You work very hard (mentally and physically) as a professional athlete for your money. While gross income is clearly defined in the Internal Revenue Code, no code section deals specifically with tax deductions for professional athletes.
In this post, I will talk about what you can safely deduct on your taxes as a business expense, how you can substantiate it, and what are specific tax deductions available to professional athletes.
Professional athletes risk being audited more frequently due to the role money plays in sports – a multi-billion dollar industry. Not only can what you don’t know can hurt you, but it might also cost you your legacy – if you are a hot-shot athlete.
Deducting “Ordinary and Necessary” Expenses for Professional Athletes
Under the IRC, for business expenses to be deductible, they need to be “ordinary and necessary.” That’s very vague and requires one to look at case law and other precedents. Whether you like it or not, playing sports, receiving income, and incurring expenses is like running a business – the business of YOU.
If you can prove that an expense paid or incurred was directly related to you being in the business of playing sports, you may then deduct it for tax purposes under Section 162 of the IRC.
I know it’s vague. It’s the IRC, and that’s as good as it gets.
Ask yourself the following questions:
- Is this a common expense in my line of sport?
- Is this accepted as an expense by my peers?
- Is this helpful to me as a professional athlete?
- Is this appropriate, given the circumstances?
- Is the amount reasonable?
Document your expense if you answered yes to any of the above questions.
In 2011, NBA star Lamar Odom deducted $178,337 in expenses for professional fitness and conditioning. Later, he successfully defended his position in tax court.
Now, let’s move on to the next aspect of business expenses – substantiation.
Substantiation of “Ordinary and Necessary” Expenses for Professional Athletes
Here’s the deal with substantiation, the IRS can ask you to substantiate or provide proof for any expense – even when you think something is common sense – such as gym membership.
A good practice is to pay for everything using a credit card. That way, you have a digital trail of all your expenses. Keep your expenses separate from your business expenses, and use a different card for business-related expenses.
Once again, even a common sense business expense can be denied if it can’t be substantiated – track everything.
Specific “Ordinary and Necessary” Expenses for Professional Athletes
There are business expenses that professional athletes incur during the year that are specific. All such expenses, commonly accepted as ordinary and necessary, in your professional sport are tax deductible.
These expenses include:
- Professional Fees: agent fees, union dues, and financial and tax advice expenses.
- Fitness Expenses: amounts you pay for a gym membership, in-house fitness equipment, nutritional supplements, and hot tubs.
- Training Fees: amounts you pay to your fitness instructor and specialized coach.
- Subscriptions: magazines, newspapers, and trade journals.
- Entertainment Expenses: food, beverages, entertainment, amusement, and recreation expenses. The amount spent is limited to 50% limit.
- Travel Expenses: meals and lodging while away from “tax” home.
There are many other complex requirements for expenses to be deductible in the tax code that I haven’t discussed above to keep things simple. It’s always recommended that you consult expenses with a tax professional and understand the ramifications of deducting expenses that are not “ordinary and necessary” business expenses.
Always ensure you understand what constitutes “ordinary and necessary” in the context of your sport. You are responsible for your tax return, not your tax professional.