The Tax Consequences of NCAA’s NIL Rights

A monumental change is taking place for college athletes this summer, with many states having passed legislation to allow athletes to obtain financial income from selling their name, image, and likeness (NIL) to companies. With many states having laws taking affect this past week, the NCAA has now announced temporary rule changes to allow all athletes to take advantage of NIL. There will remain a lot of uncertainty and inconsistency until we get a federal law (being worked on), but one thing for certain is the IRS will be taking notice. I have yet to see any articles on the tax implications for these athletes and their families, so let me be one of the first to sound the alarm bells and encourage all athletes benefiting from NIL income to ensure you do not get sideways with the tax authorities.

Don’t mess with the IRS

Make no mistake, the IRS will see these new laws as a new source of income for the government, and athletes earning money while in college will now have to file taxes and report this income. If you do not comply, you will likely be subject to onerous penalties and interest for failure to file returns and pay your taxes. And my guess is most 18-22 year old’s do not have much experience filing taxes, as most likely did not make enough part time income to be required to file.

The types of income that these athletes will be making is similar to endorsement income made by professional athletes and other celebrities. And there are numerous examples of these more experienced, mature adults running afoul of the IRS because they did not file, or they did not properly report their income. Here are a few examples:

  • Ozzy and Sharon Osbourne – As of 2011 owed the IRS more than $2 million for unpaid taxes from 2007 – 2009. The IRS put a lien on their house.
  • Dionne Warwick – Filed for bankruptcy in 2014, stating she owed $10.7 million in federal and state taxes.
  • Pamela Anderson – Owed more than $370,000 to the IRS and state of California for unpaid taxes in 2011.
  • Nicholas Cage – At one time owed the IRS more than $14 million.
  • Jim Thorpe – The professional golfer spent time in jail, owing the IRS $2 million in unpaid taxes.

You might wonder how these amounts are so large? The penalties and interest that the IRS will add to taxes owed can be quite onerous, and they can pile up quickly.

How will NIL income be treated?

This is a critical question to ponder. Once again, we can look to professional athletes and celebrities to see how the IRS views this type of income. Basically, it can be treated in one of two ways: as royalty income or as professional services income. And there is a significant difference in how much in taxes you will pay depending on this treatment.

Professional services income is considered “earned income” that is subject to FICA (social security and medicare) taxes. Therefore, this is considered business income, and in addition to income tax paid on these earnings, the taxpayer will also be obligated to pay FICA taxes of 15.3% (a portion of which maxes out at higher income levels). On the other hand, royalty income is not subject to FICA taxes, so the more that is classified as royalty income the better.

So how do you determine whether your NIL income is royalty income, professional services income, or some combination of both? We can get some insight from previous tax court cases, and in particular U.S. vs. Goosen. This was a 2011 court case involving Retief Goosen, a professional golfer who had a dispute with the IRS in regards to the classification of his income. Although the focus on this case was primarily whether the income was U.S. based or foreign based, it still provides insight and sets some precedents in how this type of income is classified. And a lot of it depends on the language in the contract.

However, here are some basics. If the compensation depends on you being physically present at an event, it is professional services income. For example, the athlete is present at a car dealership on a Saturday afternoon to promote the business, this is professional services income. In contrast, if the athlete is being compensated just for the use of his or her name or likeness, with no other obligations on the part of the athlete, then this would be royalty income. For example, let’s say EA Sports comes out again with college sports games with player likenesses, and the athletes get a check from EA sports for this. That is clearly royalty income. Sounds simple, right.

However, it can get more complicated. What if the athlete is being compensated for his or her likeness, but the athlete is required to pay in x number of games during that season to earn the fee? Or the fee is adjusted based on how often they play? Then you are likely to have some mix of royalty income and professional services income. In this arrangement, you should consider finding a tax expert to advise you, so that you both avoid issues with the IRS, but you also minimize the amount of taxes you pay.

Tax planning issues

There are legal ways to minimize some of these taxes. For example, you are able to deduct certain expenses from your personal services income to determine your taxable income. Also, for athletes who will likely have higher amounts of personal services income (a minimum of $50,000 – $75,000 per year), it may make sense to set up a loan-out corporation, which can help to reduce the FICA taxes owed. A tax advisor can assist you in determining if this makes financial sense and guide you through the process.

State tax issues

It’s not only the IRS who will be looking at this for new revenue, but also states that have personal income taxes. Keep in mind that you may owe tax in every state where you make appearances for a fee (except for those states with no state income tax). Also, your state of residence will tax all of your income, although most will give you credit for taxes paid to another state. What if your parents live in a state without a state income tax, and you go to school is a state that does have an income tax. Which state is your state of residence? This could have a significant impact on the taxes you will pay.

Conclusion

It is exciting to see that college athletes will now be compensated for their efforts, and this will be a financial windfall for many athletes that will allow them to support their families. However, along with that comes a requirement to make sure this income is not wasted through paying penalties and interest for failing to file or pay taxes. The IRS is good at tracking this type of activity, so it is not likely you can avoid paying taxes on this income. Athletes should always set aside a certain percentage of earnings to pay these taxes, and make quarterly estimated payments to ensure no interest charges are incurred. Finding a tax advisor to help sort through these complex tax issues and stay on top of compliance is a must.

If you would like to set up a free initial consultation to discuss your situation, give me a call at (479) 876-9980, ext. 102, or email me at Brent@seaycpas.com.

The Seay Firm CPAs Acquires Village Bookkeeping and Tax

Below is the press release we issued today:

June 28, 2021

Today The Seay Firm CPAs announced the acquisition of Village Bookkeeping and Tax Service located in Bella Vista, Arkansas.  The previous owner, Mike Moles, CPA, is retiring after a 53-career in public accounting.  Mike has owned Village Bookkeeping and Tax for the past 15 years.

“As I began planning for my retirement, I sought out the right person to come in and lead the firm, building on our success of the past 15 years,” said Mike.  “I am convinced that I was blessed to find that person in Brent Seay, an account with a long and successful career in both public and corporate accounting.  I saw his commitment to our clients and to our staff who have served you faithfully the past 15 years.”

Brent will continue to focus on the legacy that Mike built of providing the absolute best in client service that Village’s existing clients have come to expect.  The existing employees of Village, Matt Moles and Shirley Armstrong, will be continuing employment with the new firm.

“Over the years, I have learned that when you acquire a successful business, the number one priority is to continue with the strategies that have made the business successful.” said Brent.  “I do not plan to make any significant changes to Mike’s business model that has served Village’s clients so well in the past.  I also want to congratulate Mike on his retirement after a long and successful career.  I am excited that I can continue to have Mike as a resource and mentor as we move forward.  I have come to value his wisdom and insights as we have worked through the transition.”

The Seay Firm’s primary office will now be located at Village’s current office at 32 Sugar Creek Center.

About The Seay Firm CPAs PLLC

Founded in 2020 by Brent A. Seay, CPA, The Seay Firm is a full-service accounting firm, providing tax planning and preparation, accounting, bookkeeping and payroll services.  Please visit www.seaycpas.com for more information.

Tax Changes for 2021

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It’s never too early to begin tax planning for the current year, and there are some significant changes for 2021 that will impact a lot of taxpayers. So let’s take a look at the most significant of these changes.

Child credit for 2021

As part of the stimulus law that was enacted earlier this year, the $2,000 per child tax credit has been raised to $3,000, and to $3,600 for children under age 6. It also now applies to 17-year-olds, is fully refundable, and the IRS will be paying 50% of the credit in advance. It does phase out at higher income levels (i.e. $75,000 Adjusted Gross Income (AGI) for single taxpayers, $112,500 for heads of household, and $150,000 for joint filers), reducing $50 for each $1,000 of AGI above those threshold amounts. This phaseout applies to the amounts above the previous $2,000 credit only. So if you are not eligible for the higher amounts, you still get the $2,000 credit if your AGI is below $400,000 for joint filers and $200,000 for other filers.

The 50% payments will begin in July, with payments being sent each month. Each family’s eligibility will be determined based on 2020 or 2019 tax returns. If you have any changes in your family circumstances or AGI, you will need to notify the IRS through an online tool that is being developed. Theses payments are not taxable income.

Charitable contributions

The 2020 change to allow a write-off for cash contributions to charitable organizations for taxpayers who do not itemize will also apply in 2021. For 2021 only, the ceiling is raised to $600 for joint filers.

College tuition

The deduction for college tuition will no longer apply. It was terminated, and in its place the income phaseout limits for the lifetime learning credit was increased to match the American Opportunity Tax Credit.

Extension of tax breaks

A number of tax breaks that were set to expire after 2020 have been extended, as follows:

  • The 7.5% AGI threshold for deducting medical expenses on Schedule A (permanent)
  • The deduction for energy-efficient improvements to commercial buildings (permanent)
  • The exclusion of up to $5,250 from workers’ wages for college debt paid by employers (thru 2025)
  • The credit for employers that provide family and medical leave to workers (thru 2025)
  • The deduction for mortgage insurance premiums (thru 2021)
  • Multiple business and energy tax incentives (thru 2021)

Business meals

The 50% limitation for business meals has been suspended (100% deductible) for 2021 and 2022 as a measure to encourage restaurant dining. This includes client meals as well as meals for employees on business travel.

Mileage deductions

The standard mileage rate for business driving is lowered to $0.56/mile for 2021, while the allowance for medical travel and military moves drops to $0.16. Charitable mileage stays at $0.14 as it is fixed by law.

Qualified business income (QBI)

Self-employed individuals and owners of LLCs, S corporations and other pass-throughs can deduct 20% of their QBI, subject to limitations for individuals with taxable income greater than $329,800 for joint filers and $164,900 for single filers.

Expensing asset purchases

In 2021, $1,050,000 of asset purchases can be expensed, with this amount phasing out dollar-for-dollar once more than $2,620,000 of assets are put into service during 2021.

Health Savings Accounts (HSAs)

The annual cap on deductible contributions to HSAs increases in 2021 to $3,600 for self coverage and $7,200 for family coverage. People born before 1967 can put in $1,000 more. Qualifying insurance policies must limit out-of-pocket costs to $14,000 per family health plans and $7,000 for individual coverage. Minimum policy deductibles remain the same at $2,800 for families and $1,400 for individuals.

Long term care premiums

The limits on deductibility of long term care premiums are higher in 2021. Taxpayers 71 or older can write off as much as $5,640 per person, with those age 61 to 70 at $4,520. Those age 51 to 60 can deduct up to $1,690 each, and those 41 to 50 can deduct up to $850 each. For those 40 and younger, the limit is $450. These amounts are deductible for most taxpayers on Schedule A who itemize, while self employed taxpayers can deduct these costs on Schedule 1 of Form 1040.

These are the key changes SO FAR. However, there are a lot of rumblings within the Biden administration regarding tax increases, so we will be watching for additional changes that can impact our client’s tax situation.

The Seay Firm CPAs provides tax planning services throughout the year, so if you are impacted by these changes, or if you have other significant life changes occurring in 2021, give us a call at (479) 876-9980 or email me at Brent@seaycpas.com to set up an appointment to review your situation in detail.

Real Estate, Taxes and COVID-19

It has certainly been an unusual and challenging year. The COVID pandemic has impacted our lives in many ways, and as we gear up for tax season, you need to be aware of how it will impact your 2020 taxes that will be filed early next year. For real estate owners and developers, below are some changes to keep in mind as you prepare to file your 2020 taxes and plan for the coming year.

Net operating losses

Congress passed the Tax Cuts and Jobs Act (TCJA) in 2017, and one of the key changes in that legislation was the dis-allowance of carrying back net operating losses to prior years as well as a limitation in the amount of loss carryforwards that can be taken in future years, where the losses can be used to offset no more than 80% of taxable income. However, the Corona Virus Aid, Relief, and Economic Security (CARES) Act postponed the 80% carryforward limitation, and it will now only apply for years beginning on or after January 1, 2021. In addition, taxpayers can also carry back any NOLs that arise in tax years beginning after December 31, 2017, and before January 1, 2021, over a 5-year period.

Corporate Alternative Minimum Tax (AMT) Credit

The TCJA of 2017 eliminated the 20% corporation AMT that principally impacts C corporations, and provided that only 50% of the AMT credits carried forward could be refundable in tax years after December 31, 2017 and before January 1, 2021. After December 31,2020, 100% of any excess AMT credits could then be refunded. However, the CARES Act permits corporations to claim a refund for 2018 equal to the full amount of their excess AMT credit carryforwards. For corporations that do not elect to take this refund, the CARES Act eliminates the 50% limitation on AMT credits for taxable years beginning in 2019.

Business Interest Expense Deduction

The TCJA limited the amount of business interest expense that a taxpayer can deduct. Under IRC Section 163(j), taxpayers may deduct business interest expense only up to 30% of their adjusted taxable income. However, the CARES Act increases the limitation to 50% for taxable years beginning in 2019 and 2020, and it also allows taxpayers to elect to use their 2019 adjusted taxable income for their 2020 taxable year, benefitting taxpayers that have had their income impacted by COVID-19.

For partnerships, the IRC Section 163(j) limitation still applies at the partnership level. the 30% limitation will continue to apply to partnership interest expense in 2019. However, 50% of any excess business interest allocated to a partner and carried over from 2019 will be treated as business interest paid by the partner in 2020 and will not be limited to the partner’s business interest income for 2020. The remaining 50% will continue to be subject to such limitations.

Bonus Depreciation for Qualified Improvement Property

Probably the most important change impacting the taxation of real estate involves bonus depreciation involving qualified improvement property. The TCJA permitted taxpayers to deduct the full cost of certain depreciable property placed in service by the taxpayer in a taxable year before January 1,2027. This is commonly referred to as bonus depreciation. Property eligible for bonus depreciation included property with a depreciable life of 20 years or less. While these rules permit immediate expensing for various types of personal property (i.e. equipment, furniture & fixtures, etc.), it was also intended to apply to structural improvements made to commercial properties, including (but not limited to) hotels, restaurants, and retail establishments. However, the general 39-year recovery period for these improvements prevented them from being eligible for immediate expensing.

The CARES Act corrects this “error” by assigning a 15-year depreciable life to “qualified improvement property,” thereby permitting such improvements to be eligible for bonus depreciation. The provision is effective retroactively to property placed in service in 2018 and beyond. This provision may allow taxpayers to file amended returns and claim refunds for 2018 and 2019 tax years if they placed qualified improvement property into service during those years, and it may also encourage taxpayers to make needed improvements in the coming years as the economy recovers from the pandemic.

The CARES Act also revises the definition of “qualified improvement property” to limit that concept to “improvements made by the taxpayer,” thereby eliminating the possibility of the taxpayer getting bonus depreciation for “used” property that was purchased by the taxpayer.

If you invest in real estate, please keep these CARES Act changes in mind as you review your tax planning for the coming years. If you need assistance in better understanding how these changes apply to your investments or real estate business, feel free to contact me at Brent@seaycpas.com or (479) 329-5862.

IRS final regulations regarding Section 1031 like-kind exchanges

On November 23, 2020, the IRS posted final regulations (TD 9935) on its website in regards to changes in the the rules for like-kind exchanges of real estate under IRS Code Section 1031.

Background

Under the Tax Cuts and Jobs Act (TCJA), several amendments were made to Section 1031 rules for the like-kind exchange of real property, as follows:

  • Limited the exchange rules to include only exchanges of real property
  • The deferral rules are no longer allowed for an exchange of property that is held primarily for sale
  • Stated that real property located in the United States is not considered to be like-kind to real property located outside the United States

New guidance

The new release that came out last month provides additional clarification to these new rules. Below are the key clarifications included in the final regulations:

  • Elimination of the purpose or use test in the regulations
  • Adding a definition of real property
  • List of intangible property that is considered real property
  • Adapt an existing incidental property exception to apply to a taxpayer’s receipt of personal property that is incidental to real property the taxpayer receives in the exchange.

Elimination of purpose or use test

Real property includes land and improvements to land, both permanent structures and structural components of inherently permanent structures. The earlier prpoosed regulations also took into consideration the function of the property in determining whether it is real property per section 1031. Tangible property, such as machinery or equipment, nor intangible property were classified as real property if the property contributes to the production of income unrelated to the use or occupancy of the space. The following example was included in the earlier guidance:

For example, a gas line installed for the sole purpose of providing fuel to fryers and ovens in a restaurant is not a constituent part of an inherently permanent structure and therefore not real property under the proposed regulations.

IRS Publication TD 9935

Based on feedback from commenters on the proposed regulations challenging the need for the purpose or use test and the cost of cost segregation studies that would be required, the Treasury Department and the IRS agreed and have eliminated the purpose or use test.

Definition of real property

Per the new guidance, “..property is classified as real property for section 1031 purposes if, on the date it is transferred in an exchange, the property is real property under the law of the State or local jurisdiction in which that property is located.” The final regulations also eliminate, with regard to both tangible and intangible properties, any consideration whether the property contributes to the production of income (i.e. purpose or use test). Finally, although the IRS is following state or local definitions of real property, the regulations do exclude from the definition intangible assets listed in section 1031(a)(2) prior to its amendment of TCJA, regardless of state or local law.

Intangible property as real property

The final regulations include the following intangible assets as real property defined in section 1031:

  • Fee ownership interests
  • Co-ownership interests
  • Leasehold interests
  • Option to acquire real property
  • Easements
  • Stock held by a person as a tenant-stockholder in a cooperative housing corporation
  • Rights to develop land
  • Licenses, permits, or other similar rights that are solely for the use, enjoyment, or occupation of land or an inherently permanent structure

Incidental property exception

The proposed regulations issued earlier this year provided for the receipt of personal property that is incidental to the taxpayer’s replacement real property. Personal property is considered to be incidental to real property acquired in an exchange if both of the following are true:

  • In standard commercial transactions, the personal property is typically transferred together with the real property.
  • The aggregate fair market value of the incidental personal property transferred with real property does not exceed 15% of the aggregate fair market value of the replacement real property.

The final regulations clarified that the 15% limitation is to be applied in the aggregate for the transaction and not on a property-by-property basis.

Summary

The final regulations on like-kind exchanges are a reflection of the Treasury Department and the IRS accepting constructive feedback on the changes in the TCJA, with the final regulations reflecting feedback received after the preliminary regulations were issued. The full 75-page regulations can be found at the following link: https://www.irs.gov/pub/irs-drop/td_9935.pdf

Tax regulations related to real estate are complex. If you need assistance working through these types of issues, give The Seay Firm CPAs a call. We specialize in real estate, and we can help you figure out the best tax strategy for your situation.

The Seay Firm CPAs was officially launched today!

I am excited today to announce the launch of The Seay Firm CPAs in northwest Arkansas. You can read the press release below.

A New Virtual CPA Firm Opens in Northwest Arkansas

The Seay Firm CPAs will leverage technology to interact and serve new clients

November 30, 2020

Brent A. Seay, CPA has recently relocated back to northwest Arkansas and has opened The Seay Firm CPAs PLLC.  And because of the pandemic and need to limit face-to-face contact, the firm will initially operate virtually to serve clients.  “With today’s technology and tools such as remote access and web conferencing tools such as whiteboards, webcams, and chat, I am confident The Seay Firm can provide excellent client service while working remotely in these challenging times,” said Seay.

A native of Arkansas, Brent has spent most of the past 30 years in northwest Arkansas.  He began his career in public accounting, including two years at the former Barclay, Yarborough & Scott in Rogers, before beginning a 25-year career at Walmart.  At Walmart, Brent held numerous management and executive roles in internal audit, accounting, corporate finance, and international real estate.  Brent has spent the past 2 ½ years as Vice President Financial Accounting and Business Processes for Smartcentres Real Estate Investment Trust, one of the largest REITs in Canada.

The Seay Firm will focus on tax planning and preparation for individuals and small businesses, accounting and bookkeeping services, and virtual/part-time CFO services.  The firm has also recently entered into an agreement with Stone Financial & Tax Centers to assist that firm in managing its Eureka Springs office, including responsibility for providing CFO services to the Eureka Springs Hospital.

With Seay’s extensive background in real estate development, he will also be providing more in-depth services to real estate and construction firms in northwest Arkansas.  “Taxes for real estate owners and developers are very complex, and I believe I can bring a unique perspective as someone who has spent a considerable portion of my career working through these types of challenging issues,” said Seay.

Brent, his wife Bella, and their son Finlay live in Pea Ridge.

About The Seay Firm CPAs PLLC

Founded in 2020 by Brent A. Seay, CPA, The Seay Firm is a full-service accounting firm, providing tax planning and preparation, accounting, bookkeeping and payroll services.  Please visit www.seaycpas.com for more information.