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Tax Season Special: Deducting Agent Fees

Kauffman Sports Management Group (KSMG) is a full-service agency, providing its clients with representation in NBA employment pursuits while also offering tax preparation services.  The following article was prepared by KSMG’s expert, in-house accountant, Larry Kauffman.  Larry has served as KSMG’s Vice President and Director of Finance for the last 20 years. As Larry indicates in this piece, KSMG prides itself on working creatively with its clients to reduce their tax obligations.

AN OFTEN OVERLOOKED TAX SAVINGS

By: Larry Kauffman

The following is an income tax deduction that is often not understood and therefore not utilized to the taxpayer’s full advantage. This is the miscellaneous itemized deductions portion of Schedule A. The deductions included in this section include items such as unreimbursed employee business expenses, union dues, tax preparation fees, and agent representation fees. These miscellaneous itemized deductions are subject to a 2% disallowance. What this means is that a taxpayer will only be able to deduct the miscellaneous deductions that exceed 2% of the adjusted gross income. To explain simply, the adjusted gross income is the total of a taxpayer’s income, including, but not limited to, income items such as wages, interest, dividends, capital gains. Following is an example of how this deduction would work.

We’ll start with some facts. A taxpayer has wages of $ 4,000,000 and other income of $ 100,000. He has total miscellaneous itemized deductions of  $ 172,000. These include  $ 160,000 of agent fees, $ 10,000 of union dues and $ 2,000 of income tax preparation fees. In this example, the taxpayer would not be able to deduct $ 82,000 ( $ 4,100,000 X 2% ) of these deductions, because of the 2% disallowance rule. There is a way to get around this if certain deductions could get combined in the same year. In this example the big deduction is the agent fees, and most agents would be able to work with the taxpayer to help achieve a tax savings. Following is a simplified example to get this often missed tax advantage:

Year 1                  Year 2

Total income                                  

$  4,100,000         $ 4,100,000

Miscellaneous deductions      

$     172,000       $    172,000

Less – 2% of AGI    

( $     82,000 )    ( $      82,000 )

____________      ____________

Net allowed misc. deductions      

$      90,000        $      90,000

Tax savings at current top Income tax rate of  35%         

$      31,500       $     31,500

The above example gives the taxpayer only a total income tax savings of $ 63,000 for his miscellaneous itemized deductions of  $ 344,000.

Now, we’ll have the taxpayer pay the agent fees for both years in year 2 and show how we can get the taxpayer a much greater total tax savings.

Year 1                       Year 2

Total income            

$ 4,100,000                $ 4,100,000

Miscellaneous deductions               

$      12,000                $    332,000

Less – 2% of AGI   

( $      82,000 )            ( $     82,000 )

 ____________            ___________   

Net allowed misc. deductions    

$         0                      $   250,000

Tax savings at current top Income tax rate of 35%

$         0                      $     87,500