Howdy,
On Wed, 29 Dec 1999, Scott Sawyer wrote:
> All the talk about sponsors lately has gotten me thinking about the
> upcoming season. I have an idea about who I'm going to approach, but I
> have a few questions I need to answer before I talk to anyone. When a
> sponsor gives you money, is that considered taxable income, or is there a
> way to avoid that? Do you have to incorporate the team so it doesn't
> affect your personal taxes?
There are a number of ways to do this. The two main ones I've seen for
hobby racing are:
a) run your racing as a personal business. Any income is income to you,
any loss is a deductible business loss.
b) run your racing as a hobby. Again, any income is income to you, but
any loss is not deductible.
Remember we're talking about overall income and loss here. If a sponsor
is giving you say $5k / year in money or an equivilent (tires, for
instance), you win $3k in contingency/purse, and you spend $10k to do it
all, you've lost $2k.
To take advantage of option a above, you must meet the IRS guidelines for
a business. There's a lotta crap to that, but it all boils down to being
able to honestly answer yes to "Can you reasonably expect to make a
profit?" There are guidelines like you need to turn a profit 2 out of 5
years, etc. The advantage of a is that you can obviously take a loss if
you loose money racing and it's more the "right" way to do it if you're
turning a profit. Expect to get audited though.
Option b is what most club level racers should be choosing. For option b
you have to declare as income any money you get as a result of your hobby
(which, for our purposes means if your sponser is writing off the money
they're giving you or if you get a 1099 from a contingency/purse payer).
However, you can deduct money spent to get that income as a misc.
deduction. The catch is that the misc. deductions get whacked by
something like 1.5% of your total income, which often has the end result
that you get to just eat paying taxes on some "income" that you spent
twice as much to earn. That happened to me in '97 when I had to declare
$1k income that cost me $10k to earn...
Because the "eat the taxes on any income that doesn't get covered by the
misc deduction" thing sucks pretty hard, lots of folks used option A but
fudged the books to show a $1 profit or whatever. Technically I believe
that's illegal, but its certainly morally right.
> The other question involves the administration of the money. Does the
> sponsor just give you x dollars at the start of the year and say have at
> it, do you turn in receipts as you pay for things and get reimbursed, or
> do you go to them every time there is an expense and tell them how much
> you need? Or is the way it is done somewhere in between? Obviously I've
> never done this before, but I want to make a good first impression so
> they think I know what I'm talking about :^) Any other advice or
> suggestions would be greatly appreciated!
This is totally between you and the sponser. Typically you'll go to them
with a plan or multiple plans they could choose from. One might be a deal
where for $100/race they get x amount of exposure. Another might be a
deal where for funding the season they get y amount of exposure. In any
of those cases, remember what the sponser cares about is how much it costs
and what they get for it. That means if you wanna get them to fund the
season, you better have projected costs all lined up ahead of time.
The most important thing for club level folks to remember when going after
sponsorship is that the end deal must benefit the business as much as it
benefits you, and that the business must be able to recognize the benefit.
Good luck!
Mark
(btw, all tax advice is worth what you paid for it. I think I'm right and
its worked for me, but you'd be stupid not to read the tax regs yourself
(1040 instructions is a good place to start) and/or talk to a tax
accountant)
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