Sportslawtalk.com interview of Mitchell S. Halpern

Today we are pleased to welcome back as our guest Mitchell Halpern, an attorney, Principal and Director of Sports and Entertainment Accounting Services at O’Connor & Drew, P.C., a Quincy, Massachusetts based CPA firm.

SLT: It’s mid-November. If you represent an NFL player, they’re at the halfway point of their season. Is this a good time to do a tax projection for the player and what would this entail?

MH: Yes, now is a good time, although for many of my NFL players I prepared their projections earlier in the season, after they had received one or two pay checks. In preparing a projection for an NFL player, or any professional athlete, I first want to gather information with respect to items that I know change from year to year, such as their salary and the agent fees paid on their salary. It is important to know not just what the player’s salary will be for the year of the projection, but also over what time period it will be paid and are if there any reductions in the player’s salary that need to be accounted for, such as salary escrows (NBA and NHL issues). I also like to get the most recent pay stubs for the player’s current season, which I will use to project out not only the player’s salary on a calendar year basis, but also the total amount of taxes scheduled to be withheld by the end of the year. For items other than salary, taxes withheld or otherwise paid, and agent fees, I will often use similar amounts from the prior year as projected amounts rounding income items upwards and deduction items downward. All this information is then used to calculate the player’s anticipated tax liabilities and how much of the liabilities will be covered by withholdings and other payments made during the year. We can then determine whether or not the player’s withholdings should be adjusted or if the player should make an estimated tax payment. The key is to plan and minimize any surprises on April 15^th.

SLT: If you are working with a Major League Baseball player whose season is now over, how would this player be treated differently than that NFL player?

MH: The process of preparing the projection would be the same, but since the player is most likely no longer receiving salary, we can no longer adjust the player’s withholdings to make up for any anticipated taxes due, but unpaid. In this case, we would need to have the player make estimated tax payments. This question helps me emphasize the point that it is better to do tax planning while the player is still receiving his salary so that taxes can be paid through withholdings, as opposed to the need to make estimated tax payments. This helps minimizes the potential for penalties for underpayment of estimated tax.

SLT: In working with the athlete it’s always a good idea for them to keep track of their receipts, etc. Please give out readers some details on this, making some suggestions as to what the athlete should be looking for and keeping track of?

MH: It is definitely a good idea for an athlete to keep track of their expenses and keep receipts to support them. There are many items to keep track of, too numerous to list in this interview, but some of the bigger items include: agent fees, union dues, league/team fines, clubhouse dues, training expenses, and job related equipment, to name just a few.

SLT: The last time you were here we touched upon duty days in regard to athletes playing games out of state or in away cities. Can you give us any updates on this or some more information?

MH: There really has not been much new on this front. As a recap, states will generally tax nonresident athletes on the income earned in their state. The amount of income earned in a particular state is pretty straight forward for athletes that participate in “individual” sports, such as golf or tennis, where the athletes winnings (and appearance fees) in any particular state will represent the income earned in that state . . . of course there may be expenses that may be used to offset some of that income. But what about a “team” sport athlete? This is where the “duty day” formula comes in. Simply put, the athlete’s compensation is allocated to a particular state based upon a fraction, the numerator of which is the duty days spent in the state during the calendar year and the denominator of which is the total duty days for the calendar year. The potential areas of controversy with respect to this formula include determining what compensation is subject to allocation, what was the number of duty days spent in the state and how many total duty days were there in the calendar year. This last item is important because the larger the denominator, the smaller the fraction and, therefore, the less income allocated to a particular state. The allocation of compensation to nonresident states takes on even greater importance when the athlete’s residence is in a state that does not have an income tax because anything not taxed to a nonresident state will escape state taxation. If the athlete resides in a state that does have an income tax, he/she may be eligible in their resident state for a credit for taxes paid other states because some of the athlete’s income has now been taxed in two states since the athlete’s state of residence will tax 100% of the athlete’s income. This credit, however, is generally limited to the tax rate of the state of residence. For example, if one state taxes a nonresident athlete’s income at 10%, and the athlete’s resident state only taxes income at 5%, the resident state will generally only give a 5% credit, even though the athlete paid tax to the nonresident state at a rate of 10%. Additionally, when looking at the credit for taxes paid other states, one needs to be careful of which state to claim the credit in – some states have what I like to call a “reverse” credit where the credit for taxes paid on double taxed income is actually claimed on the nonresident state’s return. Finally, one should also check into reciprocity rules where two neighboring states might agree not to tax nonresidents from the neighboring states on income earned in the nonresident state.

SLT: Is there anything new on states or cities being more aggressive in going after visiting athletes?

MH: Again, I am not aware of new movements in states or cities being more aggressive at taxing nonresident athletes. This is something that has been going on for awhile now and most states with an income tax have been aggressively requiring nonresident athletes to file tax returns. Teams generally cooperate by withholding taxes and reporting on W-2s the wages earned in each state. That said, I have recently become aware that the IRS is more actively questioning employee business expenses claimed by athletes. This goes back to one of your earlier questions where I discussed deductions that an athlete might want to keep track of. I cannot emphasize enough that an athlete claiming employee business expenses needs to have documentation of his/her expenses. One of my clients recently underwent one of the IRS employee business expense audits. This was conducted as a correspondence audit where the taxpayer is sent a letter and the taxpayer can respond via letter. We were able to send the IRS approximately 100 pages worth of documentation supporting each of the items claimed on the return and, as a result, we received a letter from the IRS indicating they were not going to make any changes.

SLT:  Thank you, and we hope that you will be back again sometime to share more insights into the tax planning needs of sports professionals.

(also see April 15, 2009 SLT blog for earlier interview with Mr. Halpern)