"The 33"-Road Bike Racing - Attention Racers:

Because of the amount of money I put into racing each year, H&R Block decided it was best to make my hobby into a "business". I saved $400 on my return because of this.

If you have a company do your taxes, ask about it.

Since it is now a business that makes you a Pro right! :D

Yep now he is sponsored.

Cypress sponsored by the IRS...now I'd like to see THAT team jersey!

http://scottobear.com/lj/archives/091703/prison%20stripes.jpg

Cypress sponsored by the IRS...now I'd like to see THAT team jersey!


I've seen the jersey. It has guy bent over, his pants around his ankles and a very pained expression on his face while Uncle Sam is behind him with a big fat grin.

Does this make sense??

http://www.bankrate.com/brm/itax/tips/20010403a.asp




Because of the amount of money I put into racing each year, H&R Block decided it was best to make my hobby into a "business". I saved $400 on my return because of this.

If you have a company do your taxes, ask about it.

I would consider that but I would be a complete laughing stock for starting up the least succesful business ever!

This is the USA. When it comes to taxes, it's not about being successful.

Smart stuff, Cypress.

I am with the IRS in Bozeman. Could we schedule a "meeting" Mr. Cypress?

"Everybody has to pay taxes, even businessmen who lie and cheat and steal everyday have to pay taxes"

I am with the IRS in Bozeman. Could we schedule a "meeting" Mr. Cypress?

"Everybody has to pay taxes, even businessmen who lie and cheat and steal everyday have to pay taxes"

Did anyone read the link R600 posted?

It makes sense to me...I know I've spent A LOT more than 2% of my gross income on bike racing this year.

This is even a better explanation:

http://www.nolo.com/article.cfm/ObjectID/A25BA1FC-11A6-4AD8-B8E08099DD2967C0/catID/CF156B19-4580-413E-A4BD1EC63F5F021A/111/159/264/ART/


Did anyone read the link R600 posted?

It makes sense to me...I know I've spent A LOT more than 2% of my gross income on bike racing this year.

I am with the IRS in Bozeman. Could we schedule a "meeting" Mr. Cypress?

"Everybody has to pay taxes, even businessmen who lie and cheat and steal everyday have to pay taxes"


LOL. It's all legit. My "business" is taking a loss this year. :o

Very interesting.
I never considered deducting my cycling costs as losses, I just figured that as long as my costs (about $6,000.00 in 2006) exceeded my winnings (about $700) I would just not report my winnings. But since I could potentially be profitable in a few years ;) , maybe I should start declaring my losses right now. I figure I could save about $1,000 from my taxes. That would buy another nice set of wheels. :D

Is there an IRS business code for professional cyclist? Or at least professional athlete?

I was wondering which expenses would be ok to deduct?

Race entry fees?
Travel to/from races & lodging?
Equipment?
Clothing?
Race fuel?
Food consumed on training rides?
Travel to/from training rides?
Coaching?

Anything else?

With all the money I can save by claiming my losses, I can easily pump those savings into next years loss claim, getting even more back. Taking the following years increased savings and putting it into the year after that.........

I was wondering which expenses would be ok to deduct?

Race entry fees?
Travel to/from races & lodging?
Equipment?
Clothing?
Race fuel?
Food consumed on training rides?
Travel to/from training rides?
Coaching?

Anything else?

Brilliant!

I didn't even think of deducting excess food :lol:

I can see the audit now "You see, a normally active person of my size would need ~2,500 calories per day. I consume 4-5,000 on long ride days, therefore I needed to write off 3,000 dollars of extra bananas, oatmeal, spaghetti and protein powder"

This is even a better explanation:

http://www.nolo.com/article.cfm/ObjectID/A25BA1FC-11A6-4AD8-B8E08099DD2967C0/catID/CF156B19-4580-413E-A4BD1EC63F5F021A/111/159/264/ART/

is there a tax deduction for dialing it up to 400w?

This is the USA. When it comes to taxes, it's not about being successful.

Smart stuff, Cypress.

With taxes, if anything, its the opposite.

is there a tax deduction for dialing it up to 400w?

no, but it's $10 for every "OMG Poseur" you drop in an arbitrarily declared race during the fiscal year. :D

no, but it's $10 for every "OMG Poseur" you drop in an arbitrarily declared race during the fiscal year. :D

well someone should be getting a big fat refund!! :D

I actually own a business and my business sponsors my team. All cycling related mileage gets written off as well as hotels, food on trips, etc. Sadly, I can't write off any new Orbeas or Powertaps.

This is why you shouldn't let H&R Block do your taxes. This sort of deduction is a high risk audit flag. And there is a profit test to distinguish Hobbies from businesses. If you don't make a profit in a certain number of years, its a hobby not a business. And if you don't have a reasonable expectation of making a profit, you can't deduct losses.

You'll also need to account for future race winnings. (If you don't next year, the IRS may inquire, based upon last year's return.)

Without any track record of a profitable year, a business plan, business license, evidence that you treat it like a business, etc. this is a very aggressive position, not likely to be sustained if caught on audit.

If you've got a pro license, or you're a Cat 1, and have no other signficant source of income, then it makes sense to truely treat it like a business, account for it as such, and treat it as such on your taxes.

If you're a Cat 3 with $700 in winnings, enough income from a real job to worry about taxes, and show a $3000 loss year after year, it is not going to fly. You're really just banking on not getting audited.

Do you really want to go around knowing that if you ever do get audited you're going to owe a nice little bill for the last 3 years deduction, plus interest, and possible penalities?

You got to ask yourself, is it worth $400 for the risk and aggrivation?

Without any track record of a profitable year, a business plan, business license, evidence that you treat it like a business, etc. this is a very aggressive position, not likely to be sustained if caught on audit.


pretty much what I was thinking...I'm surprised they gave you that advice. You have to expect to be profitable eventually, I think by your 3rd year. Sounds like you're asking to get audited. If you paid for all bike expenses with a different business account(not your personal), it would look better.

pretty much what I was thinking...I'm surprised they gave you that advice. You have to expect to be profitable eventually, I think by your 3rd year. Sounds like you're asking to get audited. If you paid for all bike expenses with a different business account(not your personal), it would look better.

That's kinda what I was thinking after reading the links, but I still file a 1040EZ, so what do I know? :)

pretty much what I was thinking...I'm surprised they gave you that advice.

You got to remember that a lot of these folks are people with a few weeks training. And H&R Block wants to sho you how much they saved you by coming to them. So I'm not surprised they give bad advice, either from ignorance, or profit motive.

I'm not a tax attorney (and certainly don't take my comments as tax advice) but I am an attorney. I took federal income tax in law school. My undergraduate degree is in economics. I've done my own taxes for years, and I find doing income taxes and understanding the tax code to be a challenge. I can't imagine anyone relying relying on the advice of a highschool graduate, with seasonal employment, and a few weeks of training.

You got to remember that a lot of these folks are people with a few weeks training. And H&R Block wants to sho you how much they saved you by coming to them. So I'm not surprised they give bad advice, either from ignorance, or profit motive.

I'm not a tax attorney (and certainly don't take my comments as tax advice) but I am an attorney. I got an A+ in federal income tax in law school. My undergraduate degree is in economics. I've done my own taxes for years, and I find doing income taxes and understanding the tax code to be a challenge. I can't imagine anyone relying relying on the advice of a highschool graduate, with seasonal employment, and a few weeks of training.

So merlin, what do you think? Is it a legit write-off or not?

So merlin, what do you think? Is it a legit write-off or not?

It's definitely a legitimate write off if you can show a profit in 3 of the last 5 years. If you haven't been in the racing business for 3 years, it could still be legitimate if you can establish you really are seeking to make a profit, and have areasonable expectation of doing so, and a realistic plan to accomplish that.

There are a bunch of factors, that would help a whole lot that I doubt are true for most of us:

1) its you're principal source of income;

2) you're reasonably close to profitibility;

3) losses were the result of one time start up costs, or unanticipated events; (i.e. a crash)

4) you have an actual business plan;

5) you have a sponsor that pays you a salary;

6) you keep a seperate business account;

7) you're incorporated;

8) you have a professional racing license, or at least a Cat 1 or 2 (and are winning in Pro 1-2 races);

9) you have a business license

10) you keep detailed business records;

11) you pay local business and occupation taxes;

12) you've changed your business plan to address the losses and make your "business" profitiable.

See: http://www.irs.gov/businesses/small/article/0,,id=99239,00.html

These aren't exclusive, and no single one is determinative.

I think if you have a Cat 3 license, won 3 races, got $700 in prize money, and some free bike parts or discounts from your team sponsors, make $30,000 or more in your principal job, and show a $2500 loss the IRS is going to laugh at you.

Of the 35,000 people who hold USCF licenses, 34, 800 are going to lose money, know they are going to lose money, and do so because they like to race, with no intent of earning a profit. This fact is not lost on the IRS.

If this sort of thing flew, it would be a loophole in the Tax Code through which you could drive a tank . Any photographer who sold a picture deducts all his camera equipment and supplies, Anybody who's child won a few bucks in a horse show, deducts their horse, Anybody that won $50 bucks in a local golf tournament, etc, etc, etc. The IRS is not going to willingly let this happen. So unless you truely are a professional racer, you're just gambling on the odds of getting audited.

A business plan or being incorporated are not necessary to run a business.

Of course my situation is different than trying to write off cycling expenses as a hobby. In talking to my CPA here is what we came up with:

I am (my company is) a team sponsor. In my travelling to races, it's for promoting my business or seeing how my sponsored team is doing. Doesn't matter if I race or not. Therefore travel, hotels and food are "write-off-able". Race fees, framesets and hammergel are not. Winnings (haha) are not subject to taxation.

A business plan or being incorporated are not necessary to run a business.

Of course my situation is different than trying to write off cycling expenses as a hobby. In talking to my CPA here is what we came up with:

I am (my company is) a team sponsor. In my travelling to races, it's for promoting my business or seeing how my sponsored team is doing. Doesn't matter if I race or not. Therefore travel, hotels and food are "write-off-able". Race fees, framesets and hammergel are not. Winnings (haha) are not subject to taxation.

As you recognize yours is a completely different situation. In your case your deducting money spent on cycling sponsorship expenses as a legitimate business expense of your profitable business.

In Cypress' case, he's trying to establish that cycling is his business, and therefore comes under the hobby/business profitability rules.

And yes, neither a business plan, or incorporation is necessary to run a business. However if you're trying to convince the IRS that your recreational spare time activity, with massive losses, is actually a for profit business, both would be very helpful in showing them that you are in fact running a for profit business.

However if you're trying to convince the IRS that your recreational spare time activity, with massive losses, is actually a for profit business, both would be very helpful in showing them that you are in fact running a for profit business.



Good point.

Merlinextralight raises good points. Cypress might be better off raising alpacas or in a throwback to the seventies, chinchillas. :D
Okay I'll admit that is a bit obscure, but what the heck.

Oh and I'll add this tidbit from BuisnessWeek online, "Meantime, H&R Block is stumbling. Embarrassingly, the company has been forced to restate earnings after misfiling its own taxes -- owing the IRS some $32 million in back taxes."

Oh and I'll add this tidbit from BuisnessWeek online, "Meantime, H&R Block is stumbling. Embarrassingly, the company has been forced to restate earnings after misfiling its own taxes -- owing the IRS some $32 million in back taxes."


LOL.


Most of my cycling items were given to me this year. If I were to make $1000 (lol) off of racing this year, that would be in the profit category. The IRS will allow losses for two years before they begin wondering.

LOL.


Most of my cycling items were given to me this year. If I were to make $1000 (lol) off of racing this year, that would be in the profit category. The IRS will allow losses for two years before they begin wondering.

But they also have 3 years going back to audit you and impose back taxes, interest, and penalties.

And if you really are going to make a profit in the next 2 years, you understand you have an obligation to report that as income, which has now been flagged by this year's filing, and pay taxes on those profits.

There are essentially 2 ways to treat this:

One, recognize it as a hobby, don't report your $20 primes, and don't worry about it.

Two, treat it as a business, maintain records, deduct losses, report and pay taxes on winnings if you show a profit.

You can't have it both ways.


Unless you're clearly a professional, IMHO, Reducing your taxes a few hundred dollars is not worth the rsik or aggravation. (Heck for me the monthly fee on the business checking account would more than take all my yearly winnings.).

But they also have 3 years going back to audit you and impose back taxes, interest, and penalties.

And if you really are going to make a profit in the next 2 years, you understand you have an obligation to report that as income, which has now been flagged by this year's filing, and pay taxes on those profits.

There are essentially 2 ways to treat this:

One, recognize it as a hobby, don't report your $20 primes, and don't worry about it.

Two, treat it as a business, maintain records, deduct losses, report and pay taxes on winnings if you show a profit.

You can't have it both ways.


Unless you're clearly a professional, IMHO, Reducing your taxes a few hundred dollars is not worth the rsik or aggravation. (Heck for me the monthly fee on the business checking account would more than take all my yearly winnings.).

Good points.

Since I'll very likely never win more than my costs, I won't bother with anything on my return, but if I happen to get lucky at any of the NRC races I'm doing this year and win a few bucks and they bother to send me a 1099 then I'll start considering it a business.

Based on my winnings on 1/1 I'm in the black for 2007.

this sounds like a good motivational tool. if you don't win, you get an IRS audit.

but if I happen to get lucky at any of the NRC races I'm doing this year and win a few bucks and they bother to send me a 1099 then I'll start considering it a business.

Based on my winnings on 1/1 I'm in the black for 2007.

If you do get a 1099 (typically issued for a payment of $500 or more) you are going to have to report and account for it. So if you're likely to receive over $500 in single payments, then you do need to keep records to document your expenses, to prove your losses and avoid paying income tax on the winnings.

Fortunately, I'm not confronted with that problem.:)

Actually, it's like any small business. If you win money, and you declare those winnings on your taxes, you are entitled to deduct the associated expenses against that income, and other income. The catch is, in order to be a business and not a hobby, there is a yardstick -- the exact numbers you'd have to check -- that you actually make a profit (i.e., pay more taxes than you would have otherwise) in something like 2 out of 5, or 3 out of 7, consecutive years.

Actually, it's like any small business. If you win money, and you declare those winnings on your taxes, you are entitled to deduct the associated expenses against that income, and other income. The catch is, in order to be a business and not a hobby, there is a yardstick -- the exact numbers you'd have to check -- that you actually make a profit (i.e., pay more taxes than you would have otherwise) in something like 2 out of 5, or 3 out of 7, consecutive years.

My knowledge is well out of date. But it used to be 1 out of 5 years, unless you were raising horses in which case it was 1 out of 7.

Of course if you eventually sell parts or bike that were given by sponsors that has to be reported as income. That is not all bad. You pick the year and sell all excess parts etc. Result? A profit for the year.

Showing a profit in 3 of the last 5 years creates a presumption the activity is for profit ( 2 out of 7 for showing or racing horses.) http://www.irs.gov/publications/p535/ch01.html#d0e802

Couldn't you expand your cycling business into coaching by purchasing the USA Cycling level 3 coaching materials? This would help show your motivation of making a profit by taking on clients and coaching them.

I am in Canada and I have written off a "hobby" through my business. The difference is that I was not claiming that the "hobby" WAS my business but that my "hobby" was a promotion/marketing for my business. I was audited, I met the criteria, and it was all good with the govt. Now, my boss/wife on the other hand.....

However, I did get nailed on an obscure business tax that evolved from the "Beaver Pelt trade" in place at the beginning of our "Commonwealth".

This post has me jones'n to start a "team"...

vjp

Couldn't you expand your cycling business into coaching by purchasing the USA Cycling level 3 coaching materials? This would help show your motivation of making a profit by taking on clients and coaching them.
I'm not an accountant or a tax attorney, but I do run a small business and have done freelance work for years.

If you are genuinely earning income from a business like this -- let's say, pulling in $2,000 per year in coaching fees -- then yes, you have an actual business and a good reason to deduct related expenses from your taxes. After 2 years of losses, the IRS will treat this as a hobby, and will reject those deductions and/or audit you. You're supposed to report all income anyway.

If you spend $15,000 on your cycling equipment, participate in Cat3 races, earn $750 and try to declare this as a "business," I don't know if you'd get audited but chances are it is a red flag (as previously mentioned).

However, you do not need to go to the extremes listed by merlin earlier:



1) its you're principal source of income;
This is incorrect. You can have a full-time job and earn a small freelance income indefinitely, I did this for many years.



3) losses were the result of one time start up costs, or unanticipated events; (i.e. a crash)
Also incorrect. If you run a good business and turn a profit for 2 years, and then just have a bad year or high expenses, the IRS should not care why you lost money.

However, IIRC certain types of expenses (e.g. education) are only deductible after you have actually earned $500 or more of income specifically from the business (not profit, just revenue / income).



4) you have an actual business plan;
The IRS doesn't require a business plan. Not sure it'll help you anyway if you are indulging in shenanigans and expect to be audited. ;)



6) you keep a seperate business account;
7) you're incorporated;
9) you have a business license
11) you pay local business and occupation taxes;
Definitely not required.

6) is a good idea to help you keep track of things, but a business bank account isn't required unless you're incorporated. 7) sole proprietorships do not need any sort of incorporation. 8) 11) business licenses / additional taxes are usually only required if you're reselling inventory, in which case you are required to collect sales tax and send those sales taxes to the State. I never needed any kind of license to do freelance work.



10) you keep detailed business records;
Absolutely necessary. Merlin is also 100% correct that you really don't want to get audited or do something that raises a red flag -- e.g. declare huge losses or deduct 100% of your residential rent as a business expense.


At the risk of being a spoil-sport, however tempting it may be to declare your bike expenses as a deduction, I wouldn't do it unless you really are setting up a business in the field. It doesn't have to be a big thing -- small-scale repairs, coaching, hosting a bike-related web forum :D, whatever -- as long as it's a genuine source of income. And if that income is small potatoes, you may even prefer to get paid in cash and not declare it, you'd probably do better than with the deductions anyway.....

There are a bunch of factors, that would help a whole lot

Bacciagalupe, you're claiming those factors won't help? He's not saying it's necessary, but that it "would help a whole lot." I say he's correct across the board. Each one will help.

This is why you shouldn't let H&R Block do your taxes. This sort of deduction is a high risk audit flag. And there is a profit test to distinguish Hobbies from businesses. If you don't make a profit in a certain number of years, its a hobby not a business. And if you don't have a reasonable expectation of making a profit, you can't deduct losses.

You got to ask yourself, is it worth $400 for the risk and aggrivation?

+1. In order for a hobby to qualify as a business it has to be profitable 3 years out of 5. And since you lost $ last year, you're down to having to make a profit in 3 out of the next 4 years. Unless you end up riding for Healthnet within the next 12 months you won't be able to meet the IRS test, even if you win every prime and finish first in every event you enter in the next 48 months.

So, 4 years from now, you'll be filing amended returns, and paying back taxes, with interest.

Doesn't sound like a good plan.

Bob

This is NOT TAX ADVICE. You should read the code yourself and make tax decisions from there…

The general rules that apply to whether an activity can be considered a profit seeking activity (yes, selling drugs is a business) are:

Whether the activity is conducted in a businesslike manner
-Do you keep records of those primes that you won? Do you invoice the promoters for your winnings? Do you keep continuous records of all your expenses and income? Do you actively make decisions that would lead to profit? What this means to you: Those new $2000 zips that made you run in the red (unprofitable) this year? Not a sound business decision for someone who’s trying to make money. Good luck proving this one.

The expertise of the taxpayers or their advisers
-Sure, maybe you have a coach, or maybe you’re a strong tactical rider…but you’re a cat 4, 3, 2, and probably even a 1. The IRS will look at other professionals, like say Tim Johnson, and compare him to you, then levy fines, compute interest, send you a bill, and then laugh at you, because you are not acting in the way someone in the same profession would.

The time and effort expended
-I don’t know how much you ride, but unless you’re out there for 6-8 hours a day spending all your time training, you’re not going to pass this. They'll call it a hobby.

The expectation that the assets of the activity will appreciate in value
-Bikes don’t appreciate in value, and sadly your person is not an asset (your skills can't even be considered an intangable).

The taxpayer’s previous success in conducting similar activities
-I don’t even think being a former pro would help. Probably not even Ned Overend can count cycling itself as a business.

The history of income or losses from the activity
-Self explanatory, you enter business to make money. You’ve never made money.

The relationship of profits earned to losses incurred
-Look my example above. You buy $2000 wheels, but they don’t direct correlation between you winning more money or losing more money. I’m sure you can argue aerodynamics with the IRS to the end of time, they won’t care.

The financial status of the taxpayer
-If you’re making lots of money at another job, it’s going to be obvious that cycling is a hobby.

Elements of personal pleasure or recreation in the activity
-Self explanatory.

And yes, the rule is that you have to make money 3 years of the past consecutive 5. It just screams “audit me” when on year 3 you’re still reporting a loss.

Granted that those are just “general rules” but it’s clear that your business has to be operated with the goal of making money. Buying a bunch of stuff for your bike that’s putting you into the red isn’t a sign of trying to make money. Race entry fees, travel expenses, repair bills, they show something but even then you’re going to have to keep all the receipts and show some kind of accounting system.

If you treat it as a hobby, you get to deduct expenses as much as you had income. So if you made $1000, but spent $2000 you report no income. But if you only spent $500, you would have $500 of hobby income. It works the same way gambling expenses do.

It is possible to make cycling expenses legitimate business expenses. If you're a lawyer, you could make your own jersey or maybe your own team and use it to advertise your services. Making cycling a advertising expense which is a legitimate expense. What won't work is if you advertise your lawn mowing services that net maybe $200 a month but then you spend $1000 a month on race entries, parts, etc.

If you really want to do this, knock yourself out. Just remember that it’s obvious from this post that you’re trying to get out of paying taxes. That’s called tax evasion and entering into a transaction with the sole intent of circumventing taxes is a classic case. And yes, tax evasion does come with time in jail.

If you want to see the code section: http://a257.g.akamaitech.net/7/257/2422/10apr20061500/edocket.access.gpo.gov/cfr_2006/aprqtr/26cfr1.183-2.htm

And yes, this is why you shouldn't let a company that owes 32 million to the IRS for back taxes do yours.

I was wondering which expenses would be ok to deduct?

Race entry fees?
Travel to/from races & lodging?
Equipment?
Clothing?
Race fuel?
Food consumed on training rides?
Travel to/from training rides?
Coaching?

Anything else?

Masseuse! definitely.

You're asking for an audit, which is the financial equivalent of a full rectal exam. A lousy four hundred bucks hardly seems worth the risk.

I have a question..

Lets say you legitly are able to declare bike racing as your business. Its your full time job, and you make a profit.

Obviously you can deduct your racing bike gear.

But, lets say you have several bikes, and spend a lot of money on bikes and bike gear that you never use racing, such as commuting, shopping, general transportation, freestyle tricks, etc.

Are you able to deduct any portion of those secondary bikes and secondary bike gear? Or only the stuff you use directly for racing?