update in December is okay because at least you get a decent lunch).

[Black Bart]

Real intent

. It's kinda like Judge Judy figuring out who the liar is. She has a formula.

Yeah, she does have a formula. She shouts 'em down and declares she's smarter than they are.

But anyway, the people have just got their car fixed up for the first year, so there's no "track record" yet to make any judgment calls and the jury's still out on those facts and circumstances. So, do you depreciate or not depreciate it for '06?

[Black Bart]

Retirement plan

MY real intent is to win the California Lottery -- in fact, it's pretty much my whole retirement plan.

Ahem; you know how I hate to brag, but I have a very good retirement system myself and I've been receiving proceeds from it regularly for some time. I'd like to refer you to it, but NC Josh doesn't like it and he's a pretty good guy and I don't want to make him mad, but it sounds like you need one pretty bad....hmmm....okay I'm going to tell you anyway. It's called Social Security and all you have to do is go to the nearest big town and sign up when you get 62. Now there -- don't say I never did anything for you. (P.S. It's a sure thing and is very reliable, but don't spread the word around too much or they may cut it out -- Josh thinks they will anyway in about 30 years or so).

How come they don't have any good CPE classes on THAT?

I don't know, but I'm in a generous mood and will give you another tip. Have you ever heard of Carlton Sheets?

[Luis Mopeo]

But anyway, the people have just got their car fixed up for the first year, so there's no "track record" yet to make any judgment calls and the jury's still out on those facts and circumstances. So, do you depreciate or not depreciate it for '06?

Ahhh! This is good stuff. We have a southern gentleman getting a bit defensive about whether a mom and pop are sincere in their intent to rise to the top of the NASCAR circuit with their garage-built hemi-powered fuel-injected small block Dodge Charger stock car. I say "Noooooooooo! I've done at least a half dozen race cars, and I've yet to see a profit. It must be so!"

I'm not being judgemental, because I figgur you'd likely feel the same if a nice couple came to you and said they had renovated their garage and bought ATV's and fancy camping gear to be in the "business" of a bait shop and ice fishing guides. You'd say "Gimme a Break," and I'd say "Folks around here do it all the time. Most of them lose money, but that doesn't mean it's not a business."

Folks around here rent out fish houses so plush they're comfy as two star hotels and they sleep over weekends in them. I'm thinking they're not rental for passive activity purposes because the average rental period is less than seven days, and significant personal services (fish cleaning) are included with the rental price.

[Davc]

The 3 of 5 test is not a "safe harbor". It's a "rebuttable assumption". If you make a profit in 3 of 5 year the burden of proof is shifted to the IRS but it doesn't mean it can't be determined to be a hobby.

[jainen]

I believe you

>>If you make a profit in 3 of 5 year the burden of proof is shifted to the IRS but it doesn't mean it can't be determined to be a hobby<<

I believe you have that backwards. The assumption is that it is a hobby if you DON'T have a profit in 3 out 5 years. You can rebut this, but the burden of proof remains with the taxpayer to support positions claimed.