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Does anyone have personal experience with incorporating an S-Corporation for the gambling trade?

In cases where the gambling activity is consistent and produces sufficient income (versus, say, an infrequent hobby), the IRS does allow gambling to be considered a business or trade for self-employment, and thus, subject to FICA (self-employment taxes). My question surrounds whether it might be advisable to create a business entity for expense management through an S-Corp, versus the sole proprietor (or Single Member LLC) Schedule C route. Any expenses for the trade activity should be deductible to reduce the income gained from that trade activity. I'm not necessarily looking for a tax advantaged strategy (there is no appreciable taxation difference between the Schedule C or S-Corp business entity vehicles aside from SE taxes), but for the purposes of accounting and transparency, I question whether an S-Corp would be of value. That being said, with an S-Corp, I could pay myself a reasonable salary out of the gross winnings, deduct any lawfully-permitted expenses in connection with the trade, and distribute any remaining profit as a dividend.

The alternative to the Schedule C or S-Corp route is simply declaring gambling winnings as "other income" on Line 21 (Form 1040) and itemizing losses on Schedule A, which is not an efficient strategy for a professional gambler. I know there's a knee-jerk reaction to saying, hey, gambling is not a business or trade, but again, when the activity is extensive and routine, in addition to producing significant income, the IRS can and does consider the activity as self-employment, and requires self-employment taxes. I specifically wish to explore the Schedule C and S-Corp options for this self-employment activity. Thank you.

  • Why do you need an S-Corp for this? Are you going to sell shares of your poker winning business? – littleadv Apr 7 '15 at 3:32
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    What do you think a reasonable salary for a professional gambler is? I don't think there is such a thing as a salaried gambler. – Ben Miller Apr 7 '15 at 3:56
  • @BenMiller My thought here was to utilize the maximum FICA contribution of $118,500 (2015) as the "reasonable salary" baseline, but would represent just under 25% of my gross winnings based on last year's figures. I question whether the IRS would determine the balance as having to still be hit with Medicare taxes (and the ACA's additional Medicare tax), or whether the approximate 120k could be deemed as reasonable, with the rest taken as a distribution and subject only to income tax, not SE taxes. Tax avoidance is not my goal, tax efficiency is. – Brian Apr 7 '15 at 18:31
  • @Brian based on what your "reasonable salary" is 25% of your actual earnings? – littleadv Apr 8 '15 at 2:43
  • This is a follow-up question about becoming a corporation more than an answer. My client routinely receives gambling forms W-2G in the high six figures. He doesn't intend to save or avoid taxes by switching to a corporation. However, he expects to apply for mortgages and other loans in years to come. The lenders are very hesitant to lend to someone who shows $600,000 or more in W-2G gambling winnings. Also, he routinely infuses $3 million into the gambling and comes close to break even each year. He just wants to get the winnings off his personal returns so he can getter better loans. The cost – user33952 Oct 10 '15 at 21:28
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In a sole proprietorship AND an LLC, the expenses can still be deducted against the profits or losses from the operations.

The IRS does not even require that a profit seeking activity be incorporated under its own entity, hence why this is also applicable in a sole proprietorship.

From what you've said, there is no reason to use a more complicated and costly corporate structure at all. In comparison, a sole proprietorship and single-member LLC will be completely pass through entities to the IRS and all of their earnings go to you. With the LLC you have the option of letting the LLC's earnings remain with the entity itself, or you can just treat it as your own and pay individual income taxes on it.

This has nothing to do specifically with a gambling business and is largely a red herring to your profit seeking motives. Gambling in casino games and lotteries already enjoy favorable tax treatment in some regards. Gambling in capital markets also enjoy a myriad of favorable tax laws. A business entity related to this purpose should be able to deduct costs related to this trade (and pass an audit more convincingly than not having formed an LLC and business bank account)

  • dividends? What are you talking about? There's no double taxation in S-Corp. – littleadv Apr 7 '15 at 3:33
  • @littleadv ah ok, OP mentioned paying himself a salary from the S-Corp and paying a dividend from the S-Corp to himself. Even with the no double taxation, I maintain my position that it is redundant. – CQM Apr 7 '15 at 3:49
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    @Brian we are talking about your particular situation. Single-owner S-Corp where the whole income is produced by that owner's personal services will not give you any savings on FICA. Not legally, at least. – littleadv Apr 8 '15 at 2:42
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    @littleadv Can you cite this in Treasury Regulations or the Internal Revenue Code? One of the main advantages of the S-Corporation is the ability to reduce self-employment taxes. That's not illegal whatsoever. Where it becomes questionable is when an S-Corp shareholder arbitrarily sets an unusually low W-2 wage (which is subject to SE taxes) and takes the bulk in S-Corp distribution (not subject to SE taxes). Many S-Corps have only one owner. Not to be rude, but you're awfully flip with your supposed illegality determinations. – Brian Apr 8 '15 at 3:28
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    @Brian no, there's no such advantage. You cannot convert earned income to non-earned income just by making it go through S-Corp. S-Corp is a pass-through entity and the characteristics of the income doesn't change. You're confusing a case where you're profiting by the work of others (your employees) and as such the portion of income not attributed to you is not an earned income for you. You are still required to pay yourself a reasonable salary for your own work in that case. But in your case - you have no employees. Your whole income is your own earned income, SCorp or not. – littleadv Apr 8 '15 at 3:50
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You probably don't need S-Corp. There's no difference between what you can deduct on your Schedule C and what you can deduct on 1120S, it will just cost you more money. Since you're gambling yourself, you don't need to worry about liability - but if you do, you should probably go LLC route, much cheaper and simpler.

The "reasonable salary" trick to avoid FICA won't work. Don't even try.

Schedule C for professional gamblers is a very accepted thing, nothing extraordinary about it.

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