Abstract
The Tax Cuts and Jobs Act of 2017 (the Act) amends the Internal Revenue Code of 1986 (the Code) in many important ways. The Act contains a change that is targeted at gamblers in particular. The change limits the deduction that individuals who itemize may claim. Gambling losses are for tax year 2018 and limited to gambling winnings. The new code states:
New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the limitation on wagering losses under Code Sec. 165(d) is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings. (Code Sec. 165(d), as amended by Act Sec. 11050).
Professional gamblers who, prior to 2018, could deduct their expenses such as travel and accommodations in addition to gambling losses, are now going to be limited to zeroing out and may not have a loss carry forward that is useable except against gambling winnings.
If individuals cannot deduct expenses of gambling should they consider incorporating or forming a single member limited liability company? There is a possible advantage to establishing a “pass-through” entity like an S corporation, or limited liability company. These entities are called pass-throughs because their income is taxed only at the shareholder or member level. These businesses are created under state laws and file separate state income tax returns. They enjoy all the rights and privileges afforded them under state law in that they can hold title to property, sue and be sued, and operate as persons separate and apart from their shareholders or members.
There is also the option of forming a traditional C corporation. The advantage of a C corporation is that it is a separate taxpayer. The new limitations on deduction of gambling losses under § 165(d) do not apply at the corporate level. The corporation will pay at a maximum rate of 21% whereas the maximum rate on individuals is 37% for federal purposes. It would, therefore, seem to maximize planning options to have two taxpayers, a corporation and an individual shareholder/employee. The corporation could deduct ordinary and necessary business expenses and pay a salary to the individual. All expenses of the gambling activity are isolated to the corporation and the individual return reports W-2 income. The corporation will have to maintain adequate books and records and comply with corporate formalities in order to be respected for tax purposes.
The practical reality in tax planning for gamblers is that the nature of the activity can involve large sums of cash and illegal betting (such as in the case of sports betting). Adopting a traditional structure that works well in the community as a whole in order to deduct gaming losses may be a path down the “rabbit hole.” Gamblers and, in particular, professional gamblers, operate in an informal world where cash transactions are common, income is under reported or not reported, and tax compliance is often an afterthought. I have represented a number of professional gamblers and although they fear the IRS, the nature of their day-to-day activities is less about tax compliance than about winning the next bet.