Incorporating your race team?

T

Think Racing

Well-known member
I have a sponsor who is making a sizeable investment with me to go production car racing next season. He is recommending I incorporate.

Has anyone out there incorporated their race team for the purpose of providing racing services on behalf of sponsors?

To date, I've just accepted payments to cover some expenses and then taken a hobby loss on my taxes, but next season I'll receive significantly more money and take on a corresponding amount of expenses.

Thoughts??
 
What is this hobby loss you speak of? First time I've heard of it.. Then again, next year will be the first year I file a long form..
 
Matt, I'm no accountant but my sponsor submits a 1099 to the IRS reporting my earned income. I'm able to zero it out based on the fact that my expenses far exceed the sponsorship income I take in.

In this case, I still probably won't make money, but when spending $10,000 plus over a season there may be tax breaks from expenses that makes the income go further.

Again, I'm not an expert which is why I asked.
 
I spent quite a bit of time looking into this and incorporated as a LLC. It's a lot cheaper than a subchapter S or full blown corporation, the accounting is easy enough that I can do it myself and you still have limited liability. I used LegalZoom for the paperwork and it was pretty cheap.
 
My first suggestion is you discuss this with your accountant and attorney if you have either. There are financial implications that your situation may require this to be handled in a specific way. The fact that you have treated racing as a hobby in the past may effect this. IRS has been known to be really picky on that.

Re liability; keep in mind that if something were to happen your assets (especially if you have a lot), and those of the sponsor, need to be addressed. Make sure you discuss that with the attorney or a “good” agent.

An LLC is relatively easy to set up here. But whether it would cover you is again something to ask your attorney about.

Disclaimer: I am not a lawyer.

Larry
 
Fred:

I did this way back in the day as a S-corporation, as I recall. Had losses for a few years and then sold the race car, so had to report a profit that year (car had been almost fully depreciated). Certainly some tax benefits as expenses will likely exceed income (and the added depreciation helps this a lot), and you need show the offset so you don't get cross-wise with your sponsor who will be reporting the expense (your income) on his return.

If it were me, I'd heed the previously offered comments re: tax and accounting advice.

Rick
 
I receive a sponsorship income for my racing effort. My sponsor writes it off as advertising expense. We also use the car as an ongoing mobile laboratory to test and develop/improve products. I declare the racing as a business for tax purposes and this is acceptable as long as I have an income and expenses along with good record keeping. According to my tax man, in order for it to be considered a business rather than a hobby, I must show a profit at least 2 years out of 5. That way you don't have to incorporate, you just file that part of your income as a business.

I've had to show proof to the IRS for my sponsor that I actually race but that was not difficult. My tax returns have not been questioned by the IRS. It would be a good idea to get advice from the company that files your taxes on how you should set it up.
 
I am curious about the other side of this discussion. How does someone like Jesse (Prather) - Jesse if you willing to contribute to the conversation that would be great - use racing as a function of their business? With preparation, track support etc their venture operates as a "racing business" or is the racing (Prather personal efforts) an "advertising expense" for the other income generating offerings provided by Prather Racing?

Sponsorships I would think would need to be handled similarly as funding is coming from an outside source.

Thoughts?
 
I asked an accountant friend several years ago about sponsoring your own car/team from your own business is a huge no-no that gets a red flag every time the IRS glances your direction. Too easy to show a business loss to fund your personal hobby when the business owner is the team owner, driver, and crew chief.

I would think there could be some insulation with both the race team and the business being incorporated with multiple names on the list, but it's still a grey area and you should tread lightly there... Be sure to consult a pro that's been in business a loooong time if you plan to go that route. (they don't stay in business that long doing shady stuff on tax returns.)
 
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