Have you ever wondered exactly what a ‘write-off’ is? For many players, this is the trickiest part of filing their income tax return, particularly because there is a fine line between which expenses are deductible and which ones are not.
A write-off is any legitimate expense that can be deducted from taxable income on your tax return. The purpose of a write-off is to decrease your taxable income, thus decreasing the amount of tax you owe to the federal and state government.
For example, if you have a taxable income of $500,000, a $1,000 charitable contribution would lower your taxable income to $499,000. The tax rate at this income level is 39.6%, therefore, the tax due would be lowered by $396. As a result, the net cost of your charitable contribution is $604 instead of $1,000.
HOW IS A PROFESSIONAL ATHLETE TAXED?
All professional baseball players are treated as employees by their respective teams. As an employee, there are specific income tax rules as to what expenses are deductible. These expenses are generally deducted on your tax return as employee business expenses.
WHAT IS TAX-DEDUCTIBLE?
- Agent Fees: Commissions and/or fees paid to an agent are deductible as a business expense.
- MLB Player Dues: Typically deducted from wages by your club and reported as an employee business expense on your return.
- Training & Gym Fees: As a professional athlete you are allowed to deduct your gym and training fees. You are also allowed to deduct a reasonable amount of travel. This can be training in a general sense or position-specific training.
- Chiropractic / Body Maintenance: A reasonable amount of chiropractic & body maintenance expenses may be deducted during the season.
- Supplements & Diet: Training supplements and special nutrition additives may be deductible.
- Charitable contributions (cash and non-cash): Contributions made to qualified organizations are deductible. This includes both cash and non-cash items such as clothing, equipment, etc.
- Tax return, brokerage account and financial management fees: Income tax preparation and consulting fees are deductible.
- Travel: Travel which is specifically related to your baseball career is deductible. This includes meetings with agents, scouts, trainers and anyone directly connected to you baseball-wise.
- State, City & Local Income Taxes: MLB players typically have income taxes withheld at the federal, state, city and local level. A player may often be required to file in as many as nine states as well as at the federal level. The amounts withheld for state, city and local taxes are generally deductible.
This list is not all inclusive, please contact us if you have any questions about the deductibility of a particular item.
WHAT’S NOT TAX-DEDUCTIBLE?
- Clothing: Only baseball-specific workout clothing is deductible. Clothing which is suitable to be worn in outside situations (e.g., suits, casual wear, etc.) is a nondeductible personal expense.
- Personal Effects: Watches, jewelry, extravagant electronics, etc. are nondeductible personal expenses. A limited amount of electronic equipment may qualify for a tax deduction.
- Vehicles: Only a limited amount of vehicle expenses are generally allowed as a deduction (unless the player has outside endorsement income). Parking fees, tolls, etc. directly-related to baseball are allowed as a deduction.
- Temporary Living: Rents paid for temporary living arrangements are generally not deductible. Exceptions do exist, but they are typically limited to extreme circumstances (trades, injury rehab, etc.).
- Cell phones: Cell phones may be partially deductible as a deductible baseball expense. They are seldom fully deductible.
- Gifts: Monetary and commodity gifts are not deductible, except for very minimal amounts. Gifts to friends and family are never deductible.
- Personal Expenses: Other items of a personal nature are not deductible. Vacations, furniture, home renovations, etc.
It is extremely important to have proper documentation in order to support the deduction of the items listed above.
Your accountant’s ability to prepare your returns is only as good as your records. If your records are a mess, then your return will not capture everything properly or cost you a bundle, as your accountant tries to recreate your financial records for the last year.