Filing as a "pro" - minimum number of hours required?

[AZplayer]

Just had a mid-year checkin with tax advisor who has been doing a bit of research on filing as a pro vs. as a hobbyist. For the most part, I was on track with the requirements from an IRS perspective (documentation/tracking, goal to produce a livelihood, etc.)

One thing I had NOT heard before was that one of the tests the IRS uses is whether you are doing it "full-time", which in their book equates to an average of 35 hours per week. (Obligatory self-deprecating comment: Fortunately, they can't measure poker skill otherwise they'd have pity on me and send me a big fat refund.)

So far this year I only have about 900 documented hours AT THE TABLES, but I could document several hundred other hours in a variety of "legitimate poker business-related activities" to get up to the threshold.

Do any of you who have previously filed as a pro know more about this? TIA

[+EV]

AZ,

So you don't have a 9-5 job? That is the thing that keeps me from filing. I don't derive the main source of income from poker. I meet every other requirement.

I think that the IRS uses their "guidelines" but that if you meet the majority they will not usually hassle you. But they definately care if you make more money doing something else. I don't understand why they don't allow for "part time" work that is not hobby related.

+EV

[AZplayer]

Correct, no 9-5 job. 18+ years of corporate life is enough, TYVM.

As is often the case with IRS regulations, whether we agree with them or not, or whether they make sense to us, matters little unfortunately. :-(

[+EV]

[ QUOTE ]
Correct, no 9-5 job. 18+ years of corporate life is enough, TYVM.

As is often the case with IRS regulations, whether we agree with them or not, or whether they make sense to us, matters little unfortunately. :-(

[/ QUOTE ]

Congrats on getting out of the corporate world! Are you "retired" then? I am working at a 9-5 and hope to quit it to invest in real estate full time. I also am considering going back to school for an MBA. Either way though, it seems like being a "pro" is not an available option for me, since it seems like doing anything at all that makes money other than playing poker, you can not file as a pro.

It does suck that I meet every requirement other than having a day job though. I would love to net my poker income!

Regards,
+EV

[AZplayer]

Um, I am NOT an expert at all in taxes, and obviously if you follow any advice on an internet board without follow up you deserve what you get.

That having been said, my understand is that no one can "net" their poker income. You report "hobby earnings" on one part of your return, and then, possibly, depending on your individual circumstances, you can add your losses to your itemized deductions UP TO the amount of your gambling earnings. That has nothing to do with whether you meet the requirements of a professional poker player.

[TheEngineer]

Pro filers net their income.

[+EV]

[ QUOTE ]
Pro filers net their income.

[/ QUOTE ]

And they can deduct expenses!!!! It would be so sweet.

+EV

[AZplayer]

TheEngineer - sorry to be precise, but what does that mean: "net their income". I'm trying to learn more about this and understand it better, so if you can clarify I'd appreciate it.

My understanding is that if you meet the IRS criteria for filing as a professional, then you can use Schedule C and (for example) say you have $100k in gross winnings, $20k in "cost of goods", for a gross profit of $80k. You can then list your deductions/expenses (say $20k) and show a net profit of $60k.

[+EV]

[ QUOTE ]
TheEngineer - sorry to be precise, but what does that mean: "net their income". I'm trying to learn more about this and understand it better, so if you can clarify I'd appreciate it.

My understanding is that if you meet the IRS criteria for filing as a professional, then you can use Schedule C and (for example) say you have $100k in gross winnings, $20k in "cost of goods", for a gross profit of $80k. You can then list your deductions/expenses (say $20k) and show a net profit of $60k.

[/ QUOTE ]

This is how it would work if you were a pro. If you were not a pro then not only would you not be able to make the expense deduction, your gross income would be exaggerated in the following way.

Your gross income would be the total amount won during winning sessions for the year. Each time you open up a table or tables and you win it would be considered gross income. However every time you had a losing session or left a table down money, it would not be counted.

So it is conceivable that as a "hobbiest" you could earn a gross 100K per year but actually the sum of your winning sessions would be 300K plus. That is the income that they would use to determine your AGI (ajusted gross income). Then later on they subtract the losses, but not before they have fixed your tax bracket based on all your winning sessions only.

That is why the tax law is so messed up. A hobbiest who plays moderately high stakes and has a normal income could be pushed way up into the stratosphere of tax brackets or be (as in my case) forced to pay the AMT for just a few thousand dollars of poker income because of the way your gross income is calculated and applied to your day job income.

This year I had to add 6K to my AGI even though I made a combined total of $235 for the year net. That is why I will never cash out again.

+EV

[oldbookguy]

[ QUOTE ]
So it is conceivable that as a "hobbiest" you could earn a gross 100K per year but actually the sum of your winning sessions would be 300K plus.

[/ QUOTE ]

Actually, even as a hobbyist with this difference, 200K, you would file itemized and deduct the 200 k losses as anyone can who has losses enough to make itemizing greater than a standard deduction.

Difference between this and a pro are:
No 'expenses (hotel, computers, travel, ect) may be deducted.
On the flip side, no SS owed either.

obg

[yahboohoo]

I don't think hours worked has any real bearing on the "pro" vs. "not pro" argument. It just doesn't make any sense.

Take a pro basketball player. How many hours a day do they play and/or practice? How many days a week? How many weeks a year?

A consultant can make $150,000 for 3 weeks of work -- and not work for the rest of the year.

A professional speaker may only speak 3-4 times a year but get paid enough to do it for a living.

Professional writers... Crab fisherman... The list goes on and on.

Your tax advisor's claim that pro status is (partially?) defined by 35 hours a week means that anyone not working 1,850 hours a year isn't a professional.

If you made all your money in a given year from poker, you could say you're a professional poker player.

[AZplayer]

Let's agree that just because we think something makes sense or not doesn't have any bearing on what the IRS thinks.

You are preaching to the choir with those arguments... and I made very similar arguments back to my CPA.

I am trying to see if anyone has personal, or direct, or even indirect knowledge or experience in this area.

My CPA looked at actual cases the IRS has brought against people and the 35hrs/week average is a "test" they use to determine if you are able to FILE as a pro in their view. Those other professions don't matter because they can deduct their losses IN EXCESS of their earnings. Only professional gamblers not able to do so and are treated differently.

That having been said, I intend to document my other hours (writing a plan, reading/research/professional development, keeping books, travel time, etc.) and I think I can get there.

Does anyone have any experiences/anecdotes/etc. in this area?

[+EV]

[ QUOTE ]
[ QUOTE ]
So it is conceivable that as a "hobbiest" you could earn a gross 100K per year but actually the sum of your winning sessions would be 300K plus.

[/ QUOTE ]

Actually, even as a hobbyist with this difference, 200K, you would file itemized and deduct the 200 k losses as anyone can who has losses enough to make itemizing greater than a standard deduction.

Difference between this and a pro are:
No 'expenses (hotel, computers, travel, ect) may be deducted.
On the flip side, no SS owed either.

obg

[/ QUOTE ]

Really, cause I thought that once you hit the AMT you no longer deduct?

+EV

[oldbookguy]

You stop SS at I believe around 96K, other income taxes and deductions do not stop.

obg

[Poker CPA]

This is EZ. You're a pro. To bad just out there, couple of weeks ago, we could have had lunch next to the car on top of the slot machine. Facts and circumstances, this is all you do. Pretty simple.

[Merkle]

Precede this with I am no longer a professional tax preparer and I am not a CPA. The following informatin is so you can tell your accountant/tax preparer where to look and how to think about your situation.

If you qualify as a pro poker player and are a sole proprietor you enter your income and expenses on a Schedule C like any other business. And yes your losses can be carried over to future years and deducted from future winnings. You can also claim travel and educational expenses as well as possibly a part of your computer costs, internet costs and a home office if done properly.

The IRS will not let you have losses year in and year out and still claim that you are making a living at it. But if your net over a 3+ year period is reasonable then that would be a good argument for being a pro.

A quote from the 2006 Instructions for Schedule C at the IRS.gov
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

An activity qualifies as a business if your primary
purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.

Your CPA should approach your poker playing the same way he would a chess player. He should use the same criteria to determine if your poker playing is a business as he would to determine if a chess player is a hobbiest or a professional. If you spend enough time on it and make a reasonable income from it, then you are doing it for a living instead of a hobby. Not having another source of income that generates more income on a regular basis would also be a positive argument.

[DrewDevil]

I don't think you can deduct your losses even if you file as a professional gambler.

Are there any CPAs here?

[broiler]

You definitely cannot have a schedule C for a professional gambler with losses exceeding winnings. The case law is clear that the Section 165(d) limit on deducting gambling losses prevails over the Section 162(a) provision for deducting ordinary and necessary business expenses.

For anyone with case access, the cases are: Skeeles vs US (1951), Offutt (1951), and Valenti (1994) TC Memo 1994-384.

The ability to carryover gambling losses to future years is also not allowed because of the above requirement to stop at zero for your Schedule C.

[AZplayer]

Broiler - since you seem to know a bit about this what is your understanding of the 35hr/week "test"? Thanks!

[broiler]

There is no such thing as a 35 hour/ week test, however one of the criteria that is used in Groetzinger to determine a professional is the idea of operating full-time for the purpose of making a living.

Castagnetta (TC Summary Opinion 2006-24) is a case where the taxpayer was a part-time truck driver and was allowed to file as a professional gambler. The case states that he spent 40 hours/week betting and handicapping horse races. Therefore, the specific act of gambling was not the only thing considered in time spent on the activity.

The problem that you run into is that these cases are always at the extremes of gambling. You either find someone with 5-10 hours being deemed a hobby or someone well into full-time being deemed a professional.

Your idea to document everything that you do to further your gambling activity is easily the most important action in your case. In fact, documenting activities and planning are one of the considerations for a professional that cases will use.

[Poker CPA]

Broiler

Any benefits to the accrual basis of accounting? Or are you totally "locked into" cash basis?

[broiler]

I don't know why you would want to beat a dead horse. Russ Fox and I already gave you a full list of reasons and explanation of how cash is pretty much the only basis of accounting for professional gamblers.

[Merkle]

Without doing additional research I would accept Broiler statement that losses don't carry over.

Was there anything else I said that was incorrect?

[Shoe]

There is not a 35 hour per week requirement. However, this is definitely a grey area and 35+ hours per week would definitely help your case to file as a pro.

The first year I filed as a pro, I had worked about 6 months full time, and had about 6 months of poker playing full time. My tax advisors reviewed my documents (I don't know the exact number of hours I played but it was all documented), and found a similar case to mine where you are allowed to have a full time job and still file as a pro.

I believe the only requirements the IRS lists on their website is that you need to prove that you are putting in a significant amount of time where the sole purpose of that time is for profit (i.e., not for fun/hobby). If you are playing a lot of hours and that is your main/sole source of income, you can definitely file as pro.

Otherwise, do kids who work part-time at McDonald's get to file that income as a hobby because they only worked 20 hours per week? That arbituary 35 hours per week could be used as a guideline, but is by no means written in stone. Hell, most of the "full-time pro's" here don't even get 35 hours per week in.

Edit: adding to what broiler said, I'm not sure if the case he referenced is the same one my accountant found or not. Also, you may want to consider time spent studying the game, reading these boards as time spent towards your profession.

[MegaDisgruntled]

I hate this forum, just buy this book and you will not need anything else.

http://www.amazon.com/Turn-Your-Poker-Playing-Business/dp/0977486206

[broiler]

The best case for working and being a professional poker player at the same time would probably be Tschetschot (TC Memo 2007-38). Mrs. Tschetschot had a full-time job that paid $49k and played in nine "poker series" tournaments. She won $13k playing poker and had losses and expenses in excess of that amount. The Court deemed her to be a professional despite the time and money difference between her poker income and regular job.

[Russ Fox]

[ QUOTE ]
That is why I will never cash out again.

[/ QUOTE ]

Cashing out has absolutely nothing to do with whether or not you have gambling income. If you're an online player, your winnings on the site(s) during the year determine your gambling income.

The tax rules for gambling are, in this case, very clear.

-- Russ Fox

[Russ Fox]

A big issue that impacts the o.p. is whether or not he wants to file as a professional. Professionals pay the self-employment tax, amateurs don't. Many gamblers find that being a professional causes their tax bills to increase.

Indeed, the IRS has finally figured out, after years of resisting almost anyone filing as a professional gambler, that they can collect quite a bit of money by forcing many to file as professional gamblers. The IRS has a program where they examine returns to see if gambling income is the primary source of income (i.e. taxpayer's livelihood), and the taxpayer is not filing as a professional. The IRS send out a letter audit to those individuals. There have been several 2+2 posters who have written about this in the past.

The best advice I can give is what the o.p. has done--discuss this with your own tax professional as everyone's situation is different. He or she can evaluate what you should or shouldn't do.

-- Russ Fox

[Poker CPA]

Broiler

Please, the tax advantages of cash over accrual for the pro poker player.

[broiler]

I agree completely with your point about the desires of the OP as to how he and his tax advisor should proceed. His line of questioning led me to believe that he wanted to file as a professional and that his goal was to make sure that he met any existing requirements.

I've found in the last 5 years or so that the IRS treats any significant amount of income listed as "other income" as subject to SE tax. Sure, it catches people that clearly have only one source of income and are likely professionals, but it also catches a significant number of recreational players. This process lets the taxpayer correct the problem through fighting a notice, rather than have the IRS try to make an honest determination of who should file as a professional.

[Poker CPA]

Merkle:

A serious and experienced poker poker NEVER allows losses to expire on Dec 31st. They are simply worth too much in tax benefits (ie CASH). Only poker players with bad tax advisors let this happen to them. Talk to someone with experience and he'll tell that you were, in fact, correct.

[BGnight]

According to my CPA, as a pro I am paying 17% federal, 9% state, and 15% self employment tax. That's over 40% of my net I'm paying in taxes!!! Therefore I am trying NOT to file as a pro. Yes, I'm not gonna be honest about how I win my money. I don't play the deduct wins vs losses crap, since it's nearly impossible to define sessions w/ online poker. My CPA is just having me net my wins and filing on a 1040. If the IRS tries to make me file as a pro, I just tell them I won the entire amount in one donkament. No records, no proof. They have to believe me.