Learn Me: Creating a Business for Racing Expenses

I am no expert in tax laws.  But, I have a Facebook friend, who is an accountant, made a recent post about "if your business loses money, it can be a tax deduction", or something to that effect.  Also, many years ago, my Dad had created a business for personal car/racing related expenses.  As far as I can remember, that kind of fizzled out a couple of years after he created it.  I'm sure my parts purchases , race entry, repair, etc costs for a year are somewhere up around $10k or so.

So, who has done this?  What are the advantages and disadvantages?  Am I being deceptive if I have no real intent to "make" money with this business entity?  I don't know enough to know what questions to ask, so please enlighten me.  Thanks!

Lof8 - Andy said:

Am I being deceptive if I have no real intent to "make" money with this business entity? 

yes

Quick Google brought me here:. Seems like a good way to meet some people I'd rather not meet

Hobby as a business

Rent a Racer. 

Offer arrive and drive for customers. Deduct the truck, trailer, as well as the car prep and repairs. 

You might find a couple of years into it that your business plan is flawed and your loosing money and failing to attract customers. 

The IRS doesn't really grade you on how smart of a business plan you had just as long as it passes a little scrutiny of being a real "try". 

Yeah, don't listen to shady accountant guy.  
 

i go above and beyond to limit my audit risk as someone who has a real business and all my ducks are in a row.  I would not want to get an audit where i was masking a hobby as a legit enterprise to write off toys.  

John Welsh (Moderate Supporter) said:

The IRS doesn't really grade you on how smart of a business plan you had just as long as it passes a little scrutiny of being a real "try". 

nailed it. also, iirc a "hobby" business has to claim gain 3 out of every 5 years in a rolling 5-year window. so you can claim loss 2 years in a row, but then you need to claim gain, and pay tax on that gain, the next 3 years in a row. a "real" business can claim loss every year.

To mirror what Pat says, I too run a real small business that is automotive based and I do not have the balls or business acumen to do what I recommended above.  It can be done but it comes with risk and audit is a huge one of those risks (a risk i do not need.)  

As an example, having the business i mentioned does not just put a $60k F250 King Ranch in your driveway.  Yes, that truck can be heavily depreciated and leaned against your tax liability but if the business is earning zero (and taxed zero) then you will not be reducing the businesses liability, your are just paying for an expensive truck. Sure, earn $20k in the business and lean the truck against the liability will help you keep more of that $20k but you will not just "make money" from the deduction.  

Thanks for the tips.  I've determined I'm not going into the racing "business"  :)  thanks!

Does your racing program generate income?  If not then there's no legitimate way to deduct the expenses.  If it does generate income then you can legitimately claim expenses to offset the income.  However, once you decide that your racing is a business then there's fairly significant paperwork overhead that comes into play.  In addition those trips to and from the track are now commercial and you'll have to comply with the applicable DOT regs. 

In reply to APEowner :

Agreed. And, even though you'll need and have staunch no-hold liability contract with your renting customers, you will still need a steep and expensive liability policy for when they still try (and maybe succeed) to hold you liable.  

Personally, I have done a lot of sailboat racing.  I know guys who have gotten in the sailboat racing business like selling sails (the cloth.)  These are commissioned sales into the possibility of 10's of thousands of dollars for a 35ft boat.  With this sale comes the expectation that you will join the buyer on a race and help them win (or do better) in a regatta now that they've dropped a lot of cash on "upgrades." 

Almost all these guys (who love sailing) tend to do even less sailing when they make this transition into the business of sailing.  The reason is the thing they love (the joy of sailing) now becomes the source of their problems (unhappy customers or general "work".)  

I say this to just caution you about combining your pleasure with your work.  Some people do well with it, others do not.  

My best friend in college's parents own 3 public courses.  Of the 3 kids, he is the only one who does not work for the course.  He is also the best golfer of all of them.  The reason he conscientiously chose not to work there is from watching his dad (and uncle - co owner) spend most of his formative years trying to get away from the golf course.  He however wanted golf to remain his "outlet".  

In reply to APEowner :

Can he "fund" the business and get a K1 at the end of the year in order to deduct from his personal taxes?

That is how I would do it. 

In reply to John Welsh (Moderate Supporter) :

Can you not fund your race car budget as advertising?       

I do not know the full details, but if you structure your racing as a business in Ohio, you get all sorts of tax exemptions, including fuel.

Pete. (l33t FS) said:

I do not know the full details, but if you structure your racing as a business in Ohio, you get all sorts of tax exemptions, including fuel

While this may be true, it does (should?  I'm not in OH, speaking in generality) make your truck and trailer commercial.  Insurance, DOT labeling, weigh stations, etc.  Gawd help you if you are carrying fuel jugs in that trailer.

If you are claiming income (even advertising your own business) it's dicey.  Likely won't get caught but it does make you a commercial enterprise.

Yes, people put sponsor stickers or advertise their own business on the outside of the trailer all the time.  But by the letter of the law, it can raise questions.

I used an earlier version of this book when I was very active. You really need to have some form of racing based income (sponsors etc) to make it look like you are genuine. You also need to operate in a business-like way. 

The New Racer's Tax Guide ISBN-13 : 978-0936834177

I used to play Golden Tee with a guy who claimed it on his taxes.

He said something about only being allowed to claim two years of losses.

He actually was able to turn a profit at one point.

There have been a few posts about this in champcar forums, seems that those that turn a profit use the "racing" part as marketing, for their real bossiness. Seems like a lot of work for something that probably be not be useful. I would say liability insurance if you are renting is critical, regardless.

Write a book involving racecars and your racecar becomes marketing and/or research. Seriously. My accountant actually chews me out for not spending enough some years.

Reading the IRS hobby rules.

Do they go retroactive on your filing if after say 4 years they decide that you are running a hobby? Or do they just deny the one year that triggered the audit?

I like Keith's input, might have to write a book on how to build project cars for Dummies when I retire.

1) You can operate at a loss for three years before the IRS starts asking questions. 

2) Start an LLC., do the arrive and drive thing, keep a good book, and see where it goes. 

3) There's enough horror stories out there for me to avoid this situation unless I had a full on racecar that was only rent-a-drivers and a shop. 

4) Just be smart

Start a youtube channel, twitter, and instagram for your business. Start a blog, start a book, do what Keith said. 

I've had a theory with neither a way to test nor the cojones to do it, but it might work for you. It requires a certain amount of either faith or shamelessness. Maybe both.

If you have a business that generates cash, set the racing up as a religious mission and fund it through tax-deductible donations from the business. Paper the car and equipment with your message, and hold some meetings for good measure.

Call it Eye of the Needle Ministries, as we know it's harder for a rich man to get into Heaven than for a camel to pass through the eye of a needle. You go where your flock is: auto racing, bullfighting, yacht clubs, golf tournaments, antique air shows...

Lots of potential, very little paperwork required, and in reality probably a very low audit risk.

If I could figure out liability insurance I would set the garage up as a business.  The project cars would become advertising for the garage.  With youtube I'm not sure if the YouTube is the product or what.  But liability seems to be the challenge I haven't put any real effort into resolving at this point.

About the rolling 3/5-year profit tax thing. I spoke to a business law professor about 10-years ago(before we started our business), and that was one of the things I asked him about. 

He said he had a consulting business & only has clients very infrequently, so it was always operating at a loss. His solution was to incorporate a new business every couple years & but out the old one, then continue on. 

When we had our business I also asked our accountant about it & he directly told me it was nothing to worry about. We never got audited in 5 or 6 years we were in business. Though one year we received a letter from the IRS stating there was an error on our taxes & we owed ~$1400. I called our accountant & he was able to prove otherwise to the IRS. 

nocones said:

If I could figure out liability insurance I would set the garage up as a business.  The project cars would become advertising for the garage.  With youtube I'm not sure if the YouTube is the product or what.  But liability seems to be the challenge I haven't put any real effort into resolving at this point.

I've dealt with liability insurance in my jobs and I helped a friend when he decided to open his own (one man) auto repair business. The cost of the insurance wasn't really all that much for a small business.