Racing Business

[Black Bart]

Profit or not

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!"

Thanks Louie -- that's the first time anybody's called me a gentleman (defensive or any other kind) in a good while. But still, I can't see that the fact you've never run across anybody who made money racing automatically renders it "not a business." Buying an expensive Dodge might be unusual, but probably not unheard of and even successful racers had to start somewhere. I'll bet the NASCAR guys looked at it as a business when they started out on a dirt track in the boonies.

Anyway, about RLymanC's client's car (assuming it doesn't have a built-in wet bar or something), it seems to me the only way to prove it's not a business is if they lose and lose and lose and don't quit when it becomes obvious the losses are killing them. So why couldn't he depreciate it as a business (even if a "losing" business) while he's finding out if he's got the "right stuff'" or not? Lots of businesses lose money for two or three years and fold up, but the owners still write off the loss against other income, even if that furniture store or boutique was a long shot.

First guy I get like RL's, I'm not consulting you -- I'm checking with a "soul-looking" analyst who doesn't know any plushfishhouse owners. I still think the hobby-loss application is a viable vehicle for this deduction to ride on.

[Davc]

>>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.

That's the way it's generqally stated, but it's not correct. From BNA:

In addition, the statute presumes the taxpayer engaged in the activity for profit if the activity was profitable for three of the last five years (two of the last seven years for activities related to horses) ending with the current taxable year.13 Of course, the government may rebut this presumption

§183(d)

(d) Presumption


If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting "2" for "3" and "7" for "5".

[erchess]

Assertiveness

To me, this is one of those issues where a lot depends on how assertive one feels like being. The worst I have ever heard of happening to a taxpayer on the hobby or business issue is for the IRS to write to the taxpayer offering to let the past slide if the taxpayer will, starting with the next filed return, either start to consistently make profits or start treating the activity as a hobby. I tell them in advance that when they get such an offer we will have to accept it unless they want to pay a tax attorney potentially hundreds of thousands of dollars to contest the IRS position, along with additional financial costs if they do not prevail and no hope of a cash award if they do prevail.

With that said, I believe that every sort of racing has various levels. Only the lowest level is open to anyone, and you reach higher levels through success at lower levels. If it were my racing activity, I would treat it as a hobby until I either made a profit or reached the penultimate level of my sort of racing.

[jainen]

my sort of racing

>>the penultimate level of my sort of racing<<

... but... but... that's like -- CHESS. Is there any money in that gig?

[Black Bart]

Racin' penultimatin'

...If it were my racing activity, I would treat it as a hobby until I either made a profit or reached the penultimate level of my sort of racing.

But erchess; if you start that penultimatin', then...you'll......never......again (if there ever was a first time) take a race-car loss deduction.

Look at your penultimatin' -- you know, those "crimes against nature" that you Carolina boys have to contend with now and then -- the same way Veritas does his ad hominems. Just be practical and write off the loss -- remember, as you put it, the "laws against it are seldom enforced."

[erchess]

Chess - hobby or business

We have to start with the question of whether one means playing chess or doing other chess related activities or both. But before I can talk about that I have to tell you about the relative playing strengths of Tournament Chessplayers. Probably everyone who makes a living in any way related to Chess plays or used to play in tournaments where the games are played face to face and are "rated" by a National Federation (such as the United States Chess Federation) and/or by FIDE, which is the worldwide body that governs Chess. Rating is defined as "a statistical estimate of playing strength" and is derived from your game outcomes and the ratings of your opponents. Ratings tend to fall on a bell shaped curve.

There are people whose ratings fall below the 50th percentile but who for some or even most of their money, teach chess to children in the public schools. The range is from a teacher who fulfills a job requirement for working with an after school club in addition to teaching full time during the regular day all the way to people whose only job with the school system is to teach Chess.

Most people who teach Chess to adults are at the 90th percentile or above. Players at this level may give lessons, write books and magazine articles, assist in the production of Chess related software, or appear in instructional videos. A very few of these people, usually above the 95th percentile make their livings playing in Chess tournaments and/or for professional Chess teams in Europe. Even these people often supplement their prize winnings and team pay by giving some kind of instruction. (Let's face it, the better you are at a competitive activity the more audience there will be for your attempts to give instruction about the game.)

I am just below the fiftieth percentile of all tournament Chessplayers. I have never played in an event where the top prize for which I was eligible was more than about $1K. However, there are tournaments at which players who have ratings similar to mine compete for prizes of up to about $5K. (And then of course there are many tournaments with lower prize funds I'm talking about big tournaments of which the US has perhaps one or two most weekends) Prizes at the big tournaments are about the same from the lowest rating classes to the 89th percentile. Then the top section which may be open to all registrants but is nearly always won by someone at the 90th percentile or higher will have a top prize of around $10 or $20K.

Now players at the 90th percentile and above usually get free entry to the money tournaments while the rest of the attendees typically pay at least a hundred or so. These people usually get free lodging in the resort or luxury hotel where the tournament is played. Others pay from $65 to 200 a night for rooms there while others stay at cheaper places nearby. Then there is the expense of transportation.As a practical matter, this often involves airfare. I would imagine that few serious tournament players spend less than 500 a year on instruction in various forms, plus the expenses of going to the tournaments.

I have never personally won more than $200 in total prizes for a year at Chess. I did for a while have a school teaching job which depended in part on my teaching Chess to kids. I treated that pay as the employment situation that it was. I have always treated my actual chess playing as a hobby. If I ever win a couple thousand dollars in prizes during one year, I will file a Schedule C showing a profit of around 800 and of course paying regular and SE tax on that profit. I know that's assertive because lucking up and making a profit is not proof of realistic hope of profit. However, I have never heard of the IRS complaining about that issue when one files a Schedule C showing a profit.

[veritas]

But erchess; if you start that penultimatin', then...you'll......never......again (if there ever was a first time) take a race-car loss deduction.

Look at your penultimatin' -- you know, those "crimes against nature" that you Carolina boys have to contend with now and then -- the same way Veritas does his ad hominems. Just be practical and write off the loss -- remember, as you put it, the "laws against it are seldom enforced."

What? ad hominems? Oh yeah I did say something about monster truck ppl, and maybe a couple of things about horse ppl, I think I've been pretty nice about clergy ppl lately though. I have been venting more on a different forum. By the way where's Oldjack?

[Black Bart]

Somebody

...By the way where's Oldjack?

said they saw him in Springfield at a checkers tournament. I bet he lost so quick he didn't even have a chance to say "King me." Too, he prob'ly drove and came back the same day, then wrote off airfare and a room at the Hilton. I doubt he spent anything for "education" expense (he already "knows it all"), but he's definitely in the tenth percentile.

[Black Bart]

Come to think of it,

where's sea-tax been hangin' out lately? Do you suppose he's lost in the Redwoods or is gone on a company picnic with those 35 employees of his?

[Luis Mopeo]

it seems to me the only way to prove it's not a business is if they lose and lose and lose and don't quit when it becomes obvious the losses are killing them.

The IRS doesn't have to prove anything. They hold all the cards, unfortunately. The burden is on the taxpayer to prove that it is a business. Considering that if they're audited, it will likely be because of claiming losses over a period of years, the opinion of the revenue agent is all but predetermined. So "proving" it would mean appeals or court, which is fine too.

Personally, after explaining the issues to the client, if they say it's a business, I'd go for it. Just explain that if audited, it's likely going to be thrown out by the agent.

It's not always cut and dried even if you could read the client's mind. There is an element of personal pleasure, but that does not disqualify the activity as a business. I find that when I explain to the client that if they have losses several years in a row they're very likely to be audited, that often changes their perspecitive.

[Black Bart]

Hooray for you, Lou (sorry, I mean Luis - is that

...if they're audited...the opinion of the revenue agent is all but predetermined...Personally, after explaining the issues to the client, if they say it's a business, I'd go for it. Just explain that if audited, it's likely going to be thrown out by the agent.

...when I explain to the client that if they have losses several years in a row they're very likely to be audited, that often changes their perspecitive.

pronouced like Lou-ees)? I just knew that anybody who handles the three Rs like you do had to be a reasonable man.

I agree that if the agent checks you at all, then it's probably a 95% chance the loss will be thrown out. I guess the difference is in our clients. Mine seem unphased by the dim prospect of victory-at-audit. And maybe they're right. Years ago, my dad did a part-time cattle farmer for ten years of straight losses; then I inherited him and took it for about five more, warning him each time and each time him coming back faithfully with a $2K loss, until finally I just had to tell him to go away and not come back. After that, I decided to go with hobby-loss term limits and they can like it or lump it.

If he's not dead by now, he's probably still losing $2K faithfully. He claimed to love his cows, but I kind of think he loved his loss better.

Come over to the "Old School Chum" thread and chat with us for a while.

[sea-tax]

where's sea-tax been hangin' out lately? Do you suppose he's lost in the Redwoods or is gone on a company picnic with those 35 employees of his?

BB I am still lurking around. Unfortunately I have been really busy with a little thing called Tax Season. Furthermore I just have not had all that much to say. I am not sure if it is because I am busy or maybe it is because I just haven't got a clue.

Seems to be a lot of new people on the board to entertain you BB. Wonder if you could convince some of them to fill out there Bio info .