Unnecessary Roughness

Football fans can rejoice — the NFL is finally back! On Sunday night, the New York Giants defeated their cross-state rivals from Buffalo, 17-13, in a meaningless pre-season contest. On September 4, the Packers and Rams kick off a regular season sure to be filled with beer commercials, discount double checks, and brain-numbing concussions. It all leads up to Super Bowl XLIX on February 1 in Phoenix — somewhere on cable television, the pregame show has already begun.

The NFL is no stranger to controversy, and this year's first dustup came early. Baltimore Ravens running back Ray Rice was caught on video dragging his unconscious fiancee out of an elevator in Atlantic City. The league suspended Rice for two games and fined him $58,823 for conduct detrimental to the NFL in violation of the league’s Personal Conduct Policy. Now, two games is less than the league has suspended players for drug violations and even for driving without a license following a DUI. So Rice's lenient punishment has sparked outrage, including calls for NFL Commissioner Roger Goodell's resignation.

You probably don't think a football player's off-the-field misbehavior has anything to do with taxes. But you might be surprised at some of the subtle consequences of Rice's actions — so let's take a look.

The two-game suspension means Rice will miss the Ravens' season opener against Cincinnati on September 7 and a nationally-televised Thursday night game against Pittsburgh September 11. And that will cost him big-time in salary — $470,588, to be exact. Is that loss deductible? Well, no. Rice won't pay tax on it, but that's only because he won't get it. You can't take a deduction for income you never get in the first place.

Still, our friends at the IRS probably won't be quite as happy as if Rice had earned the two games' salary and paid tax on it himself. That's because whatever doesn't get taxed at 39.6% on Rice's return will wind up on Ravens owner Steve Bisciotti's return. Assuming the Ravens are an "S corporation," which passes income through to its owners, Bisciotti will pay the same 39.6% income tax rate that Rice would have paid. However, Bisciotti would avoid the 3.8% Medicare tax that Rice would have paid. That might not sound like a lot — but 3.8% of $470,588 still works out to $17,882 that would have gone to the U.S. Treasury.

The $58,823 penalty, based on one game's salary under last year's contract, is a tougher call. Fines and penalties are usually nondeductible, unless they're considered an "ordinary and necessary" expense in a taxpayer's trade or business. (Criminal fines are never deductible.) Rice could argue that paying the fine is "necessary" to continue his employment with the Ravens. But from a PR standpoint, that would likely be a fumble. Whether Rice attempts to deduct it or not, the actual money winds up in the League's treasury — and since the league is a not-for-profit organization, it will escape taxation entirely.

Rice himself has chosen not to fight criminal assault charges or appeal the league's punishment. But he's taken a rougher knock to his reputation than any hit he's taken on the field, and recovering won't be easy — if it's possible at all. We shouldn't be surprised to see him making some visible donations to women's shelters or other organizations opposing domestic violence. But those should qualify as charitable contributions and lower Rice's taxes as well.

There's really not much of a "planning" angle here, per se. But there is a valuable lesson, and it's that every financial activity has at least some tax consequence. Sometimes it's easy to see; and sometimes it's hidden. But it's always there, and it's always our job to help you make the best of it. So call us before you act, for a valuable peek at the IRS playbook. And remember, we're here for your teammates, too!