JJKJ

Not looking for free legal advice as I know what that is worth. I'm looking for info from those of you who have experience with my questions and I'm trying to get some basic knowledge before sitting down and speaking with our tax attorney.

I used to autox and progressed into club racing back in the late 90's. I got out due to family, work, house, etc. Too much to keep up with time and money-wise. I am now in a position to start autoxing again. I just purchased an '11 GS that I plan to use for a fun driver and autox.

My wife owns her own real estate brokerage that is set up as S-corp. I would like to have her brokerage partially sponsor my autox activities. Obvious tax benefits exist, I just don't know to what extent. My questions are:

What pitfalls exist? When I talk with our attorney, what should I ask/know? My guess is that he won't be an expert on this topic as it's not real common so I'd like to have some idea of what's in front of me.

Do I need to set up my racing activities as a business entity and show her sponsorship dollars as income? Or can her sponsorship be paid to me directly? I'm guessing if paid to me directly, sponsorship is taxable income? If it is considered income, am I able to reduce that income by writing it off with race expenses?

Please respond with any experience and helpful info you have. I'd love to have my hobby help relieve some of our tax burden.

Thanks,

John

Solofast

There is no free lunch, but you might be able to do what you are thinking, but what the IRS will ask is "how much is being gained from this advertising, and if you went out and bought the space on somebody else's car how much would it cost?" That is probably the limt of what you could sell them in terms of business expenses.

The short answer is that space on any autocross car doesn't cost much because it has a limited reach. That is, you aren't going to get many eyes on your ad pasted on an autocross car. If you were running at the local roundy round the number of eyes on the ad are much larger and it is therefore worth more.

If you were thinking that your wifes business could buy a few thousand dollars in tires each year you are probably reaching. The IRS isn't going to be very receptive to that kind of thing in an audit.

The conversation would go something like this:

IRS - So what is this $4,000 per year advertising expense to Numbchuck Racing?

Wife - Oh, that's my husbands race car we put sponsor decals on it.

IRS - How many people go to these races and do you have an proof that this advertising brought you any business?

Wife - Well, it autcross so there are maybe 60 people out there on a weekend, and, well, no we didn't get any real referrals out of it, but it gets our name in public.....

IRS - Well, your deduction is going to be limited in this case to $xyz dollars and OBTW, did your husband declare this all as income in his racing business?

IRS to you - Ok, you've created Numbchuck racing, how much did you win, and how much can you win in prize money? Do you have any other income from racing from other sponsors other than your wife? OBTW after 5 years you have to shut down the business because of the "hobby loss rule", which states that if you don't make a profit, and don't expect to make a profit, after 5 years your "business" is actually a hobby and you can't lose money on a hobby and write it off. According to the hobby loss rule you can only write off expenses to the limts of you income, but that is what you want to do anyway, so that does fit.

In short, you really can't deduct much and the hassle may not be worth it. I'm sure lots of people have deducted a lot of money over time on this kind of thing, but believe me the last thing you want to do is get tagged in a audit with this kind of thing.

In order to do it at all, you are going to have to create a business for the racing, get a federal tax number and a state business license and properly set up an accounting sytem that tracks all of your expenses.

I had an airplane that was on leaseback and got audited twice. I had extensive documentation and it really was a business, and I got thru it without it costing me anything except for the CPA that I had to hire to represent me with the IRS each time. Hobby loss rules are there to prevent people from making their hobbies into tax deductions. Be very careful and go get professional advice from somebody who is a tax accountant before you try to do it. Your attorney won't know jack about this subject unless he does tax law on a regular basis. Talk to the guy who does the books for your wife's business, or a good tax guy.

davidfarmer

If you have a legitimate business, you are making a huge mistake if you AREN'T sponsoring yourself. The easiest thing is to just pay expenses from your wife's business and record them as advertising. Or you can set up your own business, count the sponsorship as income, then count all of your expenses against it. However, you must show a profit every few years, so I prefer to just let the sponsor pay the bills.

I did this for many many years with our business basically taking "sponsorship" in lie of a paycheck. Less tax burden for me and the business, and we deducted all of it. No auditing in the many years we did it, either business or personally. I don't really think it is the IRS's business how you spend your advertising budget, as long as you pay taxes on the profits your company makes, and the payroll you put out.

I personally don't think you need the above fed tax ID, etc....just a sole proprietorship works just fine. I still have file one to depreciate my trailer.

Jason

This is all just crazy talk. What your wife really needs to do is sponsor MY race car.

John Shiels

talk to your accountant

Solofast

Guys,

Lots of people deduct things that the IRS would never allow, and if they never get audited there never is an issue. But if you deduct something as a business expense you had best be able to justify it as an "ordinary and necessary" expense or it will be disallowed.

Here is a link on small business deductions that explains the process, but the key element of the test is, is this deduction "ordinary and necessary" for the business?

http://www.biztaxadvisor.com/small-b...eductions.html

Your wife can buy you your race tires, but that isn't an "ordinary and necessary" business expense for a real estate brokerage. The stickers you put on the car are, and if she pays a fee for you to run the car that can be called advertising. But the auditor will look at what amount of business can come from this advertising, and if it doesn't make sense, when you go in for an audit, the auditor just disallows the expense.

Unless you are going to appeal (good luck at that) or take it to tax court, you are stuck. At the end of the audit they total up how much you owe. Then they add penalties (calculted at .5% per month from when the taxes were originally due). Then you pay interest on the total amount (7-8% per year).

As you can see the interest and penalties add up very quickly and you can end up with a huge bill if you try to use something as shakey as an autocross car that your husband drives as an advertising expense.

If you want to let her pay for the decals and then pay a couple of hundred dollars that migh fly, but if she is paying thousands of dollars for a sign that maybe 60 people see on a weekend a half a dozen times a year, that isn't going to fly.

Rednels

Solofast is right.

If you are still unsure, Google what happened to Menards Indy team. They ended being forced to pay like 2 million in taxed, they appealed and lost it in court. And they are as legit as it gets.

Also know that statistically speaking, the 2 more audited deductions are horses and racing. You will be very likely to get audited at some point.

Just some things to think about.

I own a legitimate business and I thought about this, and after consulting with a tax attorney I decided it was not worth the hassle. I think you would need to be in a pretty high level of racing (aka...lots of people watching) to be able to justify charging enough for advertising to cover what we spend racing.

froggy47

Post's 5,6,7 have it right.

JJKJ

Thanks for the responses. To clarify, we did not expect to be able to deduct thousands of dollars in race expenses. However, I think it is a reasonable method of advertising that would involve some level of deduction.

I'm not sure how the IRS would make the call on the effectiveness of advertising and which form is used. For example, when my wife was first starting her business she rented billboard space. A very expensive and what we found to be an ineffective way of advertising when discussing with her clients where and how they got her name. I guess I'm trying to determine how the IRS could make the call as to which form of advertising is successful and what is not. If she was audited for her billboard expense, would they disallow it because we couldn't prove it brought in a reasonable level of business?

Either way, I do appreciate the info. We are going to discuss this with our tax attorney before making any decisions. I felt it was easier to ask here and get some preliminary info before we sit down and discuss the topic.

Thanks,

John

froggy47

IRS does not care how advert dollars are spent or whether they are successful or not.

Most businesses waste lots of deductible dollars on poor advertising.

It's "ordinary AND necessary" test that must be passed.

Is it ordinary and necessary that a RE agent buy business cards to pass out, put their face on flyers to neighborhoods, buy glossy magazine ads?

Answer: YES

Is it ordinary and necessary that a wife "buy" ad space on hubby's weekend toy?

Answer: ????

IRS might be interested in which other race cars is wife buying ad space on.

If it happens it becomes INCOME to the BUSINESS of the husband & some form of tax return must be filed.

If it's minimal $$$ it's really not worth it IMO.

If it's substantial $$$ you are asking for an audit to substantiate that you are running a for profit business with the car.

WNeal

I have another one in mind for her as well.

AND, I would include a free 10/10ths T-Shirt to her.

OCCOMSRAZOR

This is what my CPA has told me.