PDA

View Full Version : "Foriegn Earned Income Credit NOT allowed for Pro Gamblers"


KaneKungFu123
11-26-2005, 03:03 AM
"Unfortunately, being a professional gambler does not mean you have earned income. Earned income is defined (in the tax code) as wages, salaries, commissions, etc.

Professional gamblers don't have "earned income" even in the US. They do have self-employment income. Some people who have self-employment income have earned income, but the converse isn't always true.

This issue is covered under regulations issued pursuant to the Internal Revenue Code. While you could sue, the chance of success is almost non-existant. Additionally, courts have held that deductions "...are a matter of legislative grace." Gamblers don't get much grace from Congress. There are no court cases that I'm aware of (even under a pro.se. basis) because this is a settled area of tax law."

This are statements from Russ Fox, who is a respected CPA.
Sounds like he knows what he is talking about.

ChrisMonkeymaker
11-26-2005, 09:29 PM
Can you use a corporation (domestic, Nevada, or offshore) to play poker? And would wins and loses belong to the corporation?

geormiet
11-27-2005, 08:56 AM
This makes me sad. Thanks for the info though.

Holden97
11-27-2005, 10:46 AM
What would using a corporate structure for poker activities accomplish?

ChrisMonkeymaker
11-27-2005, 11:40 AM
Technically, if you play as a corporation the income will be that of the corporation not yours, because a corporation is a separate legal entity. You would only pay personal income tax on the salary that you choose to let your corporation pay you. And also on the dividends that you choose to let the corporation pay you (I don't know whether dividends are earned income or capital gains in this case). Any share of the profits that you choose to be retained by your corporation will belong to the corporation. Of course, it would have to pay taxes on the net profits AFTER EXPENSES like travel, food, equipment like computers and software, transportation, etc.

This is all explained in this book. (http://www.amazon.com/gp/reader/0471711780/ref=sib_rdr_fc/103-6961423-3031849?%5Fencoding=UTF8&p=S001&j=0#reader-page) But don't act on any of its advice without going to a CPA. Let the CPA guide you in doing things so that everything you do is perfectly legal and ethical, and customized to your own unique situation.

This assumes playing as a corporation is allowed, of course. If not,then this post is totally useless. I'm still waiting for someone (who has done it or knows someone who has done it) to tell whether this is allowed. I hope we can get a response in this thread.

Holden97
11-27-2005, 12:00 PM
I agree with what you've described. With some limited exceptions, I'm not clear on how using a corporation accomplishes something different than reporting poker income (AFTER EXPENSES) on a Schedule C.

The limited exceptions I can think of would be in the context of utilizing both the individual and corporate graduated tax rates (this benefit may be offset by the double taxation on dividends) and "tax-free" dividends from an S Corporation.

There are probably other benefits, so feel free to shoot holes in my view of things
.
The other issue I wondered abut is whether legally you can play as a corporation, or are you really playing for a corporation? When I say "legally", I guess I'm wondering about specific terms and conditions for playing in certain tournaments.

ChrisMonkeymaker
11-27-2005, 12:07 PM
[ QUOTE ]
The other issue I wondered abut is whether legally you can play as a corporation, or are you really playing for a corporation? When I say "legally", I guess I'm wondering about specific terms and conditions for playing in certain tournaments.

[/ QUOTE ]

I am curious about this myself. My guess is that you would be playing as some agent (employee) of the corporation and therefore for the corporation. I am still waiting for info on whether tournaments would allow this corporation arrangement. This was talked about in another thread but no one made a post on whether this is possible. Hopefully, this will change in this thread.

Holden97
11-27-2005, 12:45 PM
So many tournament players have backers, what's the difference in the corporation being your backer? Corporation pays player $X to play the tournament and player returns Y% of winnings to Corporation. Case closed.

(By the way, that is a hypothesis, not a statement)

DesertCat
11-27-2005, 02:30 PM
[ QUOTE ]
I agree with what you've described. With some limited exceptions, I'm not clear on how using a corporation accomplishes something different than reporting poker income (AFTER EXPENSES) on a Schedule C.


[/ QUOTE ]

Assuming it's legal to play poker within a corporation, there is one very large additional deduction provided by using a corp. structure to convert winnings to income. You should be able to shelter over $40k in pre-tax income in retirement accounts, between corporate contributions and your own. Talk to a CPA.

Holden97
11-27-2005, 08:40 PM
SEP-IRA and Self-Employed 401(k) plans are available to most entity forms, including sole proprietors, and have the same contribution limits and deductibility.

DesertCat
11-27-2005, 11:39 PM
[ QUOTE ]
SEP-IRA and Self-Employed 401(k) plans are available to most entity forms, including sole proprietors, and have the same contribution limits and deductibility.

[/ QUOTE ]

Well you can't fund it with gambling winnings, which is why I'm assuming you'll need the corporate entity, to convert gambling wins into income. Also, individuals are limited to 14k in contributions, to go up to the max of 42k, you have to have an "employer" contributions. Can a sole proprietor make "employer" contributions?

[ QUOTE ]

Higher Contribution Limits
Fidelity's Self-Employed 401(k) allows you to make tax-deductible 401(k) salary deferrals to the plan of up to $14,000 for 2005.
If you are age 50 or older you can make an additional catch-up salary deferral contribution of $4,000 for 2005.
The plan also lets business owners make tax-deductible profit sharing contributions of up to 25% of compensation4, up to the annual maximum of $42,000 for the 2005 plan year.
Note that the total of salary deferrals and profit sharing contributions cannot exceed $42,000 for 2005 (or $46,000 if age 50 or older).

[/ QUOTE ]

mmcd
11-28-2005, 12:31 AM
Kane,

I suggest you talk to a good tax attorney about this rather than a CPA.

broiler
11-28-2005, 10:31 AM
A self employed person with no employees should rarely set up a self employed 401k. The only reason I leave in rarely is because there are certain situations (low income and little chance of making near the income limits of the other plans). The only benefit of a 401k in this situation is the lower reporting requirements for a 401k plan. Once you get past about $75k in income, the profit sharing plan is a much better option. If you have non-family (spouse and children) employee, the 401k route might be the better option.

Also, a sole proprietor is considered to be their own employer and all of the contributions are employer contributions. Therefore, a corporate setup is not necessary for retirement considerations.

mmcd
11-28-2005, 06:01 PM
[ QUOTE ]
Kane,

I suggest you talk to a good tax attorney about this rather than a CPA.

[/ QUOTE ]

Just to clarify a bit, here's the situation:

Generally speaking, a CPA will do your taxes and try to do them so you pay the minimum possible and try to avoid any potential problems with the IRS. They are reluctant to be aggressive in murky areas such as this. The IRS's position is that professional gambler's can't take the Foreign Earned Income Credit, so CPA's will go along with that. However, the IRS's position on a particular matter does not have the force of law. The IRC and Treasury Reg's and the court decisions that interpret them do. There is more than enough legal authority out there (some of which is in your previous thread on this matter) to support the position that the Foreign Earned Income Credit is available to professional gamblers. If you use it when you do your taxes, you will be doing nothing illegal.

If you take the credit, the IRS may catch it and decide to fight you on it, but as a practical matter it's very likley that your return just goes through unnoticed. If they do catch it and decide to fight you, they'll claim you owe them whatever amount you saved by using the credit plus interest and possibly some penalties. At this point, you can fight them in court and have at least a decent chance of winning (and be able to take the credit every year from now on without any problems) or offer to settle with them for some amount considerably less than you would have paid had you not taken the credit, which they might well accept. This is a situation where you have a lot to gain and little to lose. Best case scenerio, you keep taking the credit and they never even notice. Worst case scenerio, you take it, they catch it and decide to fight you on it and you either, pay a little more than what you would have anyways, settle it cheaply, or calculate the ev of going to court by weighing estimated legal costs and chances of sucess against the benefit of being able to take the credit freely every year in the future.

None of these technical tax issues are as cut and dry as some would have you believe.