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View Full Version : Are Rebates Taxable?


Track Collector
12-07-2012, 04:52 PM
This is a topic I have struggled to reach an understanding on. Someone mentioned on another thread that they thought rebates were NOT taxable. I am of the current mindset that they are taxable, or that it might be a gray area where no definitive ruling has been reached because no one has challenged it in tax court. I have started this thread with the hope of generating some meaningful dialog on this topic.

I recognize the sensitivity of this issue, and understand that those whom are involved with rebates, and even more specifically those whose wagering activities put them in the professional/business category, might be uncomfortable sharing info in a public forum. Should that be the case, private messages are an acceptable alternative.

Now on to specifics....

On the side supporting the "rebates are not taxable" position, one could try to make a comparison to the credit card business and their cash back programs. Rebates are discounts in the purchase price, which is not the same as income. I am of the understanding that the IRS does not currently consider cash back as taxable income.

On the side supporting the "rebates are taxable" position, one could say that if you believe this, then your "winnings" are really higher than what we report. Let me explain this using an example from the commercial world. A store purchases a product from their supply chain for $1.00, then sells it to the public for $2.00. Their gross profit would be $2.00 minus $1.00 = $1.00. Now let's say that the store met certain sales goals and in response their supply chain subsequently offered them a rebate check amounting to $0.25 for each product purchased. I would think that their gross profit is now $2.00 minus $0.75 = $1.25. So how do we equate this to the racing world?

Normally, it might be said that we wagered $2.00 to win on a horse that paid $6.00, and thus had a "profit" of $4.00. Now using a track where the win takeout is 20%, only $1.60 of our money actually went into the pool from which winners are paid, so could we not technically say that our winnings were $6.00 - $1.60 = $4.40? Maybe this type of thinking is too bizarre! I guess under this explanation, the $0.40 that did not go into the wagering pool, minus the rebate we received, could then be classified as "expenses". ;)

Although I'm sure how much sense it makes, you could even take the position in the above example except that winnings are $4.00 like the usual way, and you still get to use the portion of the $0.40 takeout that was not rebated to you as expenses.

Of course none of the above is relevant if a person has a year where the winnings plus rebates are still less than the wagers (i.e. has a losing year). Negative wagering results can not be carried over to off-set other income :mad:, and for reporting purposes, they are reported as zero on the tax form.

So, handicappers (or even merchants who encounter product rebates), what do you think?

Dave Schwartz
12-07-2012, 05:32 PM
The only thing taxable (by the federal government) is NET result.

State by state results may differ.

Robert Goren
12-07-2012, 05:43 PM
In your example were $ 2.00 is wagered and horse paid $6.00 with $4.00 profit and then you are rebated $0.40. The simple fact is that you are $4.40 richer than you were before you won the bet. No matter how you figure it, you are going to pay taxes on the $4.40. You are not going get out paying the taxes on the $0.40. You can argue till the cows come home, but you aren't win this one with the IRS.

Dave Schwartz
12-07-2012, 07:51 PM
Goren,

If, over the course of a year, you wagered (say) $10,000, returned $8,000 in payoffs and $1,000 in rebates, you are $1,000 loser.

You are not required to pay any tax on that money. If you have had winnings withheld, you can get them back, providing you can prove your net wins and losses.


Regards,
Dave Schwartz

JustRalph
12-07-2012, 07:53 PM
The only thing taxable (by the federal government) is NET result.

State by state results may differ.

Exactly. Unless your In a state where they don't let you deduct losses.

Mass? There are some.

Dave Schwartz
12-07-2012, 07:59 PM
Of course that would only apply to the state's taxation.

Track Collector
12-08-2012, 01:32 AM
The only thing taxable (by the federal government) is NET result.

Yes, except if you are not allowed to file as a professional handicapper.

If you are a recreational handicapper (i.e. one who does not qualify to use schedule C), who has significant wagering handle, you may have an additional sizable tax liability based on the the total amount of your wagering activity, regardless of whether that amount results in a profit or loss.

How can this be? First, one must recognize that the IRS does not allow net reporting, but instead requires one to report the sum of all returns and the sum of all losing wagers as separate entities. The recreational handicapper can only deduct their losses (up to the extent of their winnings) on schedule A and their returns or winnings get added to their AGI (Adjusted Gross Income) totals. Once AGI reaches a certain amount, you will loose partial or even all tax benefits of some other deductions you would have easily qualified and received credit for had you not engaged in wagering activity. A professional (defined by one who is qualified to use schedule C) can use subject form for the required separate reporting of winnings and losses, so their AGI is affected by the significantly smaller net rather the gross wagering amount. Thus, they keep all/most other deductions by not drastically altering their AGI.

The link provided below will have some interesting info with regard to this topic. Of particular interest is the section titled "The New Hidden Cost for Recreational Gambling" found toward the middle.

Even further down, a hypothetical example is given, and for that specific situation, the extra tax liabilities are as follows:

Yearly Handle = $10,000 --> The extra tax liability is $93
= $100,000 ---> $4,139
= $200,000 ---> $7,393
= $500,000 ---> $10,183

I recognize that for most folks, this issue will be of little concern to them. However, there could be a few folks who due to lack of knowledge, could be at significant risk. I have shared this information in the hopes that through an improved understanding, they might want to consider an alternate approach to what they have been currently doing. Remember, these extra tax liabilities are in effect even if the net from your wagering activities is zero or a loss.

Choosing to not report is always an option, which I do not recommend. That said, I am not here to judge or report anyone. What you should consider is that if you choose to not report and later are found out, your friendly taxman will require you to pay the extra tax liability (as calculated for your specific financial situation). They will also give you an additional significant penalty to encourage you and others not to do it again.

As I have stated before, tax laws are even more harsh on the average and/or recreational gambler. Whether you believe choose to believe it or not, the referenced material indicates that the above-mentioned extra tax liability for recreational gamblers was an unintended consequence of another law passed in 1990.

Now the link:
http://professionalgamblerstatus.com/pollack.htm


Chris


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