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Navigating Finances Post-NBA Draft

Growing up playing basketball at the parks and in the school yards, youngsters often dream of playing in the NBA. For those select few who have the talent, a big day will arrive on June 21, 2018, when the league welcomes its next group of rookies.

Some players will attend this year’s draft being held in Brooklyn, while others will stay home close to family and friends as they wait for that life-changing phone call. During this nervous time, are these soon-to-be NBA players also thinking about their financial futures? Are they aware of the steps they must take to protect their economic interests? And what about managing their income tax planning, asset protection, investments and risks?

In the arena of federal, state, and local income tax planning, the best advice is to find a competent and trustworthy tax advisor who can help them navigate the 2017 Tax Cuts and Jobs Act.

Most of the tax deductions that were previously available to professional athletes no longer apply. These deductions included state and local income taxes in excess of $10,000, agency fees as well as unreimbursed business expenses including club house and union dues, professional and physical training, exercise equipment rental and incidental travel expenses.

Nevertheless, professional athletes need to be savvy on how to maximize their bottom lines. Not every NBA player can play for a team located in a state that does not have a state income tax, such as Florida or Texas. Thoughtful planning regarding the state of residence and a careful accounting of duty days is crucial to minimize state income taxes.

Let’s take a player for the New York Knicks located in a city that imposes a state income tax of 8.82% (top rate) and a city tax of 4.0%. The shrewd NBA player may want to consider living outside the city to save the cost of city tax. In addition, he may want to reside in a neighboring state with a lower income tax rate for the purposes of minimizing state income taxes on games played outside of New York. Another option is to relocate and establish domicile (permanent residence) in Florida or another state with no income tax. For example, as long as the NBA player lives the majority of the year in Florida, including the offseason, and spends less than 183 days in New York State, only the income earned while playing in New York State and when playing in other states on game days and practice days (aka “duty days”) would be taxed.  Moreover, any endorsement and royalty revenue is taxed by each state under a separate sourcing schedule, as opposed to being taxed by New York.

Another strategic move a professional NBA player may want to consider is establishing a loan-out corporation for tax benefits as well as asset protection. A loan-out corporation is a business entity completely separate from the individual for whom it was created. The corporation loans out the NBA player to perform services. Certain unreimbursed business expenses that are no longer deductible by the professional athlete as an “individual” may be deductible by the corporation as an “ordinary and necessary” business expense.

The aforementioned options are just a starting point in becoming financially game-ready. As we congratulate the incoming 2018 NBA freshman class, we also remind them they will need to prepare for the fast-paced challenges on and off the court.

 

Evan Waxman has advised professional athletes on tax matters relating to defining and maintaining or changing a tax home and tax domicile in order to resolve the identification of where an athlete resides for state income tax purposes.

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