Tournament Winnings Tax

[gardnerjigman]

How are your winnings taxed? Say single large amateur tourney, you win $70,000. Capital gains, hobby tax, normal income?

Thanks

[Lund Explorer]

The following is strictly the opinion of a retired accountant and tax preparer and should not be considered legal advice.  Others may have a different opinion based on their interpretation of the IRS's current regulations.  Any opinion not based directly on those regulations should be considered meaningless unless the person offering the advice agrees to cover any penalties that advice may generate!

 

Any income a person receives as a result of their bass tournament activities is considered taxable by the IRS.  This can include cash or merchandise won in tournaments, received from sponsors, paid for endorsements, or any other related activity.  Done correctly, the individual will receive a Form 1099-Misc. from all organizations who pay $600 or more to that person.  Prize money should be reported in Box #3 of that form, and other income may be reported in Box #7.  Regardless if the money earned is reported on such a form or not, ALL INCOME should be reported on the Form 1040, Schedule C. 

 

Any expenses directly incurred in the activity is then reported in the expense section of the schedule.  This can include entry fees, travel costs, expense tied to the operation of then angler's boat, expenses for lures and tackle.  Insurance cost for the boat and liability are usually deductible.  A person who is actively engaged in the venture may also deduct self-employed health insurance costs.

 

Depreciation of assets having a life of more than one year, such as the cost of the boat, rods and reels, and electronics, can also be written off based on their useful life.  Depending on the amount of income, certain assets may be expensed in the year of purchase based on IRC Section 179.  The sale or disposition of these assets is reported as a sale of business property and should be reported on Schedule D of the same tax return.

 

Upon completion of the Schedule C, any net income is taxed based upon whether the individual is actively or passively engaged in the operation of the business.  Those persons who are actively engaged will pay both income tax and self-employment (social security) taxes on that income.  Those persons who are performing the activity passively (aka a hobby) should not be taxed for self-employment purposes.  An individual who is subject to SE taxes may also deduct losses from the activity against other income if the taxpayer is fully liable for those losses.  Losses from the conduct of a hobby generally are not deductible. 

 

Any income or losses may or may not be subject to state or other taxes as well.

 

It is my opinion that anyone who has won $70,000 in any kind of tournament should immediately contact a professional tax preparer for advice on their specific circumstances.  DO NOT wait until after the tax year has ended!  As a matter of fact, it would be my suggestion that anyone who is fishing in tournaments should spend the time to learn what their responsibilities are for reporting their income and expenses.

[Zach Dunham]

It is not common that I agree with Lund on everything, but I agree with Lund on everything. Also, save receipts for everything you spend related to bass fishing. I'm fairly sure you will have a LOT of write-offs as a business expense since paying for travel, entry fees, and equipment all lead to that income.

[gardnerjigman]

Thanks guys

[EmersonFish]

Geez gardnerjigman. You seem pretty confident about this 'Big Bass Bash' coming up. Asking specifically about $70,000.00? You must have the big ones at LOZ pretty well dialed in.

[gardnerjigman]

I wish! Just like covering all corners and being prepared! I own a small side business and so does my wife. Would rather not get audited because of a tax error from a tournament.

[EmersonFish]

I wish! Just like covering all corners and being prepared! I own a small side business and so does my wife. Would rather not get audited because of a tax error from a tournament.

Well I'm glad you asked. It's something to consider. I'm still not 100% sure I'm fishing it. My broken foot isn't healing well, among other things. But if I do, I may as well win it. I assume my first call on the Monday after will be to my accountant for his advice.

[BadRap]

Lund is giving you good advice, especially about contacting a tax professional.  One thing to consider, you may be able to report this as hobby income rather than business income.  The reason this is important is that business income is subject to Self Employment (FICA) tax of 15.3% while hobby income is not.  With a hobby, as long as you itemize you may still be able to deduct all your expenses.  Bottom line, get the help of a tax pro who understands the tax code.  Also, if you get a 1099-MISC for goods you win, you may be able to report a lesser amount as income.  The payer will likely issue the 1099 for the retail price of the goods, if you can show that the item is available at a lesser price you can use that lesser price as the fair market value.    Good luck in making this your problem!

[wnybassman]

I had to file tournament winnings two years in a row.  It wasn't $70k, but it was in the thousands each year.   My accountant listed it as misc. income and was able to separate out the receipts for that particular income.  It was very easy to make it a wash with the pile of receipts I had.    Again, that was only for $3k to $5k.

[Lund Explorer]

Lund is giving you good advice, especially about contacting a tax professional.  One thing to consider, you may be able to report this as hobby income rather than business income.  The reason this is important is that business income is subject to Self Employment (FICA) tax of 15.3% while hobby income is not.  With a hobby, as long as you itemize you may still be able to deduct all your expenses.  Bottom line, get the help of a tax pro who understands the tax code.  Also, if you get a 1099-MISC for goods you win, you may be able to report a lesser amount as income.  The payer will likely issue the 1099 for the retail price of the goods, if you can show that the item is available at a lesser price you can use that lesser price as the fair market value.    Good luck in making this your problem!

 

You can actually use Schedule C to report income and expenses from a hobby operation by simply answering "No" in the box next to the material participation question.

 

In my past experience, I would suggest following this course if the angler was fishing in one of these "One Big Bass - One Big Paycheck" tournament every year.  By fully expensing all of your costs each year, you are allowed to carry those losses forward to future years.  One of those just might end up being the year the hawg decides bite and put you into another tax bracket!

 

I have also had luck avoiding the SE tax in the rare event that a year ends up with a positive number, but only after a history of showing hobby losses in prior years.

[gardnerjigman]

You can actually use Schedule C to report income and expenses from a hobby operation by simply answering "No" in the box next to the material participation question.

In my past experience, I would suggest following this course if the angler was fishing in one of these "One Big Bass - One Big Paycheck" tournament every year. By fully expensing all of your costs each year, you are allowed to carry those losses forward to future years. One of those just might end up being the year the hawg decides bite and put you into another tax bracket!

I have also had luck avoiding the SE tax in the rare event that a year ends up with a positive number, but only after a history of showing hobby losses in prior years.

Great info. Thanks!