Bacciagalupe

One thing no one here has mentioned so far is depreciation. If you purchase a piece of equipment for your business, you are not always allowed to deduct 100% of the cost of that item in the year you purchased it. For example, if you purchase a computer for business purposes, you don't take it all off in the first year -- the deductions are spread out over 5 years. So it's highly unlikely that you can buy that $7,000 Pinarello, and get $7,000 taken right off your taxes for that year.


T,FTFY.


Not so fast.

If you are a pro and racing in non-team events like RAAM and this is genuine income (which does happen but seems rare), then yes you can deduct any cycling expenses related to that income from your taxes. e.g. A guy like Bryce Walsh can deduct any equipment he uses for races or training from his taxes, but if he buys a computer and uses it 50% of the time for his training and 50% to play Defcon, he is only allowed to deduct 50% of that computer as a business expense. (And even then, it has to be depreciated over 5 years.)

If you are a pro and you are an employee of your team, you cannot deduct your bike as a business expense. Along the same lines, if you are a regular employee, you cannot deduct your home computer from your taxes, even if you use it to perform your day job.

I am not sure this is how pro teams are actually set up, but I assume that's the case.


Help you do what, exactly? Cheat on your taxes?

To be clear, I think Merlin and I agree that you should not try to pull a fast one on the IRS.

Where I believe we disagree is that if you are building a legitimate (side) business, you do not need most of what Merlin lists. You need to keep records; and if you're selling something, you will need a Certificate of Authority, as you are required to collect sales tax plus file your quarterly sales tax reports. And that's about it.

You might want incorporate or form an LLC / LLP to protect your personal assets from a lawsuit; but it's far from foolproof, so business insurance is going to be far more helpful. Plus, incorporation will complicate and possibly increase your taxes.


If you are trying to cheat on your taxes, most of what Merlin lists either does not apply, will not prevent the IRS from initiating an audit, and probably won't convince the auditor that this is a business rather than a hobby. But the amount of losses that would be required to make the "amateur cycling is a business" a financially advantageous deduction in the first place is a red flag -- especially since you are required to depreciate fixed assets like bicycles.

And if they do audit you?

1) You'd better hire a professional to save your butweesimo. The cost of hiring a real accountant will almost certainly be greater than whatever you saved on your taxes.

2) You are basically going to need to explain to the IRS how riding with the "Old Guys Who Get Fat In Winter Bike Club" and participating in amateur races qualifies as a "business." Good luck with that.

merlinextraligh

If you look at the IRS's publications, the factors I list are pretty much drawn from the IRS"s own guidance, with some tailoring to be specific to a bicycle racer. That's why I put the IRS publication link in my post, for anyone who actually would consider this.

HDWound

If the OP's return is simple let's say straight W-2 wages standard deductions/exemption etc. what the heck is the IRS gonna audit besides the cycling activity? It would cost them more to audit the OP than any tax they would collect from the audit unless he claimed a substantial loss.

Probably the OP's cycling would be considered a Hobby and expenses would be limited to the amount of income. But there's been posts already made of things he can do to establish he intends cycling to be a business activity. And if he has done those things, even if audited it would be difficult for the IRS to prevail. Just get someone other than H&R Block to represent you if that happens.

Also, if you receive merchandise instead of cash for winnings etc. you are supposed to include the FMV of those items as income as well. So if the OP did receive substantial merchandise for winnings he may not have a loss or have less of a loss than H&R computed.

dbduke

I took a basic accounting class at a community college. One day the instructor read a note. Liberty tax was trying to hire us. Nobody in that class had any qualifications what so ever. It made me aware thats for sure.

RKR

Going LLC won't help with the IRS. It's a legal fiction set up to protect the investor's money from law suits. A single taxpayer that set up a LLC will be liable for the taxes, fines, back taxes. They cannot hide behind the LLC.

For example, there is a case of a LLP who didn't pay payroll taxes for a year. Most of the partners could not be held liable because of the LLP protection. But the partner that was in control of the payroll taxes was held liable because he had direct control of what happened. As a single member LLC, you would be in control of your taxes (just as any sole proprietorship would) and you would be liable. LLC/LLP won't help you meet any of those 9 rules.

I hate to be argumentative but Depreciation isn't an issue. This year, you can generally expense up to $108,000 of depreciable assets under section 179. And if you could afford to spend more than $108,000 on bike parts this year, you have no sympathy from me. Pay your damn taxes

Because to take those deductions as a business he will be filing schedule C. Which has a line for Net Income (line 31). If you don't make money there are additional forms that are filed. It doesn't take much of a data base program to show if a taxpayer has reported a loss on their business for the past 3 years. You need to keep extensive records as a business. The IRS doesn't need to audit anything. They show up, ask for the OP's records. He says "i don't have any". Audit done, the OP owes back taxes, fines, etc.

True, i figured if they went to H&R they'll be too cheap to pay for a professional. Reading is free

patentcad

Doesn't a 'business' have to show a profit sooner or later or lose its eligibility as a tax shelter? Isn't intent a big part of this? I mean if the IRS audits you and they clearly feel your 'business' never had a chance of showing a profit is that tax fraud? I don't know if it meets the legal test of that offense, but in principle that's all we're talking about here.

Not that there's anything wrong with that.

HDWound

My point is the IRS doesn't spend their time auditing returns they're only going to collect a few hundred dollars of tax on. Most of what you mentioned above simply doesn't happen in reality. If the OP showed a loss of $1,000 and is in the 15% tax bracket and it's disallowed in audit-- that's $150. Big deal. The audit rate for sole proprietors with gross receipts under 25K is only about 3.5% They don't just pull people from their database and go audit everyone who shows a loss for 3 straight years. They don't just 'show up' and ask for records either and say 'surprise! you're being audited.' There are tax court cases where taxpayers have won vs the IRS who have shown many consecutive years of business losses.

From the advice you're giving you would be well qualified to work for H&R Block or maybe you work for the IRS.

Bacciagalupe

HDWound: In order to get a substantial tax break, you'd need to declare sufficiently large losses, and that alone may be a red flag. Otherwise, as you point out, you're not looking at much of a benefit.

And while effort is required to audit, no effort is required to flag a suspicious tax return and almost none to start a correspondence audit. And if you get a letter in the mail from the IRS that says "dude, what're you doing?" you'd probably want a CPA, and as previously mentioned, there goes the money you "saved" by playing fast & loose.

Besides, if you are not an aspiring or actual pro racer, do you really want to go through an audit and tax court over this stuff?



On the off chance that was addressed to me, I did not mention LLC's in conjunction with avoiding taxes, rather with general liability. Even with that, it's not necessarily much help.


Why post on a web forum if you don't like to be argumentative?

Please correct me if I am wrong, but: Aren't you limited by the amount you can declare under Section 179 by the amount of income you earn from that business?

"The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year." (https://www.irs.gov/publications/p946/ch02.html#d0e2049)

I.e., if you make $30,000 as a solo / freelance racer you can deduct the full cost of the $7,000 Pinny during the year you purchased it. But if you only earn $700 in income from racing and declare $7000 in deductions during that year under Section 179, you're over by $6,300. Or am I missing something?

HDWound

First, I'm not advocating that anyone do anything that does not meet IRS requirements. Second, even if you would be one of the lucky 3.5% of sole proprietors to be audited, I'm assuming that you'd already be able to prevail in such a situation because of my first statement--you've already sought guidance and met the requirements. It doesn't take a lot of money for professional advice in these areas to do things right and meet the requirements.

Yes you are incorrect regarding Sec 197 Expense. Assuming you have met the other requirements for the deduction, your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Active trade or business includes employee and spouse's wages, sole proprietorships, partnerships and S corporations.

So assume the same facts in your example and in addition, that surely the taxpayer has more income than just the $700 from racing lets say $50,000 in wages, then if all the requirements are met for Sec 179, the taxpayer could take the entire $7,000 Sec 179 deduction producing a $6,300 loss on schedule C. And if they've sought guidance and met IRS requirements, they have no worries about playing 'fast and loose.'

bitingduck

If the pro is an employee but has to provide his own bike it may be an unreimbursed business expense and may be deductible. As a science/engineering professional I have these sorts of things, but usually they're pretty small because my employer reimburses for just about anything business related. I can deduct books and things once they hit a certain level if I buy them myself, but I don't usually spend enough per year on them to qualify for the deduction. I suspect people in the trades end up getting to deduct tools fairly often-- in a lot of machine shops it seems like there are a set of shop tools but the machinists are often responsible for their own small tools, including some consumables like special drill bits and mill ends, which would probably be deductible.

Small pro teams are probably more likely to provide equipment and travel expenses than salary, and depending on whether the rider is expected to keep the equipment or give it back at the end of the contract it might even be reportable as income for the rider.

Treefox

Could someone double-confirm that this is true?

Presumably one would want to keep receipts of all one's purchases, yes?

And is it per tax year?? So if I spent $1000 on cycling stuff in 2006, then won $500 in 2007 but only spent $300, would I be liable for $200?

I feel like I just sort of figured out the general gist of the British tax system... But I'll be moving to the US or Canada in September. Blah!

RockyMtnMerlin

I do know that you can, but only if you itemize your deductions. If you take the standard deduction, you have to include the income but can then NOT take the expenses. I am not sure about carrying over from year to year.

Holy moly - 63 posts on a tax issue on a cycling website.

Doctor Who

THAT'S HILARIOUS.