Is your tournament fishing a business?
It is October and you and your partner just won the year end championship and the $20,000 cash prize that goes with it. You drive home from the lake thinking about a new Lowrance Ghost Trolling Motor or Garmin Livescope along with something to keep your wife happy for letting you be gone in the first place. Maybe even a down payment on that new Skeeter FXR you have been looking at. You mentally spend the $10,000, your half of the winnings, before you even pull in the driveway back home. The next day when telling your buddy at work, he asks “how much you owe in taxes.” Taxes, you never even thought about that, how much could it be on $10,000? Your tax bill for that will be at least $2,500 and could go as high as $3,960 for just the federal portion, not to mention state taxes if they apply where you live. Many anglers in this situation now decide they will make fishing a business, collecting receipts and tracking expenses for the year to offset some part of the $2,500-$3,960 owed. Sounds like a great idea, until your tax advisor or the IRS tells you, your fishing is a hobby not a business and you can’t claim your fishing expenses. Who wouldn’t want to write all of their entry fees, travel, gas and especially your Tackle Warehouse bill off as “business expense”? I guess the seven new $450 Denali/Shimano combos and five $59 Bull Shads aren’t a “business expense”. If the IRS does determine your operation is a hobby you will be forced to pay tax on the income and cannot deduct any of the expenses. You also are technically required to claim any cash or prizes you win even if they are less than $600, and typically will receive a 1099 on those winnings.
Many anglers believe it sounds like a great idea to take their expenses from fishing tournaments and buying tackle and claim those expenses against their tournament winnings, but can you really do that? Your first step should be to ask yourself is my fishing truly a hobby or a business? That is an easy question to answer if you are planning a professional fishing career, but what if you just want to fish local or regional events. Ask yourself more specifically are you trying to make a profit from your fishing even if you keep your full-time job? If the answer is yes, then you are going to need to treat it like a business from the beginning, so that when your tax advisor or the IRS looks at it they will clearly see it is a business. Most anglers start off with the intention of making a profit, but realistically very few can do it fishing on a local or regional basis. It can be a challenge even at the tour level for many anglers. If you plan to progress to a professional fishing career you will have to start at lower levels like the BFL, Tackle Warehouse Pro Circuit events or the Bassmaster Opens and work way your way up. Starting your business now to progress thru the steps is a good investment in your planned career goal and sets you up to use losses against income for tax benefits as you begin to fish for higher prizes. This is a good time to note that a business that loses money for three years in a row or for three out of five years consecutively is going to potentially raise red flags for a closer examination and may be considered a hobby after further review. The IRS hobby rules are a facts and circumstances test, with good records and receipts you may be able to get beyond this thresh hold and still not have your business considered a hobby.
If you plan on fishing for a living or having fishing be some sort of sideline business, you need to make sure you treat it like one and keep perfect records. The longer you stay in the industry and the more money that passes through your business, the more likely you will be audited. Fishing is not a standard or normal job that has standard income and expenses. Numerous red flags are raised when the IRS reviews your tax return because although lots of money may come in, we have very large expenses as well. All these expenses may be legitimate, but you just need to make sure they are documented properly.
If you want to claim fishing expenses as a business, you must treat your fishing like a business. Keep expenses separate, use a different bank account with a separate credit card. Do not mix your fishing expenses from tournaments with other fishing or your regular personal accounts. Keep all your tournament expenses in specific expense reports connected to the travel of your tournament schedule. Consider setting up a legal structure to hold your tournament fishing business operations and obtain a federal and state tax identification number. Other things to make you look professional include having your resume or sponsor proposal up to date, get business cards for you company, so it looks and operates like a business. Looking for more information about obtaining sponsors check out this great guide here. A good “best practice” for proving business vs. hobby is to have a business plan that is continually updated so you can prove that you are continually adjusting your business to
- a) make it profitable if it is showing losses or
- b) to continue to make it more profitable.
It is important in the hobby vs. business discussion to have an updated, detailed business plan that shows the adjustments you are making to your business to make it better goes a long way in this argument.
Build out your yearly tournament schedule and construct a projected profit and loss statement from your yearly schedule. This will also help you clearly understand your goals for the season. When you travel to each tournament on your calendar, create an expense report for each event. Keep all receipts and corresponding credit card statements from each event. Document all of them in the expense report or related Excel file for quick reference. If you enter all your expenses into an Excel file you can categorize different expenses to quickly total and sort. Carefully track and record your mileage from each event and document that all with corresponding receipts. It is not always possible to claim 100% of purchases as expenses also as some portion of them may be deemed personal.
Many people think they will just gather the information if they need it or if they become are audited, but it can be very difficult to remember and create all the necessary documentation months after it occurred. IRS regulations require you to keep contemporaneous records as you incur the expenses and not create it all after the fact. If you want it to be a business, treat it like a business from the start. Many anglers think it won’t happen to them, but take the advice of Bassmaster Elite Series pro, Chad Pipkens, who has been thru an audit that lasted over two years.
“I was audited over a two-year period for my fishing business. They wanted to verify that all the expenses I had were true. Anything you don’t have a record of technically did not happen which would make you liable to pay taxes on those monies you said you had spent if you cannot verify a receipt,” stated Pipkens. “The more organized you can be the easier it is to produce these documents. At the minimum you should be creating at least an Excel spreadsheet which has dates and each of your receipt’s amounts. You should also have a column which has an abbreviation for which tax category of this receipt would file under. For example, one could be supplies, meals/entertainment, repair maintenance, etc. this can help you easily sort each expense category at the end of the year. It is also important to keep these receipts physically if you are not logging them electronically. I kept all of mine in order in Ziploc bags for each season. The toughest thing about being audited was that I had to reproduce each of these receipts and get them on an electronic form for the government to view. It worked but I had to spend some 25 extra hours to put the document together. “Pipkens continued.
“After learning from that I now use an app called Receipt Bank. I take a picture of each receipt and it stores it electronically as well as pulls some of the data like amount and date and tax category of the receipt. At the end of the season, I can export these so that I can easily give it to my accountant with the totals for each category of expenses. I also now have electronic receipts saved in case I ever need to duplicate them for the IRS again. It will definitely save you some headaches!” Pipkens concluded. QuickBooks On-line is a good accounting program that integrates with ReceiptBank and other 3rd party apps that may be a good option for many tournament anglers as their business grows and they need more accurate/robust accounting records.
Another thing to keep is mileage. It’s important to do this for each trip. This way you can log the location and what its purpose was as well as the exact mileage for each trip. When audited and proving mileage you need to have some sort of log and how it pertains to where you were going or what you were doing for work. It is also a best practice to keep your oil change/maintenance records on your vehicles during this time as well to assist on corroborating the mileage that was driven during the given year. Each time your vehicle is in the service center, they log the odometer reading which will help you if you are audited to support the miles driven. This can be done in a simple Excel spreadsheet as well. Doing much of this on your own can save you time and money when accounting is done each year. Also keeping good records can help lower your tax bracket and what you will pay in taxes at the end of each season.
Another good reason to consult a tax advisor is to make sure you comply with state nexus rules. Depending on where you win your money you may have state filing/payment of tax obligations in a different state from where you live considering the recent Wayfair Supreme court decision.
Just because you want your fishing to be a business, does not mean the IRS will agree with you. Make sure you follow these suggestions and consult with your local tax advisor for the best advice for your situation.