It may be that the NFL saved him from bad tax advice.
We are talking about Caleb Williams, the 2024 NFL number
one overall draft pick by the Chicago Bears. He signed a four-year fully
guaranteed contract for $39.5 million.
I can only wish.
But it was two additional negotiating positions that caught my eye.
(1) He wanted to be paid via an LLC.
(2) He wanted some/all of his contract to be
structured as a forgivable loan.
I read that he was represented by his father, who has
experience in commercial real estate but is not a registered agent.
But it helps to explain the LLC. The use of LLCs for
real estate is extremely common, so his father would have seen their use
repetitively. Still, what is the point of an LLC with an NFL contract?
It might be the expenses that an NFL player might incur:
agent fees, union dues, specialized training and related travel, certain therapies
and so forth. As those receiving a W-2 know, employee business expenses are
presently nondeductible. If Caleb could run his NFL earnings through an LLC,
perhaps he could avoid employee business expense classification and deduct them
instead as regular business expenses.
There is a hitch, though. None of the four major team sports
will pay compensation to an entity rather than directly to the athlete. In
contrast, non-team athletes – like golfers – can route their earnings through a
business entity. A key difference is that the PGA considers its golfers to be independent
contractors, whereas the NFL (or MLB, NBA, or NHL) considers its players to be
employees.
There is speculation that Caleb may have preferred an
LLC because LLCs – ahem – “do not file tax returns.”
Not quite. The tax treatment of LLCs is quite
straightforward:
(1) If the LLC has partners, then it will file a
partnership return.
(2) If the LLC elects to be taxed as a
corporation, then it will file a corporate return. If an S election in place, it
will file an S corporation return.
(3) If the LLC has a single member, then the LLC is
disregarded and does not file a tax return.
Do not misunderstand that last one: it does not say that
income belonging to the LLC does not land on a tax return.
Let’s say that Caleb created a single member LLC
(SMLLC). SMLLCs are also referred to as disregarded entities. The tax Code instead considers Caleb and his SMLLC to
be the same taxpayer. That is why there is no separate LLC return: all the income
would be reportable on Caleb’s personal return.
Could someone have read the above and thought that
income routed through an SMLLC is not taxed at all?
If so, Caleb really needs to hire a tax professional yesterday.
What about the loan forgiveness proposal?
I get it: loans are normally not considered income, as
any increase in wealth is immediately offset by an obligation to repay the
loan.
OK, Caleb receives contract monies, but he is liable
for their repayment to the NFL. This potential liability means no immediate income
to him. He would have income when the loan is forgiven, and (hopefully) he has
some control when that happens.
But the NFL can call his loan, meaning he then must
repay.
Oh puhleeeze.
Not to worry, says whoever. The NFL has no intention
of calling the loan.
I am a huge NFL fan, but I am not an NFL team owner
fan. There is no way I am trusting my money to owners who are monetizing their
sport to such a degree that many fans cannot even see the games. Seriously, how
many streaming services do they think an average person can afford?
What if Caleb includes conditions and guarantees and collateral
and puts and ….?
Listen to yourself. You are leaving loan-land and whatever
tax idea you started with. The IRS will come to the same conclusion. You have accomplished
nothing, and you may even be exposing yourself to fraud charges.
I suppose Caleb could structure it as deferred
compensation, the way Shohei Ohtani did with the Los Angeles Dodgers. Deferred
compensation can get into crazy tax tripwires, but at least we are no longer
talking about loans. If this is what he wants, then drop the loan talk and negotiate
deferred compensation.
That is BTW what I would do. There is enough money here
to make Caleb rich both now and later.
The NFL did Caleb Williams a favor by shooting down
both proposals.
