Fight Taxes 101
Taking on the IRS is a fight that no good manager is going to approve, but for those fighters filing taxes in the United States the bout is set for April 15th, and that is right around the corner.
There is a lot to think about when filing taxes as a professional fighter and it only gets more complicated with each state in which competition is held. My MMA News, with the help of Certified Public Accountant (CPA) K. Sean Packard, has the basic breakdown of Fight Taxes 101.
Filing in the Place of Competition
One of the first things a fighter should be concerned with is the individual states in which he or she has competed, because more than likely, taxes will need to be filed in each state. This is sometimes referred to as the “jock tax.”
“Different states have different rules,” said Packard. “For example, in DC, the minimum is $12,000 of gross income. Arizona is $5,000, etc. Others want you to file as soon as you set foot in the state.”
For a newer fighter who may only see a payout of a couple hundred dollars in an individual competition, there is a possibility that taxes may be avoided in that state. If that amount accumulates because the fighter competes there regularly, that is a different story. NFL players travel so much that they could file in 10-12 stated, while MBA players may hit between 16-20. If under $600 it is not necessary to file, but it may be in the fighter’s best interest in order to net losses that may be carried over to future years.
Some states have reciprocity, meaning that a resident in one state may be exempt from paying taxes on money earned in another state. Bonuses may or may not be taxable depending on the state and whether they are paid separately from the guaranteed purse.
Another concern along those same lines is fighting abroad. These taxes can be much more significant, as many places can take close to 30 percent out off the top of the paycheck. The good part about that is not having to pay it back later. The downside is the big chunk of change missing on payday.
In some cases, such as that of boxer Manny Pacquiao, taxes can become a big issue if not addressed. At the end of 2013 Pacquiao was facing over $18 million owed to the IRS for fights that the Filipino national participated in on U.S. soil between 2006 and 2010.
For some fighters, sponsorship income may be more lucrative than the actual fight purse. This can get a little tricky because not all sponsorships are monetary, which means that a number has to be attached to the service or product donation.
“Technically, they are supposed to report income whenever they receive a benefit for services, be it cash, equipment or free use of a gym,” said Packard. “Nike, Reebok and Under Armour all include the free merchandise players receive on their 1099s, but the fighter is supposed to report the income whether the benefit is listed on a 1099 or not.”
Medical Bill Exemptions
In some cases medical bills can be used as a tax emption if they exceed a certain amount or if they fall under business deductions.
“Medical bills are always going to be subjected to scrutiny by the IRS because “medical” is well-defined in IRS regulations and publications,” said Packard “But with athletes there is a gray area. As mentioned above, you can make a very strong case for business deductions for chiropractic and tests required to prepare for a fight. If a fighter suffers a broken bone in a fight, you are walking into more of a gray area. Such injuries are hazards of the job, but in the IRS’s view, many jobs have potentially dangerous hazards. The line you have to walk is training vs rehab. Training is business while rehab is medical.”
This is the big one. There are so many expenses that go in to preparing for a fight, it is crucial to know which of those are deductible. This is a timeless debate.
In Sugar Ray Robinson v Internal Revenue Commissioner (1965) the court had to discern, which of the professional boxer’s listed deductions could actually stand up against the IRS original ruling.
Among other things the decision stated that event tickets purchased, “such as those distributed to sparring partners or training camp employees, may fairly be classified as reasonably connected with petitioner’s trade or business as a professional boxer.” This means that a fighter who purchases event tickets for his camp may deduct that expense, though family member and personal friends do not meet this standard.
In this case the IRS had originally denied Robinson the ability to deduct $2,000 for the use of training facilities for his fight against Basilio. This was overturned and the deduction was allowed. The case also stated that payments to managers for services related to the fighting profession can be deducted.
Travel expenses not paid by the promotions such as airfare, rental cars, food and hotel rooms are fair game as is training equipment. Training clothes are more of a gray area because the IRS could contend that that attire could be worn for something other than training.
It is recommended for any professional athlete to seek out a qualified CPA to assist in tax preparation because of all of the intricacies of competing in various locations and the specificity as to what credits can be claimed. Using a free online form and doing it yourself just may end up costing you more than it would have been to have it done right the first time.
“I think the most common mistake is not keeping good records,” said Packard. “I recommend that my clients keep receipts for everything. If a fighter travels for a fight, I recommend getting an envelope from the hotel in which she/he stays and keep all receipts from that trip: meals, hotel, taxi, airfare booking e-mails, etc. in that envelope. Keep track of coaching, training, etc. Get invoices from your coaches and trainers and pay for everything with checks and credit cards whenever possible to keep a good paper trail. Keep a separate bank account and credit card for business purposes so personal expenses do not get mixed in.”
In a recent interview with Fox Sport, UFC fighter Donald Cerrone stated, “I’ve been taking those fights just to pay my taxes off, that’s what people don’t understand, they give us this big chunk of money and then idiots like me spend it all. Then they tell me, ‘wait, you have to pay us our set.’ Then, I have to go fight again so I can pay them. (laughs)”
*This information is in no way a replacement for the help of a tax professional who knows your unique tax situation, but we hope it helps you find a good place to start.
K. Sean Packard can be followed on Twitter @AthleteTax