Racing and Taxes

I'm a dullard when it comes to finances. So much so that I know I likely pay more for an easier time of things rather than taking the time to think about it and play the system. I'm trying to break that habit, so with the thought that there might be people who enjoy pondering financial issues, I bring you the following questions.

The first deals with race winnings. Now, this ain't no financial windfall. If I had all of the individual race and championship purses given to me in a lump sum, I doubt it would even trigger a 1099 in a casino. However, I am paid in a legit fashion. It's not like it's some dude in a shed handing out cash. Technically, I'm an "independent contractor" employed by the track. They have my social and I am paid by check from a payroll company hired by them. Buzz's old lament of "recreation without taxation" keeps ringing in my head. Because, well, I don't want to pay taxes on it =p If I were to, I dunno, get busy and, jeepers, have those winnings slip my mind, will the taxman cometh to inflict ill upon me?

The second question is about playing the system. While I may fancy myself a "NASCAR licensed race car driver", what I really am and what racing really is is advertising. Our cars, our uniforms, our media releases, interviews, etc are all advertising and marketing. While I may think that I have a "race team", don't I really have a small business that deals in marketing/advertising?

I don't know nothing about any of this. Very likely my race team won't be looked at as a legit business because of a hundred factors, but I figure it wouldn't hurt to ask. I'm trying to improve a weakness of mine, and figured I had to start somewhere. Be gentle ;)

If it is a legit expense to generate the winnings and advertising then it is a business. For example:

Welding supplies to fix the car after you race is a legit expense.

A trip to Watkins Glen to "learn the trade" is not legit.

Garage to keep the car legit but an audit magnet.

So if you are claiming the cash for the ads you will want to claim legit expenses.

Don't forget gas to the track, same as I claim mileage to a dealing gig, legit expense.

I would think this day and age, IRS would know right away they had someone who was not reporting all of his income. In days past, dunno.

Quote: odiousgambit

I would think this day and age, IRS would know right away they had someone who was not reporting all of his income. In days past, dunno.

Once I didn't file enough on winnings, and they contacted me the next year. Although, as far as I know, it's worse if they don't bother to contact you, because the penalties just keep adding up anyway.

And the nice IRS lady on the phone, helpfully suggested that she would check and see if I missed anything else in any other years while she was answering my questions for that year. Fortunately, that was the only discrepancy.

Here is my understanding of it:

If the track has your social and is paying you by check, I imagine you'll be getting a 1099 from them at the end of the year if you were paid $600+. The IRS will also get a copy of the 1099, which means their system will be expecting to see at least that much income reported somewhere on your return.

I believe your racing activity will either be considered a hobby or a business based upon a list of various factors.

If your racing activity is classified as a hobby, then you can deduct your expenses only up to the amount of the hobby income you report. In other words, you can not report a loss on a hobby. Problem is, you have to report your hobby income on the front of your return but the expenses must be deducted on Schedule A. Which means if you don't have enough Schedule A expenses to exceed the standard deduction ($6,200 for single filers in 2014), then you don't really get any tax benefit from the hobby expenses.

One positive aspect of it potentially being classified as a hobby is that you won't have to pay self-employment tax on the net profits (if any).

If your racing activity is classified as a business, then you'll report both the income and expenses on Schedule C of your tax return. You'll get the full benefit of all the expenses, and can even report a loss that can be used to offset other income on your return. But keep in mind that if you show a loss for too many years, the IRS will likely try to reclassify the activity as a hobby versus a business.

One negative aspect of it being classified as a business is that any net profits on your Schedule C would be subject to self-employment tax (around 15%) in addition to regular income tax.

You know the IRS likes to get their share and then some! :)

Quote: AZDuffman

If it is a legit expense to generate the winnings and advertising then it is a business. For example:

Welding supplies to fix the car after you race is a legit expense.

A trip to Watkins Glen to "learn the trade" is not legit.

So I gotta cancel my tickets to France for the 24hr of Lemans? =(

Quote: odiousgambit

I would think this day and age, IRS would know right away they had someone who was not reporting all of his income. In days past, dunno.

They'll certainly know. If it was some check from a manual book, maybe I'd wonder. But it's a computer drafted check from a payroll company. They'll know.

Quote: blount2000

Here is my understanding of it:

Great answer, blount. Thanks =)

Fortunately (unfortunately?), I am in way too deep to ever dream of making a profit this year. And the following years would really take a lot of luck. Even assuming there is no random costs like tires or repairs, it's easy $100 a week to keep running if we include fuel. With good finishes, a high placement at end of the year, and some knockout sponsors, perhaps I can put two or three digits in the black. But it would take a lot of luck. I suppose I'm firmly in the "hobby" section, at least for now and at this level.

I suppose I have some research to do. At least I now know where to start. Thanks!

Face,

There's some kind of earnings test, if you're doing it as a business, where you have to show a net profit 2 years of any 5. That alone might keep you in the hobbyist class; I don't know how much advertising revenue you're bringing in, but it sounds like potential purses don't come close to covering your expenses.

I would highly recommend you see a tax accountant; the independent ones are not nearly as expensive as you'd think, as I found out to my pleasant surprise this past spring. If you would like to talk to mine, I can put you in touch. Very reasonable, very willing to 'splain things plain-language until they make sense.

You might also talk to Paradigm, who does this stuff as his main job but isn't usually on DT. He worked with me on OftM and could not be a better person to help with something; discreet, smart, not condescending. Obviously I can't speak for him, but I'd think he'd give you a break on his rates.

Quote: beachbumbabs

Face,

There's some kind of earnings test, if you're doing it as a business, where you have to show a net profit 2 years of any 5. That alone might keep you in the hobbyist class; I don't know how much advertising revenue you're bringing in, but it sounds like potential purses don't come close to covering your expenses.

I would highly recommend you see a tax accountant; the independent ones are not nearly as expensive as you'd think, as I found out to my pleasant surprise this past spring. If you would like to talk to mine, I can put you in touch. Very reasonable, very willing to 'splain things plain-language until they make sense.

You might also talk to Paradigm, who does this stuff as his main job but isn't usually on DT. He worked with me on OftM and could not be a better person to help with something; discreet, smart, not condescending. Obviously I can't speak for him, but I'd think he'd give you a break on his rates.

Perhaps I will seek an accountant, thanks for the info. This year, turning a profit would be impossible save for some rich aunt paying me 5,000% over standard to hawk her cupcake business. Even if I were to get the asking price for the primary sponsorship, and win every single race and the championship, I'd be $6k+ short of breaking even. The following years won't be so bad as this year was a lot of start up costs, but even then, finishing even double digits in the black would be extremely optimistic.

That's mostly why I was asking. Hearing all the talk on WoV about being able to claim losses or whatever on gambling had me interested. I didn't go into this expecting to get money back on the money I spent, but the thought of paying even more on the few bucks I win... it just doesn't sit right with me =p

Quote: Face

They'll certainly know. If it was some check from a manual book, maybe I'd wonder. But it's a computer drafted check from a payroll company. They'll know.

The IRS will only know if you get a 1099 at the end of the year. Businesses don't have to report the payouts to every supplier so if you don't get a 1099 and you are operating as a hobby (which you are), then I wouldn't worry about.

You could just call the company and ask if you are getting a tax form for your winnings and act accordingly.

I think that if your expectations are to run a profit in the long run that you should start declaring it as a business.