In 2006, we provided a free article Tax Time all about taxes and racing deductions in the USA. With tax season approaching here in the US, we thought we’d discuss a few more ways that racers can utilize their auto expenses when dealing with the tax man. Racing deductions can free up some of your income to buy more racing parts. With the proper care in running it like a business, racing deductions from other sources of income can pass the IRS audit score.

RACING & TAXES IN THE USA: If you have excess deductions, beyond your income and an IRA retirement account, you may want to convert that same amount from your IRA to a Roth IRA. These transfers are taxable but in this case, that tax may be offset by your extra deductions. During mid year planning, do an estimate of your taxes. If you expect to have excess deductions, convert that same amount of money from an IRA to a Roth. That money will accumulate tax free in the Roth IRA. Any subsequent withdrawals from the Roth are tax free if they are made 5 years or more after deposit and after the age of 59 1/2. Every year, you may be able to transfer IRA money into a Roth IRA to the extent of your excess deductions with no tax. Some of the other categories of taxation and deductions are affected by your total income, and an added tax from this change may occur to some extent. That is why you can take advantage from mid year planning. You can adjust your transfer to Roth to balance out with the end result of your tax obligation. Examples of categories that would be adjusted would be Itemized deductions: medical and other expenses.

HIGHER AUDIT SCORE FROM “WHAT ARE YOU LIVING ON FROM YEAR TO YEAR?” One of the categories of issue that could trigger an audit is the absence of discernible money to live on from higher losses than income; especially if that occurs several years in a row. One accountant said this transfer also looks good on a tax return with a lot of losses as it essentially shows money to live on. This transfer helps satisfy that category as well as reduce retirement taxes from IRA withdrawals in the long run.

MOVE FROM ‘NO TAX’ TO ‘A LITTLE TAX’ FOR A LOW AUDIT SCORE: I was also told that it is a good idea to transfer a little more so that you owe (and pay) a small amount of taxes. That is thought to be a further improvement on a low audit score. A few hundred dollars a year of taxes due from an excess Roth conversion results in even more money into the after tax (tax free) side of your asset accumulation. You can retire when you have enough money to live on from your “after tax” side of your assets. Until then you work to live.

WHERE TO PUT IRA TRANSFERS & WITHDRAWALS: A Roth account is a great landing account when you are withdrawing money from a traditional IRA if you do not need the cash right away. The interest that accumulates in the Roth is tax free. Again a good place to move retirement money. After a retirement age of 59 1/2 and a waiting period of at least 5 years, withdrawals from Roth can be made at any time and are tax free.

NOT FOR HIRE TRACTOR-TRAILER NOT DEDUCTIBLE: A gripping story was overheard between two racing pros at a national event a short while back. One of the pros said in a recent USA tax audit, that his tractor-trailer used to haul his racer was treated unfavorably in the audit with a “not for hire” status. The other pro responded saying that a “not for hire” tow rig may be treated like a hobby expense by the IRS auditor. If it was a business expense, it would conform to commercial highway vehicle requirements that include stopping at weigh stations and others. In a brief web search, a US IRS form 2290 showed up that applies federal highway use taxes to heavy vehicles. Not sure about the outcome from the pros’ discussion or the applications of form 2290, however, if you use a heavy tow rig, it is a good idea to brain storm the deductibility with a tax preparer. Or ask other racers with heavy tow rigs about their tax deduction experience. The triggering of an audit would not be the best way to find out about further IRS rulings to your heavy tow rig deduction.

REGULATION INTERFERENCE: Regardless of the conclusion, this is an example of how a business practice for one set of regulations can trigger a problem according to another set of regulations. In contrast to that, the depreciation deduction of an expense is often necessary to be changed from an IRS standard to an industry standard. In the racing world, an example could be a $1,000 set of racing tires fully depreciated in one event rather than over a few years; then another set at the next event; then over and over throughout the year. Especially with depreciation expenses, other standards often necessitate a necessary change from an IRS standard. Again an experienced tax preparer can help with issues such as this and how to categorize them on your tax return.

FINAL TAX TIP — ALL THAT THE IRS SEES: Your audit status is influenced by how you appear from your filed tax return. The IRS business category that you choose determines the expected ranges of income and expense for your business. The IRS then puts you into that category and compares you to all others in that category. If you have extraordinary numbers that stand out from others in that category, your tax return may get a second look, possibly an audit. The cost of racing is so high that the proper application of an IRS business category, racing income, and racing expenses is more of a necessity now than ever before to get your racing expenditures on your pre-tax side of your worth, away from your after-tax side. The after-tax side is a lot less investment capital. Attention to your racing business with some help from a tax professional can result in more money. More money from tax savings for the ability to buy the best part instead of a cheaper part that may end up a racing business compromise.

FOOTNOTE: I am not a tax professional or accountant. If you are interested in doing what was discussed, check with a tax professional as it applies to your situation. Your specific taxation responsibilities may change your qualification status, and the suggestions may not work for some.