Seattle Seahawks running back Marshawn Lynch grabs his crotch after scoring a touchdown and earns a $20,000 fine from the NFL. In the same game, Seahawks receiver Jermaine Kearse throws the football into the stands after a game-winning catch and receives a $5,512 fine. And the New England Patriots' underinflated footballs could result in a $25,000 fine, at minimum, if the NFL determines wrongdoing.
Fining athletes and coaches is far from rare in professional sports. These three instances occurred in just one weekend of the NFL. But there is a silver lining for teams and their athletes facing a penalty: The fines are tax deductible. Everything from an inappropriate gesture to illicitly filming another team (which earned Patriots head coach Bill Belichick a $500,000 fine in 2007) can mean a deduction in their federal taxes.
Why's that? Here's a quick lesson in tax law:
Look at these fines as unreimbursed work expenses. Many of us have business expenses for travel or supplies. If our employer doesn't cover them, they may be deducted from our taxes if they reach a certain level. In a similar vein, professional athletes have several expenses in their line of work. They need to pay agents, attorneys, and accountants. This all goes into a miscellaneous bucket for tax deductions. Fines from the league go in this bucket, too, explains Sean Urbany, a senior accountant at Washington-area firm Bond Beebe.
"Normally, our expenses are reimbursed by the company," says Urbany, who wrote a blog post on this in 2012. "So we don't ever get a deduction for it. But obviously the teams are not going to be paying for these fines. They're going to be deducted by the employee—essentially the coach or player—as a reimbursed employee business expense."
How do these deductions work? The IRS can't factor in $5 expenses here and $10 expenses there. So they set a floor of 2 percent of your adjusted gross income. Once your pile of deductions exceeds that threshold, they start to benefit you from a tax standpoint. Say your marginal tax rate is 35 percent. That is the savings for each dollar of deduction. If you have $100 in deductions and your tax rate is 35 percent, you are saving $35 in tax.
According to the IRS, these kinds of deductions are allowed only for "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." This is how athletes and coaches justify deducting fines from their taxes. If they do not pay the fines to the NFL and are kicked out of the league as a result, they can no longer carry on their trade or business—which is being a professional athlete or coach.
One misconception here is conflating breaking league rules with breaking the law. If the Patriots intentionally underinflated balls for their advantage, they didn't break any federal laws. They broke NFL rules. When the U.S. tax code says no deduction is allowed for fines or penalties, those are monetary penalties imposed by a government. The NFL is not the government.
If a professional athlete got a speeding ticket, for example, the fine would not be tax deductible because it came from breaking the law.
"In this case, it's a law of the league," says Brian Wynne, a principal at Bond Beebe. "The league is a collection of teams. The teams are employers of coaches and athletes. And they're fining the coaches and athletes because it's the only lever they have to pull. You don't want to fire somebody. You're given millions of dollars in salary. If they're doing something wrong, you take some of it back."
But California lawmakers didn't think this rule should apply to everyone in professional sports. After the $2.5 million levied against former Los Angeles Clippers owner Donald Sterling by the NBA for racist comments, California passed a law prohibiting professional team owners from writing off fines on their taxes. Gov. Jerry Brown signed it in September. This was obviously targeted at Sterling and only affects the very limited class of owners in one state. It did not address fines against athletes and coaches, nor does it affect federal taxes for those owners.
It's unlikely, though, that the IRS will address this aspect of the tax code anytime soon. Although Lynch repeatedly said Tuesday, "I'm just here so I won't get fined," alluding to the $100,000 fine he got earlier this season for refusing to speak to the press, he may get fined yet again for wearing an impermissible hat to the press conference. But he shouldn't worry. His accountants probably know they can deduct those fines from his taxes.
This article is from the archive of our partner National Journal.