Many of the tax deductions the IRS allows require taxpayers to evaluate the reasons for incurring the expense to determine whether it’s deductible. Race fees may be deductible to one taxpayer but nondeductible to another. It all depends on whether the race fees relate to an income-producing activity.
TL;DR (Too Long; Didn't Read)
You may be able to deduct race fees on your upcoming tax return if you can prove conclusively that the fees contributed to a charitable organization.
No Deductions for Personal Leisure Expenses
As a general rule, the IRS doesn’t allow you to deduct expenses you incur for personal leisure. So if you enjoy racing your hot rod on the weekends at your local race track, the cost of using the track is a personal nondeductible expense. In addition, if you pay the fees to enter a race, regardless of whether it’s to enter your vehicle in the competition or to run the New York City Marathon, the cost is yours alone to bear without help from the federal government in the form of a deduction.
Deducting Charitable Race Fees
If a tax-exempt organization hosts a race to raise funds for a charitable purpose by charging participants a fee to enter the race, you can include the fee in your charitable deduction, provided that the entire fee goes to the charitable organization. In addition, you must not receive anything from the charity beyond a token gift of appreciation for making a donation of the race fees. Suppose, for example, that the Red Cross hosts a race in Central Park and charges participants a fee to register for the race. In exchange for payment of the fee, the Red Cross allows you to become a sponsor and advertise your business on its website. In this case, you cannot include the entire race fee in your charitable deduction. Rather, you must estimate a value for the online advertising and reduce the race fee by that amount to arrive at your charitable deduction.
Deductions for Business Expenses
When the payment of your race fee relates to a business you operate, the IRS will allow you to claim a deduction for the fee. For example, if you are a professional race car driver and you earn taxable income from racing, the race fees you pay to register into a race becomes an expense of your business, for which you can take a deduction for the entire amount. However, before claiming the deduction, you need to ensure that your racing activities actually rise to the level of a for-profit business and not just a hobby. Essentially, your motivation for entering the race must be to earn money.
Deductible Hobby Expenses
A racing hobby, on the other hand, is an activity you engage in primarily for personal satisfaction, even if you happen to earn some money from it. However, if you do earn money from your racing hobby, the IRS requires you to report it as taxable income, even if you don’t expect the earnings. For example, suppose you enter a race with 1,000 other participants, and the winner receives a prize of $1,000. In the event you win the prize, you must report it on your tax return. But since the IRS is requiring you to report your hobby income, it will allow you to claim a deduction for the race fees up to the amount you received in hobby income.