Doing your taxes is frustrating, but doing your taxes when you’re accumulating paystubs in a variety of states, precincts, and countries can make an annoying process downright draconian. Uncle Sam might not ask for anything more than a W-2 from Americans who only work for one company, but pro athletes rarely have that luxury. John Karaffa saw this firsthand when he played professional basketball overseas for 12 seasons. Between federal demands, regional idiosyncrasies, and international inconsistencies, sometimes an athlete’s tax return can be hundreds of pages deep.
So, in 2009, Karaffa started ProSport CPA, an accounting firm that offers tax services and financial planning to athletes all over the world. Today, he says the company works with almost 1,000 clients, including pros in every major sports league in America and the rest of the world. Karaffa explains that ProSport understands the tax situations athletes might come across in the murky waters of contracts, royalties, and endorsement income. But more than that, he hopes to be a steadying presence in an industry that eats its young. (For example, Karaffa advises against opening a restaurant while you’re on your first contract.)
A major part of Karaffa’s business is the so-called “jock tax.” During the 1991 NBA Finals, California instituted a tax on the money that Chicago Bulls players earned while they were in the state to play the Los Angeles Lakers. This created a snowball effect, and today nearly every state — except for Florida, Washington, Texas, and Washington, DC — enforces a tax on visiting players. Over the course of an NBA season, a player might visit 20 different states, which means that they’ll need to file returns in each of them. That is a difficult thing to accomplish without the help of a company like ProSport, which has a deep understanding of every state’s tax code. We talked about that, as well as how ProSport recruits new clients, and the rude awakening young players often have when the taxman comes knocking in April.
So you had an athletic career before you got into the tax business. What was that like?
I had played basketball and majored in accounting at Butler University, who had a well-known and fantastic program. I had job offers in Indianapolis during my senior year to start with any of several accounting firms but chose instead to play basketball professionally overseas. I started in Germany, ended up playing there for 11 seasons, and one season in New Zealand. I never thought I’d stay in one place that long. I figured I was just going to bounce around a few places.
Once I got to Germany, I was getting bored during the day, since our practices were evenings and games were primarily on weekends, so after a month or so, I decided to research the accounting firms in Frankfurt, Germany, near where I lived. I felt compelled to put my degree to use and start getting experience so I could sit for the Certified Public Accountant (CPA) exam. I was also taking college courses through correspondence school — there weren’t any online education opportunities back then. I think my primary motivation was to keep advancing in my professional career because I didn’t want to get back to the US after my playing career and have to start over. Having dual careers suited me well, I was not one to sit around and not do anything.
What I ended up doing is I decided to stay [overseas] year-round and worked with one of the big four accounting firms. I started with PricewaterhouseCoopers. I kind of had both careers going, and the firms knew that basketball was No. 1. They were really flexible with me. I was able to do both. I did that pretty much the whole time I was over there.
So I imagine during that time you got a pretty intimate perspective on how complicated taxes can be for pro athletes. What about that experience made you want to explore that niche as an accountant?
I definitely saw how complicated it was, especially the year I played in [both] Germany and New Zealand. I had three countries’ tax returns that I had to deal with! The complexity of that, it was very clear to me that you had to be a specialist. That is a very difficult niche in its own right: expatriate taxation and international taxation. Let alone all the idiosyncrasies with sports entertainment.
I transferred back to the US at the end of my stint in Germany. At that point I’d been in the tax industry for 20 years. [Athletes] felt they were underserved from the tax side of things. A lot of those [accountants] are starstruck or just not really able to relate to athletes. Putting it all together, it just felt natural for me. Obviously I have a lot of experience. I’ve seen pretty much everything in the tax world.
Today ProSport CPA is serving almost 1,000 clients. We understand athlete’s taxes. It’s more complicated than 99 percent of the people in the US. You have to find all these different jurisdictions. It can be mind-boggling. I can put a guy at ease pretty quickly when I explain the situation and handle it for them. I’ve got a team of 20 people here and this is all we do.
Let’s talk about some of the unique circumstances that athletes find during tax season. The big one obviously, is the “jock tax,” which requires athletes to file returns in every state they play in over the course of a season. What’s that like?
First off, the federal return is hard enough because there are a lot of different sections of the code and different types of ways that athletes earn money. You’ve got wage income, but then you also have endorsement income, you can have royalty income, different kinds of investments. There’s legal structures around that. That all has to be navigated on the federal side.
From the state side, everybody’s situation is different. It depends on what somebody’s home state is, where they’re going to reside, and what team is going to be employing them. Those could all be different places. With the way that the season works, you’re employed by a team in a particular jurisdiction. They’re going to be withholding, say, taxes from that jurisdiction, if there is a state tax.
Then based on the activity that the individual has — the games in the season, but also the pre-season training camp, because NFL teams often have pre-season training camps outside of their state — depending on where they’re performing their duties, income is going to be allocated to various different jurisdictions. Most of the states, and even some of the cities, have income tax. I think last year, the most we had to file for somebody was 26 different jurisdictions in one year. That’s 26 different tax returns. We’re talking 200 pages. It’s a ream of paper.
California started [the jock tax] because they were looking for extra revenue sources. They figured athletes are easy pickings because they can look up their salary online, they can look at the schedule, and then they can make a calculation. “I reviewed this guy and he had to earn a million here, so let’s tax him on the million.” It’s a money grab.
You’ve said in the past that taxes are a pro athlete’s biggest expense. Is that ever a rude awakening for a rookie?
I think the rude awakening is the first paycheck. Let’s say they’re getting a million dollar signing bonus. The financial adviser, the agent, explains, “You’re not gonna get a million in the check.” The number might even start with a four. That’s really where athletes realize that taxes are so high. When they see the paychecks, they see the withholding that’s happening with all these different jurisdictions, they start looking us up.
For most of us, as our careers progress we earn more and more. But at the beginning of our professional lives it’s not a big sum, so the mistakes that we make aren’t as tragic. It’s flipped on athletes. At the beginning of their careers, when they’ve done the least, they’re just really thrown in the fire. There’s a ton of stuff going. There’s a ton of life events that are also happening simultaneously: picking up and moving, their first job, and getting acclimated to a city which you have no control over, especially with the draft. Taxes rank up there with those changes, because it’s the biggest expense.
What other unique tax situations can an athlete find? Are they able to write off their training or fitness regimens?
Well, the tax laws have changed in that regard. Most of that would be able to be written off up until the end of 2017. The tax laws changed at the beginning of 2018, where the employee business expenses actually just got removed from the code. In theory, many of those expenses are no longer deductible.
It’s actually a paradox; some states don’t agree with all of the federal law changes. Some of the states still allow those deductions but the federal doesn’t. So, if an NFL kicker goes to a specialized kicker camp, that was absolutely to improve his chance to make a team. Hiring a trainer, working on the body helps to get ready for the job, in the same way that an accountant would go get continuing education. The Trump tax bill took away a lot of those deductions, but it also lowered the top tax rate by almost 3 percent.
What are some of the other unique circumstances that you typically find when you’re doing a pro athlete’s taxes?
It’s a lot of moving parts. We have dealings directly with the professional athletes that we’re serving, but in a lot of cases, sometimes we’re getting all the information from everywhere else. The agent, the financial adviser, a business manager, personal assistant, a team. There’s a lot of people that we have to go to because pro athletes have crazy travel schedules. You look at an NBA schedule, in one particular week they could be on six flights. They’re always on the road. It’s really hard to get things done for them during the season, so they have to rely on other people to help them.
You told me you’ve occasionally helped some athletes avoid a tax disaster. What kinds of disasters were you able to recognize before they hit?
Usually the things that we’re correcting are when someone has already passed through the books: a nonprofessional, or somebody who maybe could be a great CPA but has no idea how to handle other state tax returns outside their own state, or [someone] who doesn’t know how to handle the niche of international taxation or the niche of sports entertainment. We can very quickly identify if somebody was being served by an accountant that really had no business working with them. We do a lot of amendment tax returns, usually getting people money back because they missed opportunities. That’s probably the most common thing that we’re catching.
Do you actively recruit athletes? How do you find new clients?
Our biggest advocates are the athletes we serve. A lot of the veteran players, the team captains, they’re saying, “Oh yeah. These guys have been around the block. They know what they’re doing. They’re legit.”
Then when those people start comparing notes and talking with other teammates, and hopefully get referrals from multiple different angles, then they’re like, “Yeah, these guys must be legit if my agent is saying they’re good, and my financial adviser is saying they’re good. They’ve got a whole bunch of guys in the locker room. They wouldn’t be where they are if they weren’t doing a good job.” We’re very, very blessed to have a lot of good people that we’ve worked with that also spread the news, because these guys don’t want their rookies getting preyed on.
It’s funny to think that even in a business as glamorous as pro sports, that core office dynamic of recommending an accountant to a coworker still exists.
You hit the nail on the head. Athletes have so many people around them. A lot of people around them are just trying to get something from them. They have to be leery. It does come down to the locker room, or on the field, or having dinner at the Chipotle after practice, the guys compare notes. That absolutely happens quite a bit.
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