Professional Gambling income for Schedule C - no place to enter it so that TT treats it as gambling income and taxes at the proper rate

[JJAndre]

I am trying to figure out how to enter the income for my professional gambling activities.  I created a distinct business for this activity, and checked the box for "Is professional gambler", but the income is flowing to Schedule 1 as normal business income on line 3, not gambling income on line 8b, so it's being taxed at the progressive rate, not the flat 24% for gambling income.  

When entering the income, I don't see a way to specify the type, and I don't have W2-G's for it (online gaming sites).

[JJAndre]

That was my first assumption.  I assumed that checking the box for Professional Gambling in the company setup would kick anything entered in under that General category to be categorized as Gambling winnings.  In fact, I can only find that one checkbox at the beginning of Schedule C asking if the income is related to Professional Gambling.  

Entering income where you indicated doesn't show up on line 8b of Schedule 1, which is what I'm assuming has to happen for it to get taxed correctly.

[AmeliesUncle]

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@JJAndre wrote:

the income is flowing to Schedule 1 as normal business income on line 3, not gambling income on line 8b,

so it's being taxed at the progressive rate, not the flat 24% for gambling income.  

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The program seems correct to me. 

Why do you think it should be on line 8b and be taxed at a flat 24%?

[JJAndre]

The business income is gambling winnings.  It's being filed through a schedule C because it is being pursued as a business (which NC requires to claim losses).  As I understand it, that means it should all be taxed at 24% flat rate. 

I don't believe that just because it's filed on a schedule C it somehow converts it to regular income. Besides, everything beyond $200k in winnings would be taxed above 24% if it's ordinary income, and as the numbers go up that matters a lot.

[JJAndre]

Perhaps I misunderstood, but the federal rate on gambling winnings is 24% flat.  I assumed (perhaps wrongly) that this would apply regardless of whether the winnings were "individual" or derived from professionally oriented gambling activity.  If running through as a business just converts that all to ordinary income, then I understand the rest.  That was just a missing piece of the puzzle for me that was causing confusion.

I'm actually fine if that's not the case, I simply thought that it was still taxed as gambling winnings.  I have an appointment scheduled with a CPA next week to work through the best way to treat this income regardless.  I was trying to run through a test case in TTax, and ran across this discrepancy from what I understood, so I thought I'd ask the question.

It's looking more and more likely that housing this in an S-Corp to reduce the Self Employment taxes to a degree will make some sense as well, but that depends on whether the definition of "reasonable salary" can be substantially below the $160,200 cutoff for the bulk of that tax.  Taking a $75k salary, and the rest as distributions would keep the overall tax rate down until it gets into the upper brackets.

[JJAndre]

My misunderstanding then.  Everything I had been reading referred to it as a flat tax rate (similar to capital gains).  Statements like this "The tax paid on gains is not progressive: U.S. resident gambling income is taxed at a flat rate of 24%, regardless of the amount you win."

I hadn't had time yet to dig deeper - that's what I'm doing now.  

[JJAndre]

This is why I'm consulting a CPA on the S-Corp issue.  What you say about it being a service business is true as far as it goes.  It's also a business where the funds are at high risk of loss - unlike a service business.  Therefore a low salary during the year to be made up with a distribution at the end makes reasonable sense. 

It totally depends on what the courts have held as being reasonable in similar situations, and I'm sure there is ample case law on this. That's what I'm expecting the CPA to research and advise on.

[JJAndre]

I hear you about the 24%.  If that's the case, I wonder why the IRS provides a slot to enter gambling winnings separately from just misc. income?  Seems curious.

[JJAndre]

The problem is projecting the net profit to take 60% of, right?  Especially in this case.  In my residential design consulting business, I can project based on my hourly rate what a reasonable assumption of my income for a year will be.  No so much this.

[JJAndre]

I've read about people who tried that and ran afoul of the IRS for not having paid estimated taxes along the way that made up at least 90% of the eventual tax liability.  I'm not trying to skirt any rules or fudge anything here, but don't want to pay more than required (who does).  I've run my own business for decades and am well versed in paying estimated taxes.  I just need a reasonable basis for this new activity.  

To that end I need to have a well-documented process and record-keeping showing I'm following it.  From everything I've seen, that's a key element to stay on the IRS good side.  Then I need a professional opinion on what will qualify based on case law to be a reasonable approach to estimating the taxes quarterly, and what a "reasonable" salary would be.  So many of the cases I've found out there on this topic start off stating "THIS CASE CAN NOT BE CONSIDERED PRECIDENT" in screaming text.  It's almost like every case is a one-off decision. 

Not a comfortable place to be.

[JJAndre]

Pardon me for not being clear.  Tried doing a single payment at the end of the year, but NOT having made sufficient estimated payments throughout the year.  I'd have to look back to see if those were properly set up as W2 wages from an S-Corp.  That's been a couple of years ago and I don't recall the details.

Are you saying that making a single salary payment at the end of the year with appropriate withholdings covering the full amount is acceptable practice?  I can see if there was an employment agreement that stated that the salary was yearly, paid on Dec. 31, maybe that works.  The only real benefit there is keeping the capital in the business throughout the year, though.  Unless I'm actually using it all actively, I'm not sure it's much of a benefit over taking more frequent distributions/salary. 

In the case of the gambling business, if I'm keeping that money in use as stake money, then yes waiting has value, but I'm finding it's not likely to be the scenario.  I can keep $20-50K in play at any given time, so if money starts growing beyond that substantially, I'd rather move it to long-term investment vehicles.

[JJAndre]

I appreciate the info.  Answered my initial question, as well as getting more good information.  Trying to get this set up properly for next year starting Jan.1, so I'm running low on time.  I did enough this year to verify the model I'm using, and I like the return rate, so I'm adding this to my business portfolio. 

Cheers!  Happy Holidays! etc. etc.