For those of you who engage in the business of gambling and have taxable winnings, a recent decision by the United States Tax Court should get your attention and that of your tax advisor.
There had been some confusion in the law concerning how and to what extent gambling expenses other than actual losses could be deducted from a gambler’s winnings. On July 25, 2011, in the case Mayo v. Commissioner, the court sought to clarify which expenses are deductible for those engaged in the business of gambling, and how those deductions may be made.
The petitioner in Mayo gambled on the ponies and tried to use not just his wagering losses but also his non-wagering expenses, such as travel and admission fees, to offset gambling winnings on his tax return. The total of Mr. Mayo’s gambling and non-gambling related expenses actually exceeded his winnings.
In Mayo, there were two legal questions presented: one, could a professional gambler use non-wagering expenses (i.e., costs other than bets) to offset winnings, and, two, could the gambler use those non-wagering business expenses to reduce his tax liability as an ordinary business expense, even when those expenses exceeded the amount of his winnings.
On the first issue, the court held that only actual gambling losses could be used to offset winnings. This rule is the same for recreational gamblers as well. The court also held that non-wagering business expenses are not considered gambling losses and could not be used as a direct offset to gambling winnings. However, and this is the crucial part of the decision, the court also held that those non-wagering expenses—even those that may exceed gambling winnings—may be deducted as a business expense, if it is established that the gambler is in the business or profession of gambling. This is so even if those expenses result in a net loss for the taxable year.
On one level it may seem like a semantic difference—gambling loss versus gambling-related business expense—but that difference may have profound effects on your tax liability if you are a professional gambler. Under this new ruling, a person engaged in the business or profession of gambling can claim a deduction for losses in the applicable tax year to the extent of his or her betting gains under Sec. 165(d), and may also deduct gambling-related trade or business expenses under Sec. 162(a). Those expenses must be considered ordinary and necessary business expenses to be deductible and must be supported by documentation.
For the specifics of your particular tax liability, you should check with a tax attorney before filing your tax returns and do not rely on this or any other article for your tax advice.
Shari Geller is an attorney, journalist, reporter, blogger, poker player, and observer of the poker scene. You can write her at BurnThis2@aol.com, and read her blog at www.burnthistoo.blogspot.com.
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