Professional Gambler

[nycCPA]

Hi,

I have a client for a few years now for who we file a Schedule C as a professional gambler (actually, we call him "Entrepreneur" but that's symantics).

The questions is this: Would it be better to set him up as an S-Corp, give him a reasonable salary out of the S-Corp and distribute the rest of the profits yearly to him as dividends, thereby avoiding the 2.9% on the medicare portion of the FICA.

A few question:

1. Over the last few years, his net income has averaged approximately, 250k - 300k. What, in your opinions would a reasonable salary be. 100k or so? That would yield a savings of approximately $4,350 ($150,000 x 2.90%) on the Medicare 2.9%.

2. Is there anything incorrect on a tax basis of what I'm saying. Would this corporation be considered a Personal Service Corporation and if so, what impact would that have.

3. He lives in Las Vegas, so there is no local pitfalls that I am aware of to this.

I would appreciate anyone's input on the questions and on this topic in general as I certainly want to assist him in structuring his activities in the most tax advantaged way.

Thanks,
David

[Bees Knees]

Welcome David. Is this a joke?

How does one actually make a profit as a professional gambler? $250k to $300k? Are you sure? I thought the casinos were rigged so that you would eventually lose. What does he do? Cheat? Hold aces up his sleeves?

At any rate, if you can somehow get away with putting his income and expenses on a Schedule C without IRS having a cow over it, you know more about this business than any of us. I have no idea how you can justify a reasonable salary for a profession that all odds say should be a loss.

As for the personal service corporation rules, they do not apply to S corporations.

[JohnH]

Good questions. Reminds me of the old WC Fields line as he's sitting down to to the table with cards sticking out of his collar, shirtsleeves, etc.

"Some people call this a 'game of chance', but not the way I play it."

[Harvey Lucas]

Sch C is OK

I had a similar client, he was a professional card player, texas hold em was his game, we filed a sch c every year for at least 10 years, he reported an annual profit of 50,000 to 60,000. We never had any problems or inquiry from IRS.

I would be reluctanct to use the S-corp approach in this instance, however, in theory it should work.

If I were going to do it, I would set the wage level very high, maybe 75% to 80% of the amounts distributed.

Harvey Lucas

[nycCPA]

He really is incredible

I play cards a bit myself and I am actually decent and have made some consistent money in poker over the years.....however, my client, the real professional gambler, is somewhat of a miracle. He has a way of seemingly making money everywhere he goes and it's been consistent for 4 years now - hold'em, omaha, tournaments.

Anyways,thanks for your replies. Paying a wage of 75-80% of distributivee income certainly would mitigate the benefits at that point (after tax return fees, lol). Maybe if the Sch C's been working out, I'll keep it that way, since this is not an audit I would want to defend....he's legitimate as I put together his numbers, but the guy plays cards all day.....his records are a nightmare if they exist at all.

I welcome anyone's comments who deals with a similar situation and appreciate any suggestions.

Thanks,
Dave

[Melanie]

I have this new client that claims to be a professional gambler. Can he claim the winnings W2-G's in schedule C? and can he deduct the buy ins and the travel, hotel and miles when traveling to tournaments? Or should I treat the expenses as losses in schedule A and winnings in line 21 of 1040? The winnings are about 18k and total losses and travel expenses 9k. This is the only income besides his wife's income. I think he would save self employment taxes if we use line 21.

I play cards a bit myself and I am actually decent and have made some consistent money in poker over the years.....however, my client, the real professional gambler, is somewhat of a miracle. He has a way of seemingly making money everywhere he goes and it's been consistent for 4 years now - hold'em, omaha, tournaments.

Anyways,thanks for your replies. Paying a wage of 75-80% of distributivee income certainly would mitigate the benefits at that point (after tax return fees, lol). Maybe if the Sch C's been working out, I'll keep it that way, since this is not an audit I would want to defend....he's legitimate as I put together his numbers, but the guy plays cards all day.....his records are a nightmare if they exist at all.

I welcome anyone's comments who deals with a similar situation and appreciate any suggestions.

Thanks,
Dave

[TAXNJ]

Subject covered.

See TTB tab 3 & 4. In addition this subject covered very well in a 4-15-15 post and other posts. Do a "search" on this site

[TXEA]

What is reasonable salary

The only question I have is what is the "reasonable salary"? A distribution is used for a theoretical return on investment or in the context of service business, a return on the labor of others AND return on investment.

Take the example of a law firm with a one owner attorney with three staff attorneys. The lawyer must be paid a reasonable salary based on her production and what she would be making theoretically based on her experience, knowledge, and production. This attorney pays her staff reasonable salaries and is entitled to a distribution of profits based on the production of her staff.

For your professional gambler, he/she is the only one producing for the S-Corporation, so virtually all of the profits are based on his/her production. I would think virtually all of the profits would paid to the owner in salary.

Many people confuse the S-Corp as an entity to disguise salary as distributions. If there is only one worker, and there is no return on capital, I see very little argument for anything other than a nominal amount of distributions.

[DonB]

How does one actually make a profit as a professional gambler? $250k to $300k? Are you sure? I thought the casinos were rigged so that you would eventually lose. What does he do? Cheat? Hold aces up his sleeves?
.

Professional poker players do not play in games where the House gets a cut. This makes poker a game of skill and not luck. The very skilled can make big money.

[DonB]

I have this new client that claims to be a professional gambler. Can he claim the winnings W2-G's in schedule C?

If your client is gambling in casinos where the House has the edge, he is not in my opinion a professional gambler. No to schedule C.

[Roland Slugg]

This was an interesting post, and I thought I'd add a few comments ... not necessarily any advice or answers.

First, I would not characterize "entrepreneur" as a "semantics" synonym of "gambler." Be honest: You only use that term to try and mask your client's true occupation. What have you been entering on lines A and B of Schedule C? Just curious.

More importantly, however, I would not classify your client as a professional gambler at all. Even though playing poker may be considered "gambling" in a general sense, your client is not a "gambler" at all. He is a professional poker player, a game of skill, money management, psychology and daring. Luck is certainly a factor but probably ranks no higher than fourth or fifth in overall importance in the long run. A gambler, IMO, is someone who plays games of chance, where luck is the primary factor and skill is secondary. Yes, a skilled blackjack player, craps player, or horse race bettor will fare better than will an unskilled one, but in the long run they will all lose. This is not true of highly skilled poker players.

Regarding Schedule C, I would have no problem with that based on the information provided.

If you recommend to your client that he incorporate the business and elect S Corp taxation, I concur with Harvey Lucas above, with a variation: I would suggest setting his base salary at a sustainable level, even in a lean year, then establish a bonus arrangement based on some reasonable formula. This should be in writing and well documented. I'm thinking, say, $100k base plus a bonus of 50% of the excess winnings after travel expenses, entry fees, etc.

Finally, if your client does decide to incorporate, there may be occasions when his winnings are subject to withholding. There is a way to get that withholding onto a corporation's return, and that is via the use of F-5754. If you're not familiar with this form, you should review it, and its instructions, then advise your client to become familiar with it as well. He should probably carry a few of those forms with him, as he will need to give one to each tournament sponsor whenever federal tax withholding is an issue.

[ttbtaxes]

Not convinced about the S corporation. The OP said this guy was a professional gambler. If he is the gambler (not the corporation) and he is the one earning the gambling revenue, then how does he assign that income to a corporation?

[Burke]

In a C Corp, he could not. However, in an S Corp, it flows through to the sole owner. The only thing would be the avoidance of SE taxes, perhaps. He could elect a SMLLC and choose to be treated as an S-Corp for taxation purposes. I am not sure the IRS would go with a base salary and bonus set-up, but it is an interesting scenario and might fly on audit. Who knows? But wouldn't that hold true for any personal service income received in an SCorp? And has it ever been tested?

[Melanie]

Professional Poker Player

I see what you mean no such professional gambler. Poker player is more like it.