IRS criminal investigations

Tax Court Stalls Promo Deduction for Hobby Expense


To be deductible by a business, promotional and advertising expenses must be ”ordinary and necessary.” Essentially, this means that the costs must have a clear connection to the business and its ability to reach customers, manage its brand or provide information about products or services.

Apr 23rd 2021
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A new Tax Court case, Berry, T.C. Memo. 2021-42, 4/7/21, flagged a six-figure deduction claimed by construction business owners for their race car expenses.

In some cases, a business will go outside the scope of usual promotional and advertising expenses—like signage, media or online marketing, printed materials and the like—to engage in activities relating to hobbies. The IRS may say that the activities aren’t related to the active conduct of the business nor are they intended to generate revenue or goodwill. Not surprisingly, these cases often end up in the courts—with mixed results.

Facts of the new case: A father and son, residents of California, own a construction business that builds houses and develops other real estate They are long-time race car enthusiasts. The son restored his first race car with his father and began racing it when he was 16 years old.

In 2013, the firm purchased a race car body and chassis modeled after a 1968 Chevrolet Camaro for the son to restore and race. It also purchased car parts in 2013, including an engine, to use in the 68 Camaro. The firm claimed deductions totaling almost $122,000 for the car racing expenses. The son finished restoring the 68 Camaro and began racing it in 2014.

All of the son’s racing activities were conducted under the name “Berry Racing.” The firm didn’t report the car racing expenses as advertising expenses on its 2013 return. The only photograph of the 68 Camaro in the record doesn’t show any firm branding or advertising on the car.

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