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https://www.youtube.com/watch?v=BAjxn2US7J8
I'm a CPA and can confirm this is 100% legal. You can sponsor a motocross rider or a go kart racer and call it an advertising expense. That's totally allowed, but it would be fraud if the rider never actually existed, or you never actually paid the rider.
He's right that what most people don't understand is you're not getting the $10k as a "write off." You have a $10k expense, so assuming your business is profitable, you reduce your taxable income by $10k so you're saving yourself $2,100 or whatever the corporate tax rate is. In reality after the TCJA of 2017 and the Covid era legislation, most businesses have unlimited loss carryforwards anyway. That's why people are complaining about most businesses not paying any tax right now. And you have depreciation of other assets, most real businesses are running a paper loss right now anyway or carrying forward old losses. So the whole point of doing this sort of pointless unless your business has been consistently profitable for the last 5 years or so.
Where you get into murky waters is trying to claim the depreciation of "fun" assets as a business expense. For example, I consider my motorhome to be a mobile office for my company. I personally don't choose to write it off against my business because I don't want the headache, but from my understanding, you could use the depreciation expense of your motorhome if you use it as a "home office."
The OP isn’t talking about paying a sum to a just any rider - he’s talking about sponsoring his kid so that he can write off the expenses. It’s one thing for your existing business to pay a rider for advertising but forming a corporation for the purpose of “sponsoring” your own kid - to “write off” expenses you were going to have anyways - is quite another. The devil is in the details and we know nothing about the OP so for all we know he’ll see the first sentence of your post, say “oh good, a CPA said it’s completely legal” while ignoring the qualifications and explanation that follows. So my approach is to nip such things in the bud and not give any reason that can be misinterpreted as permission for something that is, at best, questionable.
you're right that forming an LLC for the kid isn't required at all
the fact that it's your own kid could potentially raise eyebrows, but doesn't make it against code
you can use your own kid to expense marketing costs. to say otherwise is making a mountain out of a mole hill.
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If OP reads only the first sentence of that response and runs off and does this, I put that on OP, not the CPA who wrote out a good explanation of things that OP didn't fully read.
Regardless, this seems like a lot of effort and risk to save not very much money. Remember that all this isn't free. You have to pay to form the LLC, you have to pay an LLC fee each year, tax prep costs more and/or takes more time if you do it yourself, it takes time to document things and keep records, etc. Even if you skip the LLC and do it as a sole proprietor, it's still a lot of work and risk for not much gain.
The question is: marketing for what? If you have a job where you earn a salary and your 8 year old races you don’t have any need for marketing.
well obviously the downside of being a W-2 employee, you don't get to expense anything anymore. the whole question presumes he has some type of small business or self-proprietorship. in that case, he has every right to advertise his business any way he sees fit and report those expenses.
The OP didn’t say that so I didn’t assume it.
Edit: I looked at the thread again and he did say he’d be starting a small business marketing a moto product so that’s on me to not have seen that.
Exactly. OP asked if he can create a business to deduct his racing expense by funneling it through a marketing budget. It’s kinda putting the cart before the horse. Should probably focus on getting the business off the ground first…
I was kinda thinking like this ….
I spend 30 K a year on moto . I am in the 24 percent tax bracket .
So , if I could write off the 30K as marketing and promotion , by paying him a 30 K salary yearly , in theory that could save me 7,200 bucks in income tax .
That’s like a free bike , but If I’m too lazy and ignorant to go through the process -
I’m buying the bike for the government .
one option if you form his racing as its own business, you could pay him a salary and consider all the racing expenses. assuming he races local A or something where he is participating for revenue. Now you take all the losses and claim them on schedule C, reducing your taxable income. You could probably reduce your own income by claiming losses from that business for three years until hobby loss rules apply.
Yea but only kind of. Ground rules:
- You can pretty much do anything, as long as you don't get audited.
- You can still get most shit through your CPA, doesn't mean it hold up for IRS audit.
- Whatever you do, make sure you can take a hit for multiple years + penalty, when if/it hits.
As for sponsoring, it has to be in proportion to the exposure. You can't sponsor someone with 20k that's running practises only at the local track. Sponsoring shall be at and give market value, both ways. You have to be able to prove that you got what you paid for, or reasonbly close. If you could have spent that money elsewhere and gotten a unproportional amount of eyeballs compared to what you get now it doesn't fly.
Of course, if CPA is relaxed, if IRS person you happend to get has no clue and don't put in the effort, you will get away with it. Wrong guy at IRS and you are fucked.
It is no fun, getting hit with 5 years of VAT, taxes + penalty that wasn't deemed to be "deductible". Especially if you don't have that cash.
Well said .
I was a pretty successful competition BBQ cook in a life before moto. The first year we started making money, I had a crash course in 1099’s. I fortunately had a supervisor that was a drag racer and set me up with his tax lady. We eventually were saving all bbq related receipts, tracking mileage and buying trailers and smokers and having them set up as depreciating assets. Totally naive to what she was doing, but my tax returns were always amazing.
The problem I would see in moto is unless you are at the absolute highest pro level, who is getting 1099’s in moto
It is not receiving a 1099 that makes receiving $ taxable. The 1099 is to keep you honest.
It’s easy bro I did it on my phone in the truck. Zen buisness 199.00 per yr. U just fill in a blanks & enter your cc. I think it’s important to hv a power name because late at night the irs . Has aag Global inc my old s corp name vs Bobby Lee Bobby trucking . U know Bobby is getting audited vs me. Funny I was fighting to keep that name , I made up in 2 seconds with a busy Lithuanian women waiting. Zen emailed or called & said another co has that name . I said yeah me , I ,m not going to sue myself, etc. she said u can’t use it & u can’t use inc since your not incorporated. I said can I speak to your supervisor we can do a 3 way call. She said the same thing. So I had to come up with a new name instantly. So I did but I included GLOBAL in the name. 24-48 hrs u get a email with your tax id# ein # it’s the same thing. A couple more days and your paper documents come in the mail.
I am a CPA and the focus of my practice is helping successful business owners mitigate their tax liability.
There is a lot of bad info in this thread but who is surprised! It reminds me of the “tax advice” on TikTok.
The main issue with the proposed strategy is it would create income for your kid subject to self employment taxes. Depending on your kids situation it would likely be counterproductive.
Issue #2 would be hobby loss rules assuming you didn’t have a viable business already.
It’s creative and I appreciate the thought process but it is fraught with risk.
Self employment tax? That's the big downside you're finding here? You don't even have to file a tax return at all if you don't net over $400 as self employed. So the kid gets a salary of $15,000 and spends $14,800 on racing. He doesn't even need to file a return, plus he's a kid.
Pit Row
Start a tree trimming buisness on the side . The bike parts u sneak in won’t b noticeable. I leased a trk& trl in early 2021 so the van tires @ parts where a legitimate write off. I need the van to put large truck parts. Gas driving back to side Chicago to work is not though. I think the tolls r but I don’t bother. Go to Kinkos & buy a few different receipt books. I claim 24.50 for laundry a week, 1/2 my phone , boots , cloths , ppe stuff. So a pair of Mx goggles receipts here& there end up mixed in with a pair of Mx boots . Work boots r 300 now . Tools I work on the trk every weekend . So a case splitter etc get mixed in . . I claim my work socks to underwear , expensive storage unit , every pen & paper clip , glass cleaner , rag 4 my glasses, oil filters , spark plugs. So a few oil 4 bike gets mixed in . . Basically claim everything but I hv it organized into different categories. This takes mega hrs . The more u claim the less tax u pay & the cheaper the health insurance is also. I think the irs wants ic workers to know the tax laws . Because the ones that don’t hv 50+ k tax bills they can’t pay . They go on a payment plan . It’s prefers a ic to pay late so they make a little extra on penalties & interest & all money owed paid at once . I always file for. A extension & do my r taxes just b4 the sept dead line . That way I hang on to there money till the last day. I might hv to go back working as a w2 employee, it’s slow , equipment garbage & all the loads r Really tough 1,s , etc. I kick a high % into a 401k then to tax defer my money.
What’s your opinion on amending your taxes ? You hv 3 yrs correct? My tax says he makes his fortoff of investors & taxes r a necessary evil of tge buisness. I had 12 k of legit write offs and didn’t claim them. My tax guy said your way ovr on expenses vs last yr. I said everything went up & it’s a different job. He said red flag. When we finished I asked how did the rest the the trucking co.s & ic,s fo ? He said a lot of losses & most r shutting down . BP bought TA truck stops not sure about Petro. Tge day of the buyout BP said do inventory & raise all the prices. Truth is u need to make wayy more money as a ic to equal everything out. The 15% ss & Medicare is a killer. W2 your 7.5% big difference. No insurance it’s a pain getting your own plan every yr. , retirement you do yourself but never do . 4-5 yrs ago it was wayy better than a w2 union job not now though . But it is gratifying that your taking on the system. If iL. Chicsgo labor dept didn’t deny my 400k of unpaid wages . I was going to do my own Big money 125 series. Not giving up though.
I don’t like amending without a compelling reason. It reopens the statute of limitations and sometimes it is better to let sleeping dogs lie.
If you had legitimate expenses, the only appropriate action is to take them. In my opinion there is no increase to your audit risk and if they are legit what is the downside? You could make an argument by not taking legitimate expenses you are committing fraud by inflating your income.
Yes SE tax(15.3%) in addition to the tax on ordinary income is a downside.
In the proposed scenario the sponsored kid would have very little allowable expenses to offset his income. To be more clear, racing is a hobby and you can’t take direct expenses but would need to claim the income. It’s nice trap created by the tax code. The kid would be able to write off the expenses directly related to raising the funding and creating the advertising. E.g. banking fees, graphics, other selling costs.
If the parent had a legitimate business they could potentially write off the sponsorship paid as advertising within reason but again you would be shifting the income to the kid subject to SE tax. Depending on the parents marginal tax rate and the kids marginal tax rate factoring in the SE tax I find it unlikely the juice is worth the squeeze.
Hmm, pretty sure all the racing expenses paid by the kid would be business expenses in this scenario. Not just graphics. Not worth arguing over, but if he's not turning profit. There's no tax. Until hobby loss, assuming they ever enforce it
A voice of reason. How refreshing.
My wife approves this statement
A lot of local area CPA's can just be overly conservative in their advice. They don't want to sign off on a return and risk anything or have to deal with the follow up, waste time and hours, I get it. But still a lot of people leave good money on the table by not making an effort. The tax code is incredibly complicated, different people have different specialty and interpretation of things. I've worked with CPA's who made tons of mistakes in clients tax returns.
If you're filing your own taxes, I say go for it. Claim whatever you can and do whatever you can. The money is just being sent abroad or giving back as welfare anyway and the IRS staff is being reduced a decent amount at the moment. Argue your own case in tax court if they take it there. They made so much code and so many laws, even the judges don't know what technically correct anymore.
Be careful of which LLC you use. Some do not allow claiming mileage.
I’m not an American and know little if anything about American tax so I could be completely misunderstanding something. But abstracting away from any particular tax code and just looking at the general concept being put forward, the idea of incorporating to purposely create a loss to reduce taxes so, as the OP put it, he essentially gets a free bike from the government, seems like a hair brained idea that shouldn’t work in any rational tax regime.
In Canada, if there’s no reasonable expectation of profit CRA won’t allow any losses to be claimed. If you persisted in claiming them you’d likely be facing gross negligence penalties if the CRA looked at it.
I agree many CPAs error on the side of being conservative and I find many business owners are overpaying.
We have an obligation via circular 230 and our professional ethics to never knowing file a false tax return however areas that are open to interpretation are different and if you have a reasonable basis to make the claim and understand the risks then ultimately it’s the clients call. For what it’s worth, in my opinion the hypothetical proposed above is more clearly defined than what people realize it’s just not the answer they want.
I would caution you on just sending it in on your tax return lol. If it was tested by the IRS, by the time they assessed an accuracy related penalty, and interest it becomes extremely punitive. Not to mention the IRS is the only “debt collector” that can put you in jail, and they do for less than you would think.
The IRS has catch all language written into the code. Summarizing here but it states if the primary purpose of the activity is the avoidance of tax then it cannot be classified as an active trade or business. You have to meet certain tests to support the position.
The end result would be income is taxable and expenses are disallowed. Ouch.
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