Feds change stance on deductible expenses
David in Dallas sends an FYI about a big ruling in Tax Court that should prove rather beneficial to poker players:
The key take-away is that poker losses are now deductible for professional gamblers beyond your profits, so you can carry them forward and backward to offset income in other years. You can file on Schedule C instead of Schedule A, which limits deductibility.
Of course, none of you probably have any losses to deduct, but it’s nice to know that you have the right anyway.
Wow. You know taxes and finance aren’t really my game, but if David’s correct, this reversal of interpretation seems nearly as big as the DOJ’s December flip on the Wire Act — microeconomic change poker players can believe in
!? Even if my attachment of significance is a bit of a stretch, it probably was about time for the Feds to acknowledge that yes, they know now (after years of investigation), playing poker even semi-professionally comes with legitimate business expenses beyond your buy-in …but bummer for Dan personally, as losses suffered in the Pokerati game apparently are not deductible as marketing write-offs. (Crap, there goes my equity.)
Kinda a big step for poker players seeking a certain legitimacy for their profession. And who knew … “Tax Court,” it turns out, is a real place, not some reality show on Bravo or The Learning Channel.
A quick-and-dirty excerpt from the new issue of the (always-sexy) Journal of Accountancy that jumps right to the end for stuff that matters for poker players who at least occasionally find themselves reporting net-positive results is below:
Under the holding in Mayo and the IRS’ acquiescence to it, professional gamblers are allowed to fully deduct their nonwagering business expenses beyond wagering gains. Nonwagering business expenses may include transportation, meals and entertainment, admission, subscriptions and other fees. In addition, if nonwagering expenses exceed wagering gains and other income, they may give rise to a net operating loss that may be carried back to previous-year returns or carried forward to future-year returns. Professional gamblers still must substantiate the amount and the business purpose of the expenses to secure their deductibility (Presley, T.C. Memo. 1979-339).
The IRS acquiesced to the Tax Court’s recent holding that a professional gambler in the trade or business of gambling could deduct nonwagering expenses in excess of gambling winnings under Sec. 162(a).
Historically, such costs in excess of gambling winnings have been disallowed under Sec. 165(d) and previous Tax Court precedent. Now, however, such deductions may offset other income and even result in a net operating loss that may be carried back or forward to other tax years.
To be considered a professional gambler, taxpayers generally must demonstrate to the satisfaction of the IRS that they are engaged in gambling as a trade or business rather than casually. The IRS and courts apply nine factors in regulations under Sec. 183, as well as all relevant facts and circumstances, in making the determination.
Nonwagering business expenses may include transportation, meals and entertainment, admission, subscriptions and other fees. Wagering gains include wagering winnings and “comps” (the fair market value of complimentary goods and services) but not additional income to casino personnel in the form of “take-offs” and “tokes,” which are likely to be considered compensation or other, nonwagering income.