Sorting Your Motorsports Tax Deductions

Before we get into the “sorting” of racing deductions, let’s make sure you understand whether you even need to (or are able to) sort your racing expenses.

If your racing activity is not organized as a “C-Corporation,” and

If the revenue from your racing is less than the expenses, and

If you can’t prove that your racing is “profit motivated” (in other words, it’s a hobby),

Then… you’ll have to sort your expenses into three categories.

And then – maybe then – you can deduct them on your tax return.

The first group of expenses are those that you would normally take, such as home mortgage interest and property taxes if you were itemizing your deductions, rather than taking the standard deduction. These would only be deductible if you had your racing headquarters in your home.  (This “office in the home” can be a trap for taxpayers; I’ll go into detail about it in a future posting.)

The third group of expenses are those, such as depreciation, that affect the “basis” of an asset.

(I can hear it now: Wait a minute, Phil – what about the second group? You’re a CPA and you can’t count to three?!)

OK, OK, good point. The second group consists of all other expenses not covered in the first or third groups.

Once you’ve sorted your expenses into the three categories, you can deduct them in order: group one, then group two, then group three. Remember, your total deductions are limited to your revenue.

So, now it’s time to do some number shoveling. Let’s take an example.

Megan has the “racing bug” and she began a racing enterprise known as “Megan Motorsports” several years ago. She didn’t bother to incorporate, deciding not to spend the money on legal fees until and unless the venture becomes successful. The car and all the assets are in her name.

Her expenditures for the year are:

Entry and license fees                     $1,250

Oil, grease, supplies                         1,125

Race car                                        17,850

Advertising                                         785

Parts                                               2,870

Trailer                                             3,850

Fire suits                                            540

The year’s revenue amounted to $8,135 in prize money, contingency fees and endorsements.

(Obviously, the numbers I’ve chosen are fictitious and are only used to illustrate the tax principles involved.)

The first thing to do is to separate the expenses into the three groups mentioned above. This results in the following:

Group one:                              $ 0.  Megan doesn’t own a home,  she can’t deduct any mortgage interest or house taxes.

Group two:

          Entry and

          License fees                 $1,250

          Oil, grease, etc               1,125

          Advertising                       785

          Parts                              2,870

          Fire suits                          540                       

          Total - group two          $6,570

Group three:

          Deprecation* on      

                    Race car           $ 2,550

                    Trailer                    550

          Total-group three         $ 3,100

*Trust me on the depreciation numbers. In the next blog, I’ll review tax depreciation.

So here’s how Megan would compute her deductions on her tax return:

Revenues                                              $8,135    always taxable

Less group one expenses:                             -0

Available for groups two and three           $8,135

Group two expenses:                             -6,570

Available for group three expenses         $1,565

Group three expenses:                         -1,565*

Net profit or loss for tax purposes           $   0

*Remember: when your racing is considered a “hobby,” you can’t deduct any amounts in excess of your earnings.  And you still have to report the amount of your earnings in full- $8,135, in Megan’s case.

(Of course, we’re assuming that Megan’s racing is a “hobby.” She doesn’t have a profit motive, nor has her racing earned a profit in three out of five consecutive years.)

One other hurdle must be overcome: if Megan doesn’t itemize her deductions on her tax return, then she can’t deduct anything. If she does itemize, then she can only deduct her expenses to the extent they exceed two percent of her Adjusted Gross Income. And her total itemized expenses should be greater than the standard deduction. If they aren’t, she should take the standard deduction, even though she’d lose all her racing deductions.

Bottom line: deducting expenses when your racing is considered a “hobby” is very, very difficult.

I think you can see that these concepts and calculations are intricate. You really need to talk to an accounting professional to help insure that your activity and numbers will stand up to IRS scrutiny.

Let me know if you or your group would be interested in a presentation going into these topics or other tax and financial aspects of motorsports. Contact me at: phil.schurrer.racingprof@gmail.com

Until next time …

Phil Schurrer

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