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Just wanted to throw this idea out there and see if anyone has either done something similar, or has some knowledge that would help me determine if this is a good idea or not.
Here's a little background:
Some of you might know from videos and race reports I've posted that I race hillclimb at the professional level. We used to get paid in cash, but now everything is a lot more legit, so we are expected to pay taxes on our winnings. For the amount of racing I do it isn't much, maybe a couple thousand a year if I do really well, but it is expected to be claimed none the less. Someone in my family suggested that I maybe explore the idea of starting a LLC for my racing, which would allow me to more easily write off racing expenses and separate them from my regular taxes. Obviously this would not be considered my primary source of income, but something that is secondary and separate from my personal taxes.
The main thing that brought this about is I am in the market for a new van (likely a sprinter), and since it will be used quite a bit for riding and racing I don't think it would be unreasonable to use it as a tax write off. Under the LLC, I assume I would be able to track the mileage I put on it for business use (racing/practicing), and write off the depreciation and expenses (maintenance, etc.). I'm not in any way trying to pull anything shady off or stretch the law, I'd just like to take advantage of tax laws that may be in my favor. I can imagine for potential sponsors it might be a good selling point as well, since it shows a decent commitment level to racing.
Anyone done something similar or have any thoughts? Good idea, bad idea, not worth the hassle for the small amount of savings? I'm just throwing the idea out and will obviously be talking to a CPA if I decide to go ahead with it, but I just wanted some thoughts. I'm far from an expert on this and I'm just a dumb recent college grad who is learning the system, so go easy if I'm way off course here.
Here's a little background:
Some of you might know from videos and race reports I've posted that I race hillclimb at the professional level. We used to get paid in cash, but now everything is a lot more legit, so we are expected to pay taxes on our winnings. For the amount of racing I do it isn't much, maybe a couple thousand a year if I do really well, but it is expected to be claimed none the less. Someone in my family suggested that I maybe explore the idea of starting a LLC for my racing, which would allow me to more easily write off racing expenses and separate them from my regular taxes. Obviously this would not be considered my primary source of income, but something that is secondary and separate from my personal taxes.
The main thing that brought this about is I am in the market for a new van (likely a sprinter), and since it will be used quite a bit for riding and racing I don't think it would be unreasonable to use it as a tax write off. Under the LLC, I assume I would be able to track the mileage I put on it for business use (racing/practicing), and write off the depreciation and expenses (maintenance, etc.). I'm not in any way trying to pull anything shady off or stretch the law, I'd just like to take advantage of tax laws that may be in my favor. I can imagine for potential sponsors it might be a good selling point as well, since it shows a decent commitment level to racing.
Anyone done something similar or have any thoughts? Good idea, bad idea, not worth the hassle for the small amount of savings? I'm just throwing the idea out and will obviously be talking to a CPA if I decide to go ahead with it, but I just wanted some thoughts. I'm far from an expert on this and I'm just a dumb recent college grad who is learning the system, so go easy if I'm way off course here.
Just my .02.
Although I see you're in CA and single member LLC's are allowed. $800/year.
I'm not a CPA yet but I am currently taking the exam.
The Shop
No point in spending the money to setup an LLC when you can track expenses and deduct them from your income as a sole proprietor. Do they give you a 1099? You should be able to deduct your mileage, hotels, and shop/garage. You will probably raise some red flags and get audited so be aware of that. It's pretty simple to calculate the cost of your garage. I do it for an in home office. If you do any book keeping, scheduling, reserving hotels in an office in the house then I'd say deduct some space for that as well. Cell phones, insurance, utilities, etc. Keep receipts for it all and be ready to justify it to the IRS.
You would do an LLC if you were wanting to remove liability and protect your existing assets. I don't see the advantage in terms of taxes. IRS doesn't look it at it as any different than sole proprietor.
Also, talking with us on here is a waste of time haha. None of us are truly qualified to answer these questions.
That said, please update us with what your CPA or attorney tells you. I'd be curious to hear their advice.
https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/When-the-IRS-Classifies-Your-Business-as-a-Hobby/INF22852.html
https://www.forbes.com/sites/kellyphillipserb/2011/10/25/run-with-it-sp…
"...you must report your winnings on your income taxes. The actual treatment of the winnings, though, hinges on whether you consider running a business or a hobby. If running – or any other sport – is your hobby, then you would report winnings as "other income" (good ol' line 21 on your federal form 1040). If that's the case, you can claim deductions - like entry fees, running shoes and other related expenses - against your winnings but only if you itemize. You would include your related running expenses as "miscellaneous itemized deductions" on your Schedule A. Those miscellaneous itemized deductions are limited to those in excess of 2% of your AGI (adjusted gross income).
Additionally, if you treat running as a hobby, your deductions are limited to the amount of your winnings. You also can’t carry excess deductions forwards or backwards. So, if you’re like me and you pay an entry fee to run but don’t win anything except for the odd finisher medal (my last one was carved out of wood into a whistle), you can’t properly claim any running-related deductions. But that’s okay – I’m only running because I like it. And for the shoes.
If, however, running is a business for you, you would report your winnings on a Schedule C. Similarly, you would claim your deductions on your Schedule C. In that event, your deductions wouldn't be limited to a % of your AGI and you can report deductions in excess of your income.
How can you tell if running is a hobby or a business for you? The IRS looks at a number of factors. First of all, the IRS assumes that you’re in business to make money. There’s nothing that says that you can’t enjoy your business, but if you’re running primarily because you like it and not to make money as your main motive, it’s likely a hobby. Additionally, the IRS assumes that a business will eventually make a profit. If you spend more than you make year after year, the IRS is going to lean hobby - especially if you've lost money for three of the past five years. For more on the hobby rules, see my prior post about hobby income tests and Mary Kay.
Lots to consider, right? Or, if you're like me, you just take your medal and run. No tax consequences for those of us in the middle of the pack."
Just maybe not worth starting a LLC over, at least you may be able to use expenses to off set winnings and not pay any additional taxes.
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