The 2018 Reebok CrossFit Games just came to an end. There are many categories of competition, but the main draw is the individual competition for men and women.
The two winners are deemed “The Fittest (Man or Woman) on Earth.”
In the men’s category, the winner for the third year in a row is Mathew Fraser (an American from Tennessee). In the women’s category, the winner for the second year in a row is Tia-Clair Toomey (an Australian from Queensland).
The winner in each category is awarded a main prize of $300,000. There are other awards for winning individual events and of course endorsement deals for clothing and shoes.
Since athletes from around the world come to the U.S. for the competition, any foreign athletes who win are generally subject to U.S. taxes on their awards. Assuming we just focus on the main award of $300,000 and consider the perspective of a nonresident alien (NRA) individual such as Ms. Toomey, what is the most U.S. tax-efficient method for her to receive this income?
To make this tax analysis simple and straightforward, I am removing any discussion or analysis related to the U.S.-Australian tax treaty and to tax rules for professional athletes. I am looking at this solely as an NRA who will receive $300,000 of U.S. compensation (as an independent contractor or self-employed person).
My first question would be the following:
As an NRA, can Ms. Toomey take advantage of Internal Revenue Code §199A (brand new for 2018), which allows a business deduction of up to a 20%?
The answer is yes. There are no prohibitions against an NRA taking advantage of §199A. But the income would need to “Qualified Business Income” (QBI). To be QBI, it would need to be income that is “effectively connected with the conduct of a trade or business within the United States.” Since the earnings were made in Madison, Wisconsin, while Ms. Toomey was conducting her trade, the earnings are QBI for purposes of §199A.
What is the benefit of §199A?
IRC §199A allows a deduction of 20% of the taxpayer’s QBI.
Example (assuming the highest tax rate):
Taxable income of $300,000 x 37% = $111,000 tax
Taxable income of ($300,000 – $60,000 (QBI Deduction)) x 37% = $88,800 tax
Savings = $22,200
But wait, there is a twist here.
Ms. Toomey’s profession as an athlete makes her a “Specified Services Trade or Business.” This means that she is only able to benefit from IRC §199A if her taxable income is below a specified threshold limit.
For individuals, the threshold limit for the full 20% deduction is $157,500. However, a partial deduction is available for individuals with taxable income between $157,000 and $207,000 (the deduction phases out over this range).
This means that if Ms. Toomey were to receive the entire $300,000, then she would be completely phased out of IRC §199A and unable to claim any of the QBI deduction.
But is there a way she could still receive a tax break on her earnings under IRC §199A?
The Benefit of Establishing a U.S. Partnership
What if Ms. Toomey were to create a U.S. domestic partnership with her NRA trainer/husband, Shane Orr?
Assuming she prearranged everything correctly, she could have the payout of $300,000 paid directly to the partnership. The partnership would then have to withhold 37% of tax ($55,500 of withholding tax for each partner). The partnership could then distribute the remaining $189,000 to each of the partners. On the partner K-1, each partner would show $150,000. Each partner would then file a 2018 Form 1040NR tax return in 2019. Because the income received is below the §199A threshold, the 20% deduction under §199A would apply. The taxable income would then be reduced as follows:
- Assume taxable income is $150,000 for each spouse
- QBI deduction = $30,000
- Adjusted taxable income = $120,000
- $120,000 x 37% = $44,400 tax each x 2 spouses = $88,800 total tax
- Savings = $22,200
This is a huge savings to Ms. Toomey and Mr. Orr, but more importantly, it is something to consider if you are an NRA who is earning compensation (not as an employee) in the United States.
In my next blog post, I will look continue forward with this example. Ms. Toomey owns a CrossFit gym in Queensland called CrossFit Gladstone. I will assume that based on her back-to-back wins at the CrossFit Games, Ms. Toomey would like to open CrossFit gyms in the United States, become a U.S. tax resident, continue to run the gym in Queensland, and open new gyms in other locations. What outbound planning structures would work well for this set-up? What aspects should she consider under the new GILTI provisions? How would QBI work for her U.S.-sourced income? Are there are any planning structures to improve the QBI result?
 IRC §199A(c)(1)
 IRC §199A(c)(3)(A)(i)
 It is important to note here that Shane Orr is Ms. Toomey’s full-time trainer during the calendar year and at the Games works overtime with both trainer and coach functions for Ms. Toomey.
 This would obviously not be taxed at 37%, but I am sticking with it to make the comparison simple.
 Shane Orr + Tia-Clair Toomey
 $111,000 – $88,800
 Example – A G4 visa holder spouse who has a small business LLC reported on Schedule C.