February 8, 2018
Tax reform dominated the news headlines for weeks before and after the legislation was signed into law. Formally known as, the Tax Cuts and Jobs Act, it created significant changes to the tax code in over thirty years. The message from the White House and Congress was that most would experience a reduction in taxes. There are a few groups, such as athletes and entertainers, that need to read the “fine print as they will no longer be able to take a deduction for their unreimbursed business expenses. Although this may seem like an insignificant item, it’s a crucial point, because if not properly managed the change could result in additional taxes. To help clients, prospects and others understand the change and it’s impact, Wilson Lewis has provided a summary of key details below.
What Are Unreimbursed Business Expenses?
According to the IRS, is any expenditure made for a job that is both ordinary and reasonable but is not reimbursed by an employer. Common examples may include travel, transportation, meals and professional memberships. Since entertainers/athletes often have unique income streams and job expectations, there are often unreimbursed business expenses. Examples that impact those in the industry include:
What Changed?
Under the previous tax law, these expenses could be deducted on the entertainer’s individual income tax return as “unreimbursed employee expenses.” The amounts were aggregated on Tax Form 2106, and after the total was reduced by 2% of the taxpayer’s Adjusted Gross Income, the sum was reported as an itemized deduction. Starting in tax year 2018, this deduction will no longer be available.
Is There a Solution?
Athletes and entertainers may have an opportunity to deduct these legitimate business expenses, but they would have to do so in a very different manner – they would have to self-incorporate. If athletes and entertainers created a Limited Liability Company (LLC), any extraneous business income and expenses could be reported through the LLC and thus be fully deductible.
Some entertainers, for example, incur large travel costs when doing public appearances, speaking events or endorsement activities. If they operated an LLC for their business dealings, they could offset these travel expenses against any other entertainment income they earned that year, such as promotional revenue, speaking fees, or freelance work. Any LLC expenses that exceeds LLC income can offset other income that the taxpayer earns, including W-2 wages or capital gains.
Important Considerations
Before an athlete or entertainer creates their LLC, there are a few things they should consider. First, they must consider each state’s incorporation laws. As we discussed in a recent article, athletes and entertainers work all over the country and must consider the best state to establish domicile. Similarly, they have the opportunity to incorporate their business in many different states. They should look to each state’s laws to see which one would benefit them the most. Second, entertainers should keep in mind that LLCs are legal entities. There will be some legal filings required at the onset, and for the life of the entity, to remain in good standing with the state. And third, LLCs may require additional tax return filings. Depending on how the LLC is structured, the athlete may report the LLC’s income and expenses on his or her Schedule C, or they might need to file a separate tax return (such as a partnership return).
Contact Us
This new tax legislation may require athletes and entertainers to think about their income and expenses differently. Now is a good time to meet with an advisor to review your situation and determine the best steps for 2018 and beyond. If you have questions about the impact of tax reform on you, or your client, Wilson Lewis can help. For additional information please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.