Can I Create an LLC for a Hobby?

I've been reading the old threads on this topic for a while now, but can't find the answer to my question. Sorry for my ignorance on the topic, I should probably consult an accountant, just wanted to see if there was some common knowledge here.

I'm comfortable that racing is a hobby (opposed to a business). I only want to write off the income made from racing, no personal income.

I would like to have a 'business' type operation though... are there any issues with creating an LLC if I plan on only writing off income from that channel?

Better solution?

 

You can have a "hobby business" and do exactly what you want to do - write off any expenses against income generated. You can never take a loss and you don't need a formal business structure.

You can start an LLC or sub S to claim losses, but if you dont turn a profit in some years it's going to create audit hell for you.

 

I believe the red flags go up after 5 or 7 years. Then you close it and start a different one.... but very similar

 

Talk to a qualified tax attorney and accountant. Period.

 

You don't need an LLC for this. You can write off the expenses from racing to the extent of your income from racing on Schedule A of your 1040.

You certainly could create an LLC for this...but you'd still only be able to write off the expenses to the extent of the income...and you'd have the added hassle of maintaining the LLC, which if it's a single-member LLC will just show up on...your 1040.

Edit: or not really, assuming your expenses exceed your income from racing. You'd just prepare a Schedule C with zeros on it.

Are you trying to accomplish anything with this short of tax issues?

 

you don't have to start a LLC or any type of corp to write off just what you've spent. you can easily write off up to the amount you were 1099'ed and not claim a profit or a loss. that will not trigger any red flags, and is perfectly legal to do. you will need to file a schedule C with your 1040 return.

 

Hobby income and losses go on the Schedule A.

 

scotth beat me to it, but his post is definitely more eloquent.

 

For whatever reason, I have a potential sponsor that wants to pay a 'business' rather than an 'individual'.

That's what I'm trying to accomplish. Not planning to deduct any personal income.

 

you can be a sole proprietor and do the schedule C, not forming an LLC or corp, but still treating it as a business. thats the way I did it. I didn't treat it as hobby income, but I didnt know hobby income went on schedule A. good to know.

 

That sounds like what I'm looking for...

How did you form your 'trade name'?

 

What sort of 'business' does he want to pay? Does he want an EIN as opposed to your SSN, or does he just want a d/b/a, or what?

If he wants the EIN (not your SSN), I'd make sure he's worth dealing with, unless he's got a good reason, because he sounds hinky.

But whatever, if he wants an actual EIN, form an LLC. Make it a single-member LLC, which will be a disregarded entity from the I.R.S.' perspective. You'll prepare a Schedule C, and assuming your expenses exceed your income (and if they don't, you really need more sponsors), you'll have a zero-income Schedule C.

I don't like this situation, just because if you're ever audited for some other reason, the examiner might give you a hard time about it, and I like to avoid a hard time.

I'd see if the sponsor will pay you as a d/b/a. If not, form the LLC.

Something else to consider: depending on your state, LLCs can be much more expensive to form. The Florida Secretary of State, for example, charges about five times as much for LLC formation as it does for an incorporation. Make sure you get all the costs before you move forward. You could just as easily incorporate a business, but then you'll have to file a business return. Not hard, just one more thing.

And either way, if you want to do it the right way, there are niggling issues with maintaining a formal business. All that may or may not be worth it, depending on how much he's paying you.

 

You say, "I'm the operator of JJJerry Racing. Thanks for the check."

 

And, it's worth noting, are treated as misc deductions and subject to the 2% AGI floor. So if you're not already itemizing your deductions this might not be that advantageous.

 

Don't know if it has changed... The tax accountant who was an officer of the AAMRR used to give a little class... It was like any startup business... as long as their is the possibility of profit you can run at a loss for three years without raising flags.

 

I wouldn't let that guy mess around with my tax return.

The activity will be presumed not to be a hobby if profits result in any three of five consecutive tax years.

Check that wording--you're essentially 'proving' it's not a hobby by earning a profit. Prior to that, it's assumed to be a hobby, and even new examiners are up on this stuff. You can file a 5213 and get an extra year...but trying to get over on the I.R.S. is never your ideal position.

 

Not talking about a hobby. Racers who were earning substantial checks from racing (remember Doug Polen?) were able to deduct all their racing expenses, etc. Not making a profit was easy, for three years.

 

That's not a hobby, that's a profession. Or at least a profitable enterprise. Totally different.

 

Guess it's good of time to ask as any and not exactly related.

Any way a person can offset in tax returns their trade skillset time/labor applied to a 'not for profit' or am I just fishing in an empty pond?

 

Explain more.