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your promotional activities at lack of profit motive (i.e. the “hobby income. For example, if for the
the drag strip are conducted in a loss” rules) include having a written year you won a grand total of $2,500
organized and businesslike fashion. business plan and budget, seeking cash at racing events, but you
You need to realize (or expect to professional help when appropriate spent $10,000 during the year on
realize) bona fide business benefits and keeping good records that are race related expenses, you would
such as new customer leads, separate from personal transactions. report the $2,500 income to the
sales, publicity opportunities, etc. Following is a basic discussion of IRS, and deduct only up to $2,500 of
Business signage on your trailer, the hobby loss rules. These rules racing expenses. Your net taxable
tow vehicle and race car along with apply to all business entity types profit from this hobby would be
promotional materials that are including sole proprietorships, zero. However, with the recent
distributed will help support your LLC’s, partnerships, and S-corps. increase to the standard deduction,
position if your racing deductions They do not apply to businesses most people are better off not
are challenged. Signage may organized as C corporations. itemizing deductions. In this case,
impact your auto and truck liability as a hobby activity you would pay
policy. This is an area where you The IRS presumes your business federal income tax on the $2,500 of
can’t afford to make any coverage is a hobby if it is unable to show a winnings, with no allowance for the
mistakes. net profit in the latest three years $10K you spent to win the races.
(including your current year) out
The taxing authorities are of the latest five-year period. If you On the other hand, if treated
suspicious of activities that involve have enough itemized deductions as a business, you would show
“pleasure and recreation” coupled (i.e. over $24,800 for married a $(7,500) net racing loss for
with recurring net losses. Practices filing jointly in 2020), your racing income tax purposes. This
that may help you successfully expenses will only be allowed to loss would be available as a
defend an IRS challenge based on the extent of your hobby gross deductible promotional expense

SPRING 2021 Nitro Madness Magazine 53