Business Side of Racing

[padam]

I'm planning to get more serious with my drag racing program in the next couple of years. So far I've just farted around here and there, but my other commitments have lessoned so that I will have more time and a little more money for it.
I would like to treat it as a business from the money side, so I can write off some expenses. Also try to get some sponsors if possible. I am the worst at this stuff, kind of a mental block.

I know we have a lot of pretty serious racers here. Can anyone point me to a resource or guide for this kind of thing? Or perhaps some quick tips?

Thanks in advance, Paul.

 

[gkent]

IRS is gonna love you! Businesses are expected to MAKE money. Your expenses will outweigh revenue for years to come - and I think you know that. The IRS only tolerates losses for so long AND significant losses will get their attention - which they'll focus on you.

Personally I think it would be foolish to do it as a business unless you're really going to step up your game to running some type of "pro" car that will compete for decent money and attract big buck sponsors. And doing it as a business will probably take the "fun" out of it really quick.

I'd say test the waters first. Find those sponsors. Put together a race schedule, do up a budget, etc. and determine if its a viable as a business. Because once you register that business, the IRS is going to want to see some financial reporting.

 

[slepr1]

IRS is gonna love you! Businesses are expected to MAKE money. Your expenses will outweigh revenue for years to come - and I think you know that. The IRS only tolerates losses for so long AND significant losses will get their attention - which they'll focus on you.

Personally I think it would be foolish to do it as a business unless you're really going to step up your game to running some type of "pro" car that will compete for decent money and attract big buck sponsors. And doing it as a business will probably take the "fun" out of it really quick.

I'd say test the waters first. Find those sponsors. Put together a race schedule, do up a budget, etc. and determine if its a viable as a business. Because once you register that business, the IRS is going to want to see some financial reporting.

Really? I guess that's what separates business minded from the non. If you go into business for anything you need to have your books ready. Just because the taxman is a threat to look at your books doesn't mean you get all scared. Just do it all above board and he'll be fine.

 

[slepr1]

I've done it before, but obviously here in Canada. If you follow the rules you'll benefit. The rules here are you can claim loses for 7 years. Anytime within that 7 years and up to 3 years after you have to be ready to show the taxman your books. Its totally legit if you keep your books straight and follow the rules. I claimed all my initial build costs, all expenses for car events and shows, equipment, ect and benefited by it for a few years before I shut it down. No problem. I encourage anyone to save your tax money wherever possible. Just follow the rules and don't do anything wrong.

 

[padam]

If I can show a loss for 7 years, I might be dead before that.
I'm not dumb enough to think I'll make money, but If I shell our for big ticket items, it would be nice to get some tax relief.

 

[gkent]

I guess that's what separates business minded from the non.

I currently own three small businesses. Don't lecture me about being "business-minded" !!

 

[Fran Blacker]

Think it's 5 years of losses in US. Think selpr1 wasn't talking about you just generally Stanton.

 

[66Satellite47]

I did the business thing for years. Kept really good books. My wife was a CPA. I took my losses. Never had a problem with the IRS.
A few years later had a couple years of actual cash profit. Did good at enough of the bracket races.

 

[gkent]

but If I shell our for big ticket items, it would be nice to get some tax relief.

Hmmm, you only get tax relief against revenue.

You go out and buy a new rear end - $5000
You go to one race and expenses total 2000
A sponsor gives you 1000
Owner equity is 6000
You file taxes for loss of $6000
The government cuts you a cheque for ... $ 0

You can carry the losses forward in hopes of making money but chances are you'll be broke before that happens.

If the government was reimbursing losses, everybody would have a small business!

 

[padam]

Hmmm, you only get tax relief against revenue.

You go out and buy a new rear end - $5000
You go to one race and expenses total 2000
A sponsor gives you 1000
Owner equity is 6000
You file taxes for loss of $6000
The government cuts you a cheque for ... $ 0

You can carry the losses forward in hopes of making money but chances are you'll be broke before that happens.

If the government was reimbursing losses, everybody would have a small business!

Yeah, see this is what I don't understand.

 

[gkent]

Yeah, see this is what I don't understand.

Its pretty simple ... the taxpayers are not your sponsor.

My uncle owned his own business and would ask family members to give them their receipts if they dined out so he could claim them against his business. My mother, who is not the brightest bulb in the box, used to think my uncle "got it all back". It took a fair bit to make her understand that the "expense" just reduces "revenue". If there is no "revenue", you eat the expense.

 

[w.Hudson]

I have done it as a hobby business.
As an official business, LLC or Corporation, will require different insurance and for you to follow strict DOT regulations while towing and traveling. I am not very familiar with that part of it.

Use expenses to offset winnings.

Most tracks will send you a 1099 reporting what they paid you that racing season.

My advise is to hire a top notch CPA.

CPA can advise you on equipment depreciation and what are valid deductions.
Keep all receipts and pay entry fees with a check for proof of entry.

A potential sponsor may chose to use part of his advertising budget for sponsorship. In return the sponsor will be
looking for a target audience to get the most bang for his buck.

Join and or attend drag racing classes by Luke Bogaki or Scotty Richardson. They race for a living. They know
first hand the ins and outs of it. They both offer online sessions also.

Things that you don't want to do -
File a return a tax return with big expenses and no income.
I have seen guys try to make a huge claim of their equipment and expenses the first year. Then get a huge refund and
be audited by the IRS.

Stay below the IRS radar. If you win some money, claim enough expenses to cover the amount won and what it cost to attend
races.

IRS is not going to fund your racing season. If they would then everyone would have a race car.

Remember 2 things -

1. Bracket racing is a very tough sport.

2. In drag racing to become a millionaire you will have to start with 2 million.

 

[padam]

I have done it as a hobby business.
As an official business, LLC or Corporation, will require different insurance and for you to follow strict DOT regulations while towing and traveling. I am not very familiar with that part of it.

Use expenses to offset winnings.

Most tracks will send you a 1099 reporting what they paid you that racing season.

My advise is to hire a top notch CPA.

CPA can advise you on equipment depreciation and what are valid deductions.
Keep all receipts and pay entry fees with a check for proof of entry.

A potential sponsor may chose to use part of his advertising budget for sponsorship. In return the sponsor will be
looking for a target audience to get the most bang for his buck.

Join and or attend drag racing classes by Luke Bogaki or Scotty Richardson. They race for a living. They know
first hand the ins and outs of it. They both offer online sessions also.

Things that you don't want to do -
File a return a tax return with big expenses and no income.
I have seen guys try to make a huge claim of their equipment and expenses the first year. Then get a huge refund and
be audited by the IRS.

Stay below the IRS radar. If you win some money, claim enough expenses to cover the amount won and what it cost to attend
races.

IRS is not going to fund your racing season. If they would then everyone would have a race car.

Remember 2 things -

1. Bracket racing is a very tough sport.

2. In drag racing to become a millionaire you will have to start with 2 million.

So how does it work as a hobby business?

 

[gkent]

"business" is "business". There is no "hobby" designation, it just means its not a full time, make a living at it business. Mine can all be considered "hobby" but the tax forms get filled in the same as any other business. When I started them they were all things to "supplement" my retirement income - pay for my vehicle, pay for vacations, and pay for my hobby - without touching my pension money. I probably work somewhere around 600 hours a year and the income is pretty damn good for that effort. When the time comes I'll sell off to someone else who wants to supplement their retirement income.

 

[66Satellite47]

The tax code is very tricky, you need to have someone that knows what will work. Keep really good records.

 

[RemCharger]

Need the Seinfeld clip where Kramers talking about write offs.

 

[dvw]

Not every event gives you a 1099. It's up to you to report what you win that's not on a 1099. If it's a business you are supposed to have DOT log book, insurance, drivers license, etc. Also if something bad happens there is always the liability issues. I've won quite a bit. The taxes aren't that bad.
Doug

 

[padam]

So the feeling I'm getting is that it's not worth the trouble for a small time guy.
I'm not expecting to win more than a couple hundred bucks, so not worth messing with.

 

[w.Hudson]

So how does it work as a hobby business?

So the feeling I'm getting is that it's not worth the trouble for a small time guy.
I'm not expecting to win more than a couple hundred bucks, so not worth messing with.

Keep records of your expenses. If only for you to total at the end of the year. After you total it one time you probably won't do
it again. The total always shocked me. You tend to spend more than you think.
Then if you hit a big money race and get a 1099, you'll have records of your expenses.

I have done hobby business with drag racing and horses. You never know who reports what to the IRS.
Both are cash based and much isn't reported.

Go have fun. Drag racing is a fun event and is filled with a lot of great people.

Good Luck to ya !

 

[Budnicks]

So how does it work as a hobby business?

you need to show an income of sorts, something coming in
even if it is less then you spend, need to keep track & keep books
I did it for decades (almost 4)

1st off if you seek sponsors don't call it sponsorship
call it;
marketing partnerships, it's far more professional
it doesn't sound so much like a handout
tell them how you will hell get their name out there
who will see it & where they can see it, how you will earn it
where it will be on the car, hood & roof are the most $$$
decklid, doors & rear quarters next most,
the side of the trailer is a billboard a moble billboard too,
it's your best advertisement spot $$...

Be professional,
act & look like you don't need the $$$
have team apparel/MATCHING uniforms/shirts
(even if it's just you & the wife or son)
if you look like a poor boy asking for handouts/freebies
they won't do **** for ya'
In my experience anyway...

H&R Block did my taxes too, for the 1st 10 or so years
the lady that did mine had a boyfriend/later husband
that raced in TAD too
so she was extremely familiar with expenses & the process
I never had any issues with the IRS or State franchise board
Later one of my partner's wife did the taxes, she was a Certified/CPA

1st get a business license, the county/city will wonder
many don't have anyone that goes thru it legally, with a license etc.
they may not even know how to do it
but be persistent & get it done
I'd start an S-corp (that we did, on advice from the accountant)
get buss. cards made up
a separate shop helps too,
but if it's supplemental income/expenses
IMO it doesn't matter, you will still show an income
with your other earnings/job/buss etc.

keep detailed records, milage, expenditures, parts, fuel, tires
payouts, round $$, entrance fees/tickets
licensing fees/telephone/electric bill & go get a NHRA comp license etc.
get a credit card/bank account with the Racing Buss. Name on it,
use it for the car/buss.
to help 'to show it's legit'
IIRC it all has to be separate from your everyday stuff
especially if you use the same truck to pull it,
the same garage to store it
or office expenses etc.
& use it as a write-off

I was told you have to show a profit 'of some sorts', every 5 years
I never experienced any of that at all thou, it was never questioned
I had 2 other partners for a long time too. 20+ years of my 35+
1 of the wives was a CPA too, she kept the **** straight/legal
none of US were in the negative in income, we al had jobs/other buss.s too
we just wrote off more in expenditures for the racing business
along with our regular taxes

IMO if you have another income, it shouldn't be a real problem
'you're not living off the racing business'
don't call it a "hobby business" either, ever
that's a good way to get audited
a business is supposed to be legit,
not a hobby or for fun
that's called;
'recreation not a business'

I'm not a lawyer, I'm not responsible for your decisions
one way or another

good luck, do your due diligence