Most things aren’t deductible, and I think that’s pretty well understood by 90% of Americans. As much as I’d like to reduce my taxable income by the video games I purchase, or the model railroads I create, or on my personal aerial drones, I can’t. Unless, of course, they’re for my business, then I can deduct them (if I’m in the video game industry, the whatever-the-heck industry deals with models, or the spying/lechery field, respectively). Usually, what counts as a business and what counts as a hobby is pretty obvious. For Mr. Christopher W. Johnson, Jr., it wasn’t quite so black and white (TC Memo. 2012-231).
Mr. Johnson clearly loves cars. He’s been drag racing for years, since the nineties. And considering that for the three year period reviewed in this case he spent nearly $600k, he probably considers this his life work.
Unfortunately, it isn’t his real work. His real work is as a code monkey. But hey, at least the software he makes is used in high-performance vehicles. If he’s not feeling the rushing wind through his hair, the adrenaline surging through his veins and bursting through his heart, the next best thing is to hammer out lines of codes that allows others to experience the fun.
The court ruled that because he didn’t make more than token income related to drag racing (some $6,000 over those same three years), and because he didn’t run his beloved CJ Racing (his name, not mine) like business, it was only a hobby, so he can’t deduct those losses. He’ll have to pay tens of thousands of dollars in taxes and penalties to make up for the years he claimed a deduction…tens of thousands of dollars he could have invested in his real passion.
Not all hope is lost for Mr. Johnson. He just needs to learn how to run his CJ Racing like a real business. It wouldn’t hurt if he could take in a few extra bucks of revenue, either. Who knows, maybe the fame he gains from this court case will help him get a sponsorship? If that’s the case, Chris, can I get an autograph?
One odd side note: based on the names of the Petitioners, it looks like our friend CJ got married sometime in 2004 (it lists him a sole petitioner in 2003, then him and his wife in 2004 & 2005). Very Overdue Congratulations, Mr. & Mrs. Johnson! Also, his drag racing expense declined significantly between 2004 and 2005. Coincidence?