10th Circuit: Racing Costs Aren't Deductible as a Business Marketing Expense

Attorney advertisements proliferate on many platforms, most commonly on billboards, radio, television, and websites. Particularly for small law firms and solo attorneys, any edge you can get in marketing is nice to have. It isn't too surprising, then, that some attorneys choose unusual branding methods. At least one PI law firm has a race team for the NASCAR Cup Series. And one solo attorney in Colorado thought it might help his brand to affix his law firm logo on the back of his Dodge Viper when he competed in road racing around the country.

Was that deductible as a business expense?

Under federal law, businesses can deduct "ordinary and necessary" business expenses on their Schedule C tax form. But when solo attorney James William Avery tried to deduct his racing expenses, the IRS denied them all.

Avery contested this denial in the United States Tax Court. It was to no avail. The Tax Court agreed with the IRS, holding that Avery's racing-related costs were neither necessary nor common. Further, it noted:

"[Avery] greatly enjoyed car racing, which he found more exciting than his previous hobby of acquiring collector cars and participating in car shows. But we find that both activities were hobbies. No deduction is allowed for personal expenses of this kind."

10th Circuit Agrees

Not to be deterred—and facing a very significant check owed to the IRS—Avery appealed to the 10th Circuit Court of Appeals. He argued that his enjoyment of car racing wasn't material to whether it was deductible as a business expense.

Well, said the 10th Circuit, even assuming the Tax Court didn't just note it as "a passing observation," it knew of no authority to suggest the tax court couldn't include that as a consideration, among others. Further, the Tax Court's standard in determining deductible business expenses includes the primary motivation for the payment. Here, the 10th Circuit felt that the primary motivation for road racing was for fun, not as an advertisement for his law firm. For example, the 10th Circuit noted that he raced in many states where he wasn't licensed.

Deducting Advertising Expenses

While taking a deduction for sticking a decal on the back of your racer might get scrutiny from the IRS, that's not to say that advertising expenses can't be deducted in most situations. According to the IRS, an ordinary expense is one that is "common" and "accepted in the field." Necessary expenses are ones that are helpful and appropriate. These expenses do not need to be indispensable, however.

Of course, it's always a good idea to speak to a tax professional if you are uncertain about appropriate deductions. And, whether you are deducting home office expenses, a car, or anything else, it's always a good idea to clearly delineate between professional and personal expenses.

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