Top Five Things Athletes Need to Know to Prepare for 2021 Taxes
As of July 1, 2021, the NCAA granted student-athletes the privilege of profiting from their name, image, and likeness (NIL).
This reversal of policy is welcome news and has been celebrated by nearly everyone.
As the saying goes: With great freedom comes great responsibility, and this is truer now than ever as these student-athletes can now add “business-athlete” to their title.
As business owners and entrepreneurs quickly learn, whenever money is to be made, Uncle Sam is there to take his cut of their profits in the form of taxes.
Federal taxes are generally due April 15 of the following year. For 2021, those taxes will be due and payable on April 15, 2022.
Below are the top five actions a new business-athlete can take now to prepare for filing their 2021 taxes.
1. Track your income and cash receipts.
Taxes generally start with one thing: How much money did a business-athlete make during the year. Without knowing this, a business-athlete is behind the 8-ball. They will spend extra time gathering information and recreating their income amounts for 2021. It is always easier to track income as one goes along than recreating it months later.
Suggestion: Set up a separate bank account for cash earned solely from NIL activities. It you are disciplined enough to only run business income and expenses through one account, it makes it much easier to track.
2. Track your expenses and cash disbursements.
Congress requires you to report all your income for tax purposes; however, it does not require you to claim your business deductions. The courts have ruled that “…every deduction from gross income is allowed as a legislative grace…,” so why not take advantage of them. If you do not know what your business expenses are, you will not be able to deduct them, so it is
imperative that you track them as you go along.
Business deductions could include:
1. Business meals
2. Travel expenses for business
3. Consulting expense related to your business
4. Accounting and bookkeeping fees
5. I.T. expenses (i.e., tablet or laptop) for your business
Suggestion: Along with the suggestion for #1 above, you could also have a business credit card that is only used for business expenses. Again, knowing that a credit card is only used for business purposes makes it much easier to track expenses at the end of the year.
3. Set aside money for taxes as you earn it.
As your income goes up, so do your taxes.
It essential that you put money aside as you earn it in order to pay taxes come April; otherwise, you will have an unpleasant surprise with tax liabilities due and no cash to pay it.
Suggestion: Treat taxes as another cost of doing business and save for them in a separate bank account.
4. Line up a tax professional early on.
Do not wait until March or April to line up a tax professional to consult with and prepare your taxes. It will be much easier on you and them if you have a professional lined up before the end of the year. In addition, it is important to consider your own schedule between February and April. If you participate in a winter sport, do you really want to find a tax professional during the middle or end of your sport season?
Suggestion: Find a tax professional that is a good fit for your situation before the end of year. An added benefit to this is that they can help prepare year-end tax estimates for you. This will give you an idea of what to expect in terms of taxes that will be due in April.
5. Be honest.
Underreporting your income or overstating your deductions generally does not end well under an IRS audit.
Suggestion: Always report your income and deductions honestly to your tax professional and the IRS.
The IRS is more powerful than most people think. It was the IRS that brought down infamous gangster Al Capone for tax evasion and not law enforcement.