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Lessons from the Tax Court: Rev up promotion write-offs

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in Small Business Tax,Small Business Tax Deduction Strategies

Generally, you can deduct marketing and promotional expenses incurred in furthering your business operation. But you can’t deduct payments made by your enterprise that aren’t expected to generate business income.

In a recent decision, the Tax Court ruled that the owner of a construction company could deduct payments to support his son’s motocross racing activities, because the payments legitimately boosted the business. (Evans, TC Memo 2014-237)

Facts of the case: Mr. Evans was the owner of Dave Evans Construction (DEC) based in Boise, Idaho. DEC constructed residential and commercial buildings. For 2006 and 2007, it reported gross revenue of more than $16.2 million and $16.7 million, respectively.  

Motocross racing is popular in Boise and the surrounding area. While all of Evans’ five children participated in the sport, his son Ben exhibited a special talent. As a teenager he won the Amateur Motocross National Cham­­pion­­ship in Nashville, Tenn., a highly competitive event. After Ben was featured in several motocross magazines, sponsors such as American Honda began clamoring to support him. Mr. Evans’ CPA advised him that promoting Ben’s moto­­cross racing could be a valid business activity for DEC.

In each of the two tax years in question, DEC’s motocross racing expenses exceeded $74,000.

Taxpayer victory: The Tax Court sided with DEC. In addition to improving community relations and attracting more customers, Ben’s celebrity status attracted new investors and helped secure financing for the company.

Furthermore, the Tax Court dismissed the IRS objections that the expenses were unreasonable. Based on the significant benefits DEC derived from the motocross racing activity, the amounts DEC spent, which were actually small compared to its revenue, were justified. Finish line: DEC was allowed to deduct all the costs related to the motocross racing activity with the sole exception of expenses relating to a utility trailer.

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