Update: Tax Consequences of NFL Rookie "Hazing"
By Teresa Ambord
Our recent article (below) listed what NFL players can deduct on their taxes, and two of those deductions are making headlines in sports news this week: fines for personal behavior and rookie hazing expenses.
Miami Dolphin guard Richie Incognito is accused by another player, Jonathan Martin, of bullying. Incognito says the team coaches told him to toughen the Martin up after Martin missed some team workouts last spring . . . and maybe things went too far. Incognito has a reputation for being outrageous, but now there are charges he made racial comments, threatened Martin's mother, and told Martin he'd "kill him." Because of that treatment, Martin left the team to deal with emotional issues. Fox News says it's unclear whether he's expected back or not.
While the charges are being investigated, Incognito – who earns $4 million per year – has been suspended from play for conduct detrimental to the team. Pursuant to the NFL collective bargaining agreement (CBA), Incognito could be looking at a serious financial setback.
“According to the NFL CBA, he can be looking at a suspension of up to four weeks, plus a fine for a week's pay," said Robert Raiola, CPA
, who heads the Sports & Entertainment Group
for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC. "Incognito earns $235,294 per week, so if he gets the maximum suspension plus a fine, he'll be losing close to $1.18 million." (See the bullet point "Fines" below.)
Another issue that has come up in regard to "bullying" is the rookie expense. While the regular players make salaries in the millions, as Incognito does, the minimum salary for a rookie is about $405,000. But it's common practice for rookies to pick up the tab for some team meals.
Maybe the Dolphins, and Incognito in particular, took it too far. ESPN reported that Incognito asked Martin to contribute $15,000 to finance a Las Vegas trip for some of the Dolphins in 2012. Martin didn't travel with the group on that trip, as he cancelled at the last minute.
One source told the Miami Herald that rookies are treated like ATMs and are often expected to pay for expensive team meals, sometimes in the range of $30,000 tabs. (See bullet point "Rookie expense" below). In the midst of the bad publicity about Incognito, Miami defensive lineman Jared Odrick tweeted "Everything tastes better when rookies pay for it."
As for rookie hazing, it's a form of bonding and it's pretty common, said Raiola. "It usually takes one of two forms. Rookies might be made to carry the team equipment. They might have to dress up in some costume or sing the fight song from their college. Players have been known to fill a rookie's car with popcorn or duct tape a guy to a goalpost, that sort of thing. Joe Montana once hid the bikes the rookies needed for training."
The other form of hazing is picking up meal tabs or other expense. AOL News reported that one of the Chargers linebackers once got stuck taking the entire team to dinner, to the tune of $14,000. "Usually," said Raiola, "if a rookie picks up a meal tab it's for his position group, not the whole team. Rookies are able to deduct those meals on their tax returns, up to 50 percent, just like a business meal."
The Dolphins management released this statement on Sunday: "We believe in maintaining a culture of respect for one another, and as a result, we believe this decision is in the best interest of the organization at this time. . . . We will continue to work with the league on this matter."
By Teresa Ambord
NFL players make a lot of money, that is no secret. Even those at the bottom of the salary list are well paid, but then there are those at the other end, like Drew Brees. He is currently averaging $20 million a year, plus whatever endorsement income he may make and his prorated signing bonus.
Nobody's going to feel sorry for athletes with earnings like that, but big bucks come with big taxes, and big out-of-pocket expenses.
Most professional athletes are employees of the team for which they play. So just like any other employee, players can deduct unreimbursed business expenses as itemized deductions, subject to the 2 percent of AGI threshold. On a salary of $2 million, for example, business expenses have to exceed $40,000 before there would be a tax benefit from the deduction.
What Happened to My Millions?
All too often, we hear of famous athletes going broke in spite of enormous salaries. Often the problem is due to their youth and inexperience when it comes to handling money. Without proper guidance, they may trust their money to someone who is not qualified to handle the task (a well-meaning relative, a brother-in-law who needs a job, or even a financial adviser who truly is not qualified).
Athletes and others who are suddenly rich tend to think the money will never go away. To make matters worse, some income – such as for licensing contracts for trading cards, video games, and other items – is paid in lump sums and reported on a Form 1099 without any tax withheld. At tax time, the players are surprised to learn they may have a large tax liability when they have already blown through the money. This surprise is even more upsetting now that the top federal income tax rate has risen from 35 percent to 39.6 percent.
In recent years, the IRS has begun to focus more on selecting highly paid athletes for audit. As a result, more than ever, these players need to seek out an accountant with expertise in tax issues pertinent to their industry.
What costs are deductible? Here is a partial list:
- Agent fees, which are generally a percentage of a player's salary. The maximum an agent can charge in the NFL on a contract is 3 percent. For other income, such as endorsement income, it is customary for the agent to charge a higher percentage. Agent fees are deductible, regardless of the type of income on which they are based.
- Fines. "I am often asked if player fines are deductible," said CPA Robert A. Raiola. "Fines which do not violate public law can generally be deducted. For example, if an athlete incurs a speeding ticket on the way to a game, that is not deductible. If he is fined by the team for being late to practice, that is deductible because it violates the team's policy, not public law." As the head of the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC, Raiola is intimately familiar with the ins and outs of sports accounting. "It is a common misconception that these fines are deductible because some leagues, including the NFL, donate those funds to charity. They might, but the fines are deductible to the athletes, regardless of what the league does with the funds."
- Ground transportation, such as business-related taxi fares, parking fees, and tolls. This includes travel to meet with agents, scouts, trainers, etc. Transportation fees related to the player's commute, such as to the stadium or practice facility, are not deductible.
- Athletic equipment related to the player's business are considered tools of the trade.
- Costs of overall development and maintenance for the athlete, such as training classes and general workout equipment (for example weight machines and dumbbells).
- Massages that are therapeutic in nature may be deductible.
- Rent for temporary housing. This may be deductible if it is for a short-term, definite time period (such as spring training for baseball players). Housing costs that are for an indefinite period of time are generally not deductible.
- Rookie expense. Rookie expenses, such as buying a meal for his entire position group, are a kind of friendly hazing. This is considered a normal business expense in the NFL, and generally it is deductible, subject to the standard 50 percent meals and entertainment limit.
What expenses are not deductible?
- Clothes that are not for football-related workouts. In fact, many NFL players have contracts with companies that provide them with shoes and clothes, and the value of those items is taxable income reported on a Form 1099 by the companies. Players can deduct the portion of the clothing used for playing their sport, but they cannot deduct clothing suitable for street wear.
- Personal items, such as electronics, watches, and jewelry.
- Temporary living expense, again, is not deductible if it is for an indefinite period.
- Cell phones are only partially deductible.
- Gifts are not deductible, unless they are related to the business of football, and even then they are limited to minimal amounts.
In general, NFL players and other pro athletes may have a few deductible items related to the nature of their profession that most of us do not qualify for. But overall, the same rules apply to athletes. An accountant with specific knowledge of tax-related issues pertaining to football players or any athletes is a valuable resource for any player in tackling Uncle Sam.