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No Such Thing as Free Swag

3 min readBy: Austin John, Liz Malm

Last week, ESPN hosted its annual ESPY Awards (“Excellence in Sports Performance Yearly”), where athletes were awarded for outstanding performance during the past year. Most of the celebrity presenters and nominees were given the highly-anticipated gift bag—a swag bag that is filled with everything from two night stays in Cabo San Lucas, Maui, and Aspen, to sailing lessons and luxury pet products (take a look at the detailed list here). The estimated value of products and services contained in the whole bag is $25,000.

What the lucky recipients may not know is that these items are considered to be taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. by the IRS. That means any recipient of this gift bag will be taxed as if they received $25,000 of additional income. This may seem like a drop in a bucket to wealthy athlete, but it’s important to remember that not all professional athletes earn seven- or eight-figure incomes. Maya Moore, a WNBA basketball player for the Minnesota Lynx, made a modest $47,000 in her rookie year. The maximum salary a WNBA player can earn in 2013 is $107,000—that’s a lot less than the multimillion dollar salaries we traditionally associate with professional athletes.

On their “Gift Bag Questions and Answers” page, the IRS argues that even though these are technically “gifts,” they must be treated as taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. able income for the following reason:

These gift bags are not gifts for federal income tax purposes because the organizations and merchants who participate in giving the gift bags do not do so solely out of affection, respect, or similar impulses for the receipts of the gift bags.

In the case of the Oscars, companies will pay a hefty sum to have their products included in the bags, likely because it could result in a celebrity endorsement:

Not only are the companies included in the package giving away things for free, they're even paying big bucks for the right to do…Distinctive Assets, the marketing firm that puts together the gift, charges brands a minimum of $4,000 — and up to $20,000 — to be included in the basket…Despite the financial risks, many brands still spend their entire annual marketing budget… in the hope of finding just one influential person to embrace their product.

But even so, there is a big problem with the policy of taxing gift bags in general. The IRS also makes assumptions regarding the consumption of the bag’s contents by the recipient. The agency assumes they will consume the entire bag despite the fact that many of the services may never actually be used. CPA Practice Advisor reported on the consumption of some of the more obscure items in recent years’ Oscar swag bags:

[M]ost of the big-ticket items in the post-Oscar gift basket aren't even redeemed. Last year, interior designer Seyie Putsure offered a gift card worth $10,000 toward a design consultation for three rooms in a star's home. Only Jessica Chastain took her up on it. In four years of giving away $20,000 African safaris for two, Premier Tours only had one Oscar nominee turn up on the exotic getaway.

Just because an item ends up in the gift bag doesn’t necessarily mean the recipient will use it. Taxing them as if they did is unfair.

More on jock taxes here.

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