For you, perhaps nothing surpasses the feeling of bombing down the racetrack at breakneck speed, engine grease sticks under your fingernails and a whiff of unburnt fossil fuel lingering about your nostrils. The only thing remotely comparable to winning the race might be claiming tax deductions for your efforts. Well, if your car has the right setup, then the government may let you do just that.
Business vs. Hobby Activity
One approach to substantiating tax deductions for auto racing expenses involves characterizing the undertaking as a business rather than hobby activity under Treasury Regulation Section 1.183-2. For an example of how to do so, look to the case of Morrissey v. Commissioner, which concerned a banker who operated a competitive drag racing outfit. The taxpayer proved that he entered into racing with the actual and honest intent to earn a profit, and therefore, the court allowed him to claim deductions for racing-related expenses. Critical factors in this determination included that Morrissey had obtained sponsorship from a local casino, actively worked to make his car more competitive, enjoyed previous success in drag racing, prepared detailed business plans and maintained a separate bank account for racing transactions.
Another way to claim deductions for racing costs rests upon the argument that the activity provides a direct benefit to your business as an advertising venture. For instance, in Ciaravella v. Commissioner, the owner of a company that sold and leased private jets, also raced open-wheeled cars. Ciaravella's company reimbursed him for his racing activities as an advertising expense. The IRS argued that such reimbursement actually constituted a disguised dividend rather than a deductible payment. However, the court allowed the company to claim the reimbursement as an advertising deduction, in part, because Ciaravella's car bore the company's logo and he used his status as a race car driver to develop relationships with wealthy race fans interested in purchasing jets from his company.
Yellow Caution Flag
Beware, however, that the Internal Revenue Service and federal tax courts have noted that people often engage in auto racing for amusement or recreation as a hobby-like undertaking. Note also that for tax purposes, the law prohibits hobby deductions in excess of hobby income. As such, those looking to claim deductions for the full amount of their racing expenditures should be prepared to demonstrate to the IRS that their activity has an underlying profit motive. Consult with your tax attorney or certified public accountant for further advice on documenting and substantiating this position for your specific situation.
Commonly Deductible Items
If you can prove that your pursuit of auto racing glory should qualify as a for-profit activity, then the tax rules allow deductions for many of the related costs. Commonly incurred deductions related to operating an auto racing business may include expenditures for supplies (gas, oil, tires and other spare parts), travel (airfare, lodging and meals), entrance fees, licensing, repairs, uniforms, research and development, merchandising production, advertising, administrative overhead and employee salaries. However, expenditures for the cost of acquiring or improving long-term assets, such as a race car or trailer, usually should be capitalized and depreciated over a five-year period, unless an exception applies.
- United States Government Printing Office: Internal Revenue Code: Treasury Regulation Section 1.183-2
- United States Tax Court: Morrissey v. Commissioner, T.C. Memo 2005-86
- United States Tax Court: Ciaravella v. Commissioner, T.C. Memo 1998-31
- Cornell University Law School: Internal Revenue Code Section 183
- Cornell University Law School: Internal Revenue Code Section 162
- Cornell University Law School: Internal Revenue Code Section 168
- Internal Revenue Service