Tax deductions for sponsored riders?

Moto810
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10/16/2016 6:02pm Edited Date/Time 10/16/2016 6:03pm
Any other business owners here sponsor riders? Question is how do you write off the bikes you provide for these riders? Depreciation or just direct deduction? If there is any team owner here or someone with this experience please share some details.
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MxKing809
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10/16/2016 6:28pm
I would imagine as an advertising deduction....... not sure though.

I doubt you would be able to recoup even 15% of your investment through deductions.
Moto810
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10/16/2016 6:43pm
The big issue is how you deal with bikes. Most cars and large capital items are normally depreciated rather than direct expensed?
Starcrossed
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10/16/2016 7:04pm Edited Date/Time 10/16/2016 7:04pm
Unless you're in the business of racing motorcycles, the expenditure would not qualify for capitalization. Most people/companies who sponsor riders are doing it as a way to subsidize the racers' programs, regardless of the advertising value, and would have to look to the IRS rules for deducting advertising expenses. If the "advertising" does not correspond to the business, or does not appear to be an "ordinary and necessary" expense of the business in question, it would be disallowed.
Moto810
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10/16/2016 7:20pm Edited Date/Time 10/16/2016 7:21pm
That is not what I am asking. Thanks for your input though. This is not if we are allowed to write off expenses. It is how to write off the bikes. We are a business and we are NOT sponsoring ourselves. We are sponsoring another person separate from our business thus we are allowed to write it off as advertising. The issue is how to write off the bikes itself. I expect teams are expensing them as normal items and not like a car would be done for a business.

The Shop

731chopper
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10/16/2016 7:41pm
I'm sure there are some CPA's on here that can give some recommendations but I think some basic questions that need to be answered are how long do you keep the bikes and what do you do with them once you're done with them?
Moto810
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10/16/2016 7:47pm
Yes there is always a disposal situation with cars and major expense items. That is why I am wondering if any team owners are on here. We all know a pro raced 250f is trash after the season thus it is not worth much. The life of it really is only one season for high level racing. I would imagine the teams are writing them off almost 100% because of that fact.
Steiny
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10/16/2016 8:26pm
Moto810 wrote:
Any other business owners here sponsor riders? Question is how do you write off the bikes you provide for these riders? Depreciation or just direct deduction...
Any other business owners here sponsor riders? Question is how do you write off the bikes you provide for these riders? Depreciation or just direct deduction? If there is any team owner here or someone with this experience please share some details.
Advertisement deduction is what I do and my CPA makes it work.
CarlinoJoeVideo
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10/16/2016 8:31pm
I'm no tax pro, but here's my 2 cents...

In your case I'd just label it as a marketing expense and take it all off 2016. Full price you paid, graphics, ect that went towards this, "marketing item".

The difference between your situation and a race team is that for them the bike is a, "tool" or "nessicary item" to perform their job. So I believe it's just a different category but same result?


10/16/2016 8:39pm
This is a great tax topic!!

I believe there are a few options available and your overall tax strategy needs to be considered.

The asset does not qualify as a vehicle so, this opens up the possibility of using section 179. Careful consideration should be used in valuation of the asset. Some parts are routine maintenance items and some are considered upgrades and should be added to the cost of the asset, or depreciated as a separate asset. Again, depending on the details of that particular item.

The business should have a policy in place that determines their threshold in the case of capitalization versus expense items. This will be a determining factor in execution.

It sounds like the Planned life of the asset is short. This matters because when the asset is disposed, there maybe a recapture calculation necessary. The planned selling price of the asset could help to determine the overall strategy.

The key is to put together a plan using all variables and the overall tax strategy of the entity. Of course, nobody wants to pay more taxes than they have too!!

chump6784
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10/16/2016 8:50pm
Probably different in Australia but here the business cannot pay for the bikes themselves but can pay day to day expenses if running the bikes, entry fees etc and write it off as advertising. That is what I do. I am unsure how it works for teams though, maybe they can write off the bikes
Moto810
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10/16/2016 9:06pm
Thanks for the feedback. This is a good topic for many out there I am sure. Having a clear picture of tax issues could help more small business owners sponsor riders or put together teams.
Jrewing
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10/17/2016 2:08am
chump6784 wrote:
Probably different in Australia but here the business cannot pay for the bikes themselves but can pay day to day expenses if running the bikes, entry...
Probably different in Australia but here the business cannot pay for the bikes themselves but can pay day to day expenses if running the bikes, entry fees etc and write it off as advertising. That is what I do. I am unsure how it works for teams though, maybe they can write off the bikes
What I do... Or accountant actually. Geez my advertising budget is big!!
Starcrossed
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10/17/2016 5:35am
This is a great tax topic!! I believe there are a few options available and your overall tax strategy needs to be considered. The asset does...
This is a great tax topic!!

I believe there are a few options available and your overall tax strategy needs to be considered.

The asset does not qualify as a vehicle so, this opens up the possibility of using section 179. Careful consideration should be used in valuation of the asset. Some parts are routine maintenance items and some are considered upgrades and should be added to the cost of the asset, or depreciated as a separate asset. Again, depending on the details of that particular item.

The business should have a policy in place that determines their threshold in the case of capitalization versus expense items. This will be a determining factor in execution.

It sounds like the Planned life of the asset is short. This matters because when the asset is disposed, there maybe a recapture calculation necessary. The planned selling price of the asset could help to determine the overall strategy.

The key is to put together a plan using all variables and the overall tax strategy of the entity. Of course, nobody wants to pay more taxes than they have too!!

This is all true, but in this case the assets (bikes) are not used by the taxpayers business. This is an advertising issue, not one of capitalization vs. direct expense.
motogrady
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10/17/2016 7:28am
Moto810 wrote:
Any other business owners here sponsor riders? Question is how do you write off the bikes you provide for these riders? Depreciation or just direct deduction...
Any other business owners here sponsor riders? Question is how do you write off the bikes you provide for these riders? Depreciation or just direct deduction? If there is any team owner here or someone with this experience please share some details.

Seems to me, if you are a license dealer, factory, or some kind of aftermarket company, like factory connection,
it would all be advertizing. Write it all off minus what you recoup when you sell off the old stuff at the end of the year.
The rest, the vans, tools, stuff that carries on from year to year, depreciate it.

Makes you kinda realize why crushing bikes at years end is a not so bad an idea.
Total write off, no hassle selling, no putting that value back in the mix.
ACBraap
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10/17/2016 10:47am
MxKing809 wrote:
I would imagine as an advertising deduction....... not sure though.

I doubt you would be able to recoup even 15% of your investment through deductions.
If you have a business where advertising is common, you could sponsor a rider or team and take a deduction. You're confusing ROI with deductions though.

The cost of the sponsorship to you is (1 - your marginal tax rate) x Amount spent. For example, if you're in the 35% bracket, spending $1K, would effectively cost $650.

ROI on the advertising is a different matter, and is hard to quantify (probably part of why large sponsors come and go so quickly in the sport...).

You see a lot of mx families 'sponsoring' with their own business not because it's effective advertising, but because turning a personal expense into a business deduction makes it much less expensive.



kkawboy14
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10/17/2016 12:00pm
MxKing809 wrote:
I would imagine as an advertising deduction....... not sure though.

I doubt you would be able to recoup even 15% of your investment through deductions.
I write everything off whether I help someone else or myself as an Advertising/Marketing expense. I have been audited and never had a problem with it.
Moto810
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10/17/2016 12:07pm
Yes true what some say about ROI. Mostly it does not pay. We are a business though and by sponsoring some riders we do get some advertising and at the same time we help someone. I know the ROI is not good at all. I just do it to help and why not get a tax deduction while we are at it being that we do have products that can always use the advertising!

The good thing about us is we are not in the motocross business. We are in the tech biz so we fall into just advertising much like Monster Energy, Red Bull, Chevy, or any other non moto biz.
Starcrossed
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10/17/2016 1:49pm Edited Date/Time 10/17/2016 1:52pm
Moto810 wrote:
Yes true what some say about ROI. Mostly it does not pay. We are a business though and by sponsoring some riders we do get some...
Yes true what some say about ROI. Mostly it does not pay. We are a business though and by sponsoring some riders we do get some advertising and at the same time we help someone. I know the ROI is not good at all. I just do it to help and why not get a tax deduction while we are at it being that we do have products that can always use the advertising!

The good thing about us is we are not in the motocross business. We are in the tech biz so we fall into just advertising much like Monster Energy, Red Bull, Chevy, or any other non moto biz.
The IRS rules and regs for deducting advertising expenses are designed to prevent taxpayers from taking deductions that are essentially supporting somebody's hobby, and have no, or very little, advertising value to the taxpayer. This is your issue, not one of capitalization. Ignore it at your own expense. Monster and Red Bull clearly are not in the same category, when it comes to advertising.
The threshhold is "Ordinary AND necessary business expense." You must meet both standards.
Moto810
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10/17/2016 2:00pm
My company is no different than ME. Just because they have different products does not decide one can advertise on a riders bike and the other can not. Monster has nothing to do with dirt bikes as the product goes. Same with Nascar and say "Home Depot". We are no different so we fall into the ability to advertise on a car or bike. It is just a matter of how to write off the bikes and if it is a disposable item or if it must be depreciated.
Starcrossed
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10/17/2016 2:02pm Edited Date/Time 10/17/2016 2:06pm
Moto810 wrote:
My company is no different than ME. Just because they have different products does not decide one can advertise on a riders bike and the other...
My company is no different than ME. Just because they have different products does not decide one can advertise on a riders bike and the other can not. Monster has nothing to do with dirt bikes as the product goes. Same with Nascar and say "Home Depot". We are no different so we fall into the ability to advertise on a car or bike. It is just a matter of how to write off the bikes and if it is a disposable item or if it must be depreciated.
If you say so...."Ordinary AND necessary"

https://www.irs.gov/businesses/small-businesses-self-employed/deducting…

assuming you have a small business
Cygnus
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10/17/2016 2:04pm Edited Date/Time 10/17/2016 2:05pm
It's one thing to write off some entry fees and a couple sets of tire's and writing off the whole bike. Talk to an experienced accountant before ya go to jail.
Starcrossed
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10/17/2016 2:15pm Edited Date/Time 10/17/2016 2:23pm
Also, small businesses that have unusually high advertising expenses find their way onto the IRS's radar quicker than those who don't. There are certain expense categories that draw the IRS's attention more so than others. Advertising, auto, meals & entertainment, being a few of them

From the IRS guidelines:

What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Moto810
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10/17/2016 2:33pm Edited Date/Time 10/17/2016 2:33pm
So if you say that then how does Home Depot justify it? ME in dirt bike racing? Godaddy in Nascar? Godaddy is a tech company and we are a tech company. I am sure they write it off an advertising.


Now there can be issues between if you sponsor a private person or buy an advertising package from a team. That is what I am looking to know. If there is a team manager or owner here who can shed light on what they have learned over the years that would be great.
Starcrossed
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10/17/2016 2:46pm Edited Date/Time 10/17/2016 2:47pm
Home Depot probably has a better case for national television advertising than most small businesses.
Not sure if a motocross team manager is the best person to get tax advice from.
chump6784
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10/17/2016 2:53pm Edited Date/Time 10/17/2016 3:30pm
I know it's a different country but below is a link to a case study that the Australian tax office did. I imagine there would be similarities to the US


Facts

The taxpayer operates a business.

The taxpayer intends to sponsor motor cycle racing in the belief that the exposure arising from the sponsorship will benefit his business in the form of advertising.

The taxpayer will provide sponsorship for up to four motor cycle riders. This will include paying the day to day costs such as fuel, repairs, spare parts and safety clothing only.

The motor cycles and a support vehicle as well as the clothing and caps worn by the riders will carry the taxpayer's business name.

In addition, the taxpayer intends to hand out business cards at the motor cycle events to stimulate interest in his business through his position as sponsor of the sporting event.

The taxpayer will not pay the costs of purchasing motor cycles.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' ( Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' ( Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 ( Snowden & Willson's Case )). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276, when the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred

In this case, the taxpayer intends to provide sponsorship in the belief that the exposure from that sponsorship will benefit his business in the form of advertising and will generate future income. As it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business (Snowden & Willson's Case) the expenses associated with the taxpayer's sponsorship of motor cycle racing are deductible under section 8-1 of the ITAA 1997. They are in the nature of advertising expenses and are directed to enhance the income producing activities of the taxpayer's business and are not excluded on the basis of being capital or of a private or domestic nature.

http://law.ato.gov.au/atolaw/view.htm?locid=%27AID/AID2005284%27
Moto810
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10/17/2016 2:56pm
I don't know about that. Teams deal with tax issues just as all businesses do. Jimmy Johns was involved with RCH and others. I don't think this is about if one company can do it vs another. It is more about what are the different methods. Showing that other companies have done it is easy. This does not fall into a hobby issue. That is where the IRS goes after people who start a company just to right off their hobby. I certainly am not doing that. We are very profitable! 80% or higher vs our expenses!
Starcrossed
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10/17/2016 3:04pm
chump6784 wrote:
I know it's a different country but below is a link to a case study that the Australian tax office did. I imagine there would be...
I know it's a different country but below is a link to a case study that the Australian tax office did. I imagine there would be similarities to the US


Facts

The taxpayer operates a business.

The taxpayer intends to sponsor motor cycle racing in the belief that the exposure arising from the sponsorship will benefit his business in the form of advertising.

The taxpayer will provide sponsorship for up to four motor cycle riders. This will include paying the day to day costs such as fuel, repairs, spare parts and safety clothing only.

The motor cycles and a support vehicle as well as the clothing and caps worn by the riders will carry the taxpayer's business name.

In addition, the taxpayer intends to hand out business cards at the motor cycle events to stimulate interest in his business through his position as sponsor of the sporting event.

The taxpayer will not pay the costs of purchasing motor cycles.

Reasons for Decision

Section 8-1 of the ITAA 1997 allows a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, no deduction is allowed to the extent that the losses or outgoings are of a capital, private or domestic nature or are necessarily incurred in gaining or producing exempt income.

Losses or outgoings are incurred in gaining or producing assessable income where they are 'incidental and relevant to that end' ( Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). Where a taxpayer is carrying on a business for the purpose of gaining or producing assessable income, the commercial and practical implications of the term 'necessarily incurred' imply that voluntary expenditure incurred for business needs may be deductible. It is the taxpayer who decides whether the expenditure 'is dictated by the business ends to which it is directed' ( Federal Commissioner of Taxation v. Snowden & Willson Pty Ltd (1958) 99 CLR 431; (1958) 11 ATD 463; (1958) 7 AITR 308 ( Snowden & Willson's Case )). This was further supported in Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276, when the Court stated:

For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred

In this case, the taxpayer intends to provide sponsorship in the belief that the exposure from that sponsorship will benefit his business in the form of advertising and will generate future income. As it is the taxpayer who determines the nature of the expenditure to be undertaken in the conduct of their business (Snowden & Willson's Case) the expenses associated with the taxpayer's sponsorship of motor cycle racing are deductible under section 8-1 of the ITAA 1997. They are in the nature of advertising expenses and are directed to enhance the income producing activities of the taxpayer's business and are not excluded on the basis of being capital or of a private or domestic nature.

http://law.ato.gov.au/atolaw/view.htm?locid=%27AID/AID2005284%27
That case is right on point. Too bad US and Australian laws differ, or Moto810 would have something to hang his hat on. I assume the taxpayer in the case was able to convince the court that the advertising would benefit his business. Unfortunately the thresholds for deductions vary between the countries. The Australian standard is "a deduction for all losses or outgoings to the extent that they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. Where the US standard is "ordinary and necessary." Can't be relied upon in a US tax court.
Starcrossed
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10/17/2016 3:09pm Edited Date/Time 10/17/2016 3:12pm
Moto810 wrote:
I don't know about that. Teams deal with tax issues just as all businesses do. Jimmy Johns was involved with RCH and others. I don't think...
I don't know about that. Teams deal with tax issues just as all businesses do. Jimmy Johns was involved with RCH and others. I don't think this is about if one company can do it vs another. It is more about what are the different methods. Showing that other companies have done it is easy. This does not fall into a hobby issue. That is where the IRS goes after people who start a company just to right off their hobby. I certainly am not doing that. We are very profitable! 80% or higher vs our expenses!
The teams probably have large, sophisticated CPA firms handling any tax issues that they encounter...not the guys setting up the bikes, or hiring the riders. Sounds like you should have a reputable CPA you could bounce this off, with the wildly successful business and all. Would you like me to screen the CPAs in your area, and suggest a good one?

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