Authors: Flyboy Wakesurf
We were just talking about the most recent contest in Texas and a question came up about deducting the various expenses associated with these contests. As we got involved in the conversation, it became obvious that some folks may not be aware of some of the reporting obligations or what can be deducted.
So first up, is filing requirements when you are away from your tax home. Remember a few years ago when the WWSC was held in Arizona? Well, if over the course of the year an athlete had more than $5,500 from Arizona sources, they should have filed a non-resident income tax return for that state. To further complicate the matter, each state seems to have different filing thresholds and many cities have filing requirements also. The best thing to do? Keep track of your winnings and expenses by event and then do some quick research to see if you have a filing requirement in that state. It’s not uncommon for professional athletes in various sports to file 10 and 12 individual state and jurisdiction returns.
The next question that comes up is the deduction for the various costs of competing. Some are really clear, the entry fee for a contest where you can win money is a direct expense of your income as a professional athlete. What about the travel to and from? There are a myriad of rules surrounding the cost of travel. One of the factors is your tax home. For IRS purposes that is usually your regular place of business. Uh oh, huh? Most traveling athletes don’t have a main place of business. This is one reason James established the Flyboy Store, it clearly establishes his place of business. Anyway, the IRS hates travel expenses and if you don’t have a main place of business they can consider you an itinerant and as such, you have NO deductible travel expenses! A little planning can really help here.
Also, the question the IRS always asks regarding travel expenses is whether the main purpose of the travel is business related. You ride for 2 minutes and there is no pay out, think those travel expenses are deductible? What if the vast majority of time you are out sight seeing, or just having fun, unrelated to winning money? Yeah, the IRS is probably going to tell you that your primary purpose of travel was to go have fun! Not the 2 minutes of riding. The primary purpose of a trip is determined by looking at the facts and circumstances of each case. An important factor is the amount of time you spent on personal activities during the trip as compared to the amount of time spent on activities directly relating to business. If the trip is primarily personal in nature, none of your traveling expenses are deductible. This is true even if you engage in some business activities while you are there. Oh and if someone PAYS for your travel and you just show up, that’s still income to you. The IRS considers that to be just like you were paid and then used the money to buy the travel. Are you recording that income? Most folks don’t!
In front of all taxing authorities, YOU have the burden of proving your deductions are allowable. It’s not like criminal law where you are presumed innocent, you are presumed GUILTY until you can prove yourself innocent. The IRS doesn’t need to do anything more than say – prove all of those deductions are allowable. If you can’t, kiss them goodbye, along with your tax dollars.
There are ways to help insure your deductions are allowable. Contractual provisions from sponsors, ridiculous amounts of documentation showing you’re selling products or fulfilling the requirements of sponsor/clients and, of course, actually doing business!!!
Not making money? That’s not uncommon and it’s a hobby. The IRS has limitations on Hobby Losses. You may have enough allowable deductions to offset your income, but the IRS won’t allow you to deduct a loss on your taxes.
What about the cost and operation of the boat? Is it yours? If you’re a minor, it’s probably your parents and so those expenses aren’t yours! Not deductible. But there are ways to take those, within reason, and insure they are deductible. Training is a huge expense and shouldn’t be overlooked, but you have to structure them and make sure they are obligations OF and paid by the person/entity that has a business operation. Mom and dad, typically don’t.
We’ve also seen a lot of contests that don’t issue 1099′s. Does the mean you don’t have to report it? Nope! The failure of the contest to issue a 1099, doesn’t exempt that income, you still need to keep track and report it. The contest may be in for trouble for failing to issue information returns, but that doesn’t change your basic requirement to report the income.
So, lots to think about in there. Your status as employee or self-employed or as a corporate/LLC owner, your tax home, the winnings in various states and cities, are you doing business or just having a blast (check your FB posts!) and do you have piles and piles of documentation to support your deductions. You’ll certainly want to consult with your tax adviser and get those transactions structured appropriately.
Thanks for following along, we really appreciate it!
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