Professional athletes usually face unique tax minimization planning challenges. Their tax planning typically here includes filing complex returns, and their CPA may have to file federal and state taxes. It’s not uncommon for a professional athlete’s accountant to file tax returns over 150 pages long.
Pre-draft professional athletes may be interested in having their accountant minimize their tax liability, especially with their signing bonus. However, they usually do not want themselves or their accountant to be in the headlines post-draft because their taxes were not filed correctly. The professional athlete may end up facing the expense of back taxes or the possibility of jail time.
How State Tax Planning Impacts Professional Athletes
State taxes are one of the biggest taxation areas professional athletes should sort out pre-draft and likely one of the biggest factors affecting their take-home pay post-draft.
An athlete should consider where they will live pre-draft, regardless of the team they get drafted with. Texas, Nevada, Wyoming, Alaska, Washington, and South Dakota have no state tax. Professional athletes who live in these states or who are shooting to make the pre-draft decision to move to one of these states are on the right track. They may drastically minimize the amount of their taxes on their signing bonus. Tax on signing bonuses should be paid to the professional athlete’s state of residence. If they live in a state with no tax, they should only need to pay federal tax on their signing bonus.
How the Tax Cuts and Jobs Act May Influence the Tax Minimization Planning of Professional Athletes
The Tax Cuts and Jobs Act introduced a lowering of tax rates and an increase in the standard deduction. If an athlete earns a substantial wage from non-income, such as endorsements, businesses, or partnerships, their CPA may lower the athlete's tax rates with pass-through deductions. CPAs who file taxes for married athletes, unless they live in a high tax state, should have clients that pay lower taxes, whereas accountants with single clients may see them pay higher taxes.
Should Accountants Have Their Pre-Draft Clients Set up LLCs?
Accountants may wish to talk to their clients pre-draft about the need to set up an LLC or corporate structure. However, an argument may be made by CPAs regarding waiting until post-draft before setting up a corporate structure. Setting up an LLC may incur an expense that a pre-draft athlete may not be able to afford.
Traditionally, there is a time and a place for creating a corporate structure. Post-draft athletes who have reached an elite stature and who are getting high endorsements benefit from their CPA setting up an LLC that is properly structured. If the accountant has the athlete create an S corporation with the goal of running their business through it to save self-employment tax dollars, the CPA should work with the client to see that the corporation is paying reasonable compensation for the athlete's service to the corporation. This is something that may be highly scrutinized by the IRS.
Getting the Most Out Of Deductions Under the New Law
Something a CPA may want to discuss with their client pre-draft is how changes to the law affect their ability to deduct agent’s fees, training expenses, and union dues. An accountant may work with a pre-draft professional athlete helping them to arrange things so that these expenses relate to the production of their income, which might make them deductible.
Making Wise Financial Decisions with the Help of Financial Advisers
The decisions that an athlete makes before they put on their uniform may impact their post-draft finances. It’s imperative that they understand how their place of residence, business structure, and other factors may impact them. An athlete’s income may increase exponentially post-draft. Fusion CPA has a team of accountants dedicated to helping athletes make wise pre-draft decisions. We also offer services bookkeeping and financial advisory to help athletes hold on to the maximum amount of their post-draft income. One of our major goals is to create strategies to minimize tax liabilities. You can learn more about our services by clicking the button below to schedule a complimentary discovery call today!
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.