One of the great secrets in plain view is the tax-deductible status of fines levied on athletes, owners, and coaches. When the NFL punishes a player for an illegal hit or an owner for public comments found to be distasteful, the fines that accompany these reprimands can be used to lower their tax bill—legally.
Is the IRS sending the right message with this treatment and how should fines be addressed?
How the Tax Deduction Works
Athletes big and small generally record income through approved tax structures, like an S-Corporation or an LLC, in which they file annually with the IRS to report income, deductions, gains, losses, etc.
Owners, too, will have set up legal structures, like partnerships, to record the income and expenses of the business as well as distributions/passthroughs to investors and the ownership group.
As the primary income-generators of their own mini-businesses, athletes incur expenses on a regular basis that can be considered tax-deductible.
To be deductible, according to the IRS, a business expense must be both ordinary and necessary.
An ordinary expense is one that is common and accepted in trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.
Some typical tax deductions a professional athlete can deduct are:
- Preseason training expenses like hotel, apartment or home rental
- Transportation to training locations
- Car rentals
- Sports agent fees (generally a percentage of a player’s salary), etc.
While the deductions may seem excessive, the same is true for income where athletes get taxed at the city and state level for every time they visit a new town.
Fines Carry Positive Tax Treatment
Fines imposed by the team or league can generally be deducted from income.
According to Robert Raiola CPA, whose Twitter handle is fittingly @SportsTaxMan, these violations must be of team/league rules and not public law in order to be deductible. For example, if an athlete gets a speeding ticket on the way to practice, it is not deductible. But if an athlete is late to a team meeting and fined, that expense is deductible.
The same logic naturally applies to team owners and coaches.
That $25,000 fine given to Los Angeles Clippers Coach Doc Rivers for criticizing the refs? Deductible.
49ers’ Safety Dashon Goldson’s massive $100,000 fine for an illegal hit on Darren Sproles last season? Deductible.
And the famed $2.5 million dollar fine issued to Clippers owner Donald Sterling? Should he choose to pay and not embroil himself in a legal battle, that too is deductible.
Can Policy Be Corrected?
A few weeks ago, California congressman Tony Cardenas introduced a bill that would ban Sterling from taking this tax deduction. The bill does not explicitly mention Sterling but instead says the deduction would be disallowed for fines imposed on professional sports team owners after December 31, 2013.
Singling out tax deductions on a case-by-case is an example of poor tax policy and a misuse of the tax code. Plus, a retroactive tax change has literally no chance of passing any hall of Congress.
Still, athletes, owners, and coaches are getting rewarded by the IRS for behaving badly. There’s a strong disconnect there but if you’re yearning for logic then you shouldn’t be looking at the tax code.
Uproar over these tax deductions are like political veneer: a thin and bright rallying cry that covers up the real issue which is federal tax policy. If a discussion of fines from sports leagues and teams can lead to a more in-depth discussion of the overall tax code, then any outrage over these deductions will be squarely serving its purpose.