When the Tax Cuts and Jobs Act (TCJA) of 2017 was enacted by Congress, much of the conversation centered on new tax rates and brackets, increased standard deductions and the elimination of miscellaneous itemized expenses. The new law generally eliminated the business deduction for entertainment, amusement or recreation expenses but maintained ordinary business expenses.
However, what happens when an individual – through his profession – makes more money than many small businesses and accumulates significant “business” expenses, yet isn’t considered a business in his own right? Such is the quandary for certain professional athletes—specifically, for those who are employed by the teams they play for. While professional tennis players and golfers are considered businesses by the IRS, other professional athletes – who must employ agents, attorneys, trainers and more – are not, and therefore can’t deduct such expenses.
In addition, the new 20% qualified business income deduction, also known as Section 199A qualified business income, is not available to professional athletes, who were eliminated from this tax benefit, along with other specified trades or businesses.
Even though federal individual income tax rates decreased by 2.6%, the loss of the deductions for unreimbursed business expenses far outweighs the benefits of the reductions of the tax rate. Most athletes are losing hundreds of thousands of dollars in deductions they were able to take before tax reform—some losing as much as $1.5 million or more. Further, not every athlete makes the multimillion-dollar salaries so publicized by the media.
The Challenge Ahead
Football players and other athletes in this predicament must find ways to put themselves in the best position for the next step of their lives. With tax deductions eliminated, what are they to do? Perhaps more so than any other taxpayer, the professional athlete has been unfairly penalized by exclusions in the TCJA.
Given this disadvantage, it will be important for athletes to establish savings from the start of their careers. As we addressed in a previous blog, a sound savings plan must be part of any long-term strategy. A qualified professional tax advisor with experience in working with professional athletes will help to identify tax reduction and savings strategies.
Daszkal Bolton, a South Florida CPA and business advisory firm, provides accounting and consulting services to athletes in all four major sports: baseball, football, basketball and hockey. Our CPA and sports accounting services include asset protection, budgeting, cash flow forecast and management, financial reporting and personal financial statement preparation, philanthropic giving and tax planning and compliance.
Questions about this article or our accounting services for athletes? Contact Arthur J. Hurley, CPA, Partner, Game Plan Practice Leader, Industry Leader, at 561-953-1512.