Setting up as a business - some questions

[Alchemy Autosport]

I know a bunch of you guys run your team as a registered business for the tax advantages since you have cashflow with renters payments.  We are going to do the same, but I have a few questions that I was hoping some of you guys could help me out with.  I know that things are different state to state but the general ideas work the same I believe.

 

1. Ficticous Business Name (DBA) or LLC - SO the obvious one here is the financial liability, but outside of that I dont know if there is any other benefit to spending the additional $800/year in LLC registration fees in Commifornia.  To protect us I can get personal liability coverage for less.  So I dont think it worth it, but I dont know.

2. Does the business own your tow rig/trailer - registered under the business or do you expense miles and costs?

3. Any other tax advice or other advice?

 

Thanks!

 

[Alchemy Autosport]

not a popular topic i see....

[ramair]

Two thoughts:

Use the $800 a year to buy an umbrella liability insurance policy. You can probably get $3million and it will cover the rest of the things in your life as well. Personal insurance policies are cheap and cover a lot. Commercial insurance is expensive and limited in coverage. You probably would have a hard time getting commercial insurance for a race car rental business.

Racing is a hobby business. IRS writeoff is very limited for losses. Don't bother if you aren't making a profit.

 

Move to Texas. the LLC fee is $150 one time.

[IPF Racing]

I'm curious about this topic too, but have zero info on it. 

[ross2004]

Just be aware of the Hobby Loss rules if you think you're going to be writing off losses year after year after year.

[Alchemy Autosport]

A Tax guy told us that you need to make sure the following 3 things are in place/happen for you to be basically clear:

1. Have a website that is someone maintained - Easy

2. Have a dedicated phone number - Easy with Google Voice

3. Show a "profit" 3/5 years - Not as simple but you just claim less on your losses.  Example:  We try and sort it out where our costs as owners (2 of us) are the same as the collective renters costs at the end of the year.  Now if we end up spending more for whatever reason, we can just claim less losses on the business and show a "profit" of a $100.

 

Also, @ramair you are spot on with the commercial insurance vs the personal liability coverage.  Insurance for the 2000 F350 Dually thru the business was $2200/year.  On my personal plan - $750/year

[JDChristianson]

Be careful using the truck for business and insuring it on a personal level.   The insurance co may not be impressed.    Just a thought 

[ross2004]

1 hour ago, Alchemy Autosport said:

3. Show a "profit" 3/5 years - Not as simple but you just claim less on your losses.  Example:  We try and sort it out where our costs as owners (2 of us) are the same as the collective renters costs at the end of the year.  Now if we end up spending more for whatever reason, we can just claim less losses on the business and show a "profit" of a $100.

That's my sticking point- how much profit is enough. $1? $1,000? Can I show a $5,000 loss this year, $1 profit the next- rinse & repeat and be ok?

 

The only reason for doing this from a tax standpoint is to, over the course of time, show more losses than profits- otherwise you're just creating a bigger tax bill for yourself.

[scottyk]

Take the losses up front while you can, never know how the tax structure is going to change.

[Alchemy Autosport]

4 hours ago, JDChristianson said:

Be careful using the truck for business and insuring it on a personal level.   The insurance co may not be impressed.    Just a thought 

So it appears that you can say that its used for business as well for that issue.  But if you got into an accident, couldnt you just say you were using it for personal anyway?  Its a solid point tho that definitely needs clarification.

 

3 hours ago, ross2004 said:

That's my sticking point- how much profit is enough. $1? $1,000? Can I show a $5,000 loss this year, $1 profit the next- rinse & repeat and be ok?

 

The only reason for doing this from a tax standpoint is to, over the course of time, show more losses than profits- otherwise you're just creating a bigger tax bill for yourself.

It can be very little money from what I am being told, as in well under $1000.  You just need to be a little clever about it:  dont claim a profit of $1 or $0.01 and make sure that you dont have the exact same profit claim each year.

[BollingerChump]

What is the advantage of claiming a profit?  Ability to write expenses off? 

 

We set up an LLC with 4 equal shareholders, 1 minority shareholder and a business agreement that we all signed.  Bought the car, entry fees, consumables etc with company funds.  Since we will never make a profit there's little concern re tax liabilities etc going forward.  That said we don't expense towing, fuel, etc.  Team members buy what is deemed company expenses with the company debit card.

 

Each year we re-evaluate and fund the company account for the upcoming race season.

 

That said, we also don't rent seats, which probably simplifies things greatly.

[enginerd]

11 minutes ago, BollingerChump said:

What is the advantage of claiming a profit?  Ability to write expenses off? 

 

We set up an LLC with 4 equal shareholders, 1 minority shareholder and a business agreement that we all signed.  Bought the car, entry fees, consumables etc with company funds.  Since we will never make a profit there's little concern re tax liabilities etc going forward.  That said we don't expense towing, fuel, etc.  Team members buy what is deemed company expenses with the company debit card.

 

Each year we re-evaluate and fund the company account for the upcoming race season.

 

That said, we also don't rent seats, which probably simplifies things greatly.

What advantage does this have over a system where one guy does all the buying on a personal credit card and hits up the teammates at the end of the year for their owed amounts (parts, race expenses, etc.)? No company structure, no tax reporting.

[BollingerChump]

11 minutes ago, enginerd said:

What advantage does this have over a system where one guy does all the buying on a personal credit card and hits up the teammates at the end of the year for their owed amounts (parts, race expenses, etc.)? No company structure, no tax reporting.

An LLC protects the personal liability of owners. Also keeps things fair/honest between team members.

 

Back to my question, is there a benefit to running a race team llc and showing a profit?

[thewheelerZ]

I think the benefit is that the tax man doesnt come and shut you down.  Profit = tax.  Just hope that your "loss" years offset those taxes paid when making profit.

[Alchemy Autosport]

On 3/1/2019 at 12:40 PM, thewheelerZ said:

I think the benefit is that the tax man doesnt come and shut you down.  Profit = tax.  Just hope that your "loss" years offset those taxes paid when making profit.

Thats basically the idea.  and you basically get a "discount" on what you spend up to your revenue by that coming off your taxable income.  ex:  write off $5000 in race business costs and your taxable income goes down $5000.  At least thats the simple version how I understand it

[bam]

there are so many answers here that are wrong, I don't know where to start.  

 

Liability:  Yes a LLC would protect you   would reduce your chances of personal liability, and isn't a bad idea if you're going to be renting your vehicle to other people.  Just treat it like a separate entity, or it means nothing (not commingling funds, proper accounting, etc). 

 

Titling Vehicles:  Commercial insurance will cost you more. Also titled as a business may require you to act like a commercial vehicle (way stations, travel plans, DOT regs).   This is a whole other additional sets of rules, fees you don't want any part of. Even size/length/weight trailer setup may trigger this.  We got a $700 bill coming back through PA from Chumpcar at Watkins Glen for this. 

 

Business as Tax avoidance strategy: I would strongly suggest you talk to a CPA and ensure that it passes the hobby test and that you utilize proper accounting.  You really don't want to play with the IRS and anything you think is clever has been thought of before.  Just creating an LLC isn't enough. It needs to operate as an actual business, not  be a place for you to expense money. As others said, there is an expectation that you generate income and profit, otherwise it is just a hobby.  Also a DBA provides no liability protection because it's not a separate entity. 

 

For the record, I run my racing team as a business.  It can be done, you just need to do it correctly, otherwise you expose yourself to far more trouble than it's worth.  You mentioned $5k in racing, it's definitely going to cost you more than your tax liability to setup and maintain the business. 

Edited March 7, 2019 by bam