The COVID-19 pandemic has thrown a curveball at CPAs who handle professional athletes’ tax returns and at states that could get a smaller slice of taxable income from nonresident players.
“It’s added some kinks to our standard calculations,” said Ryan L. Losi, a CPA at PIASCIK, a CPA firm based in Virginia that has a practice group dedicated to professional athletes.
Losi told Tax Notes that he and other tax practitioners who work with professional athletes have had to revamp their tax return preparation process because of COVID-related travel restrictions and quarantine requirements.
Nearly all states that impose personal income tax use the so-called duty day method for determining the amount of compensation they can tax that is earned by nonresident athletes who play in their state. This method divides the number of duty days the player spent in a host state by the player’s total number of duty days during the season. Duty days include games, practices, team meetings, training camp, and any other business-related activity the athlete is contractually required to perform.
An athlete’s return preparer has to track the number of duty days spent in each state and then apportion the athlete’s yearly compensation among the states that tax nonresidents, Losi said. “It gets pretty detailed,” he said. “You have to find out how many days the team was out of state and see if your player actually played; maybe he was injured and didn’t travel.”
With COVID reducing the total number of duty days and restricting some players’ ability to travel out of state, the process was even more complicated this tax season, and those issues will continue into next year, Losi said. “We’re having to ask a lot more questions about how COVID has specifically impacted our players’ working days,” he said, adding that schedules are more varied than usual.
“Some athletes have contracted the virus or been in contact with someone who had it, and all of a sudden they’re in quarantine and now have 14 nonworking days,” Losi explained.
Feeling the Heat
The disruptions are affecting bottom lines, Losi said.
“The denominators get smaller, so each working day potentially has a larger amount of income attributable to that working day,” he said. “And if the athlete has a seven- or eight-figure contract, you could have some unexpected results. Sometimes it might be more favorable, sometimes not.”
Losi said that with the NBA 2020 playoffs and finals between the Miami Heat and Los Angeles Lakers held exclusively in a Florida arena, California will come out on the losing end when it comes to taxing nonresident income. “Normally, the entire Miami Heat team and staff would have had to allocate some of their compensation to California,” he said. With no games played in California, the state won’t get a cut of any of the Miami team’s income, he added.
Some foreign athletes who play with U.S. teams were in danger of becoming U.S. tax residents because of COVID-related cross-border travel disruptions, Losi said. Those players were able to avoid that risk thanks to IRS guidance issued in April. In Rev. Proc. 2020-20, 2020-20 IRB 801, the IRS said it will assume that up to 60 consecutive calendar days of their U.S. presence arises from COVID-19 travel disruptions and that those days won’t count for purposes of determining U.S. tax residency under the substantial presence test.
“It’s nice to be able to have certainty through the rest of the year,” Losi said, adding that the October 15 extended filing deadline can’t come soon enough.
2020 “is the tax season that never ended,” Losi added. “I’ve probably worked more this year than I have in the last five years.”