During his time as a professional basketball player in Europe in the 1990s, sports accountant John Karaffa witnessed firsthand how complex taxes could get between cities, states and countries.
Frustrated by the inadequate services provided by many accounting firms, he believed that creating a niche firm exclusively focusing on athletes and entertainers was essential to address their unique needs. As a result, Virginia-based ProSport CPA is an accounting firm of 25 employees composed of multistate and multicity tax experts, with a deep understanding of the athletic world.
Karaffa said a sports accountant needs a vast background in international taxes because of the global nature of sports, with a keen fluency in corporate taxation and charitable foundations. Sports accountants also need to understand the relationship between clients and the businesses they run, for example between a sports team owned by an entertainer or a production company run by an athlete. This is why Karaffa believes a synergy between sports and entertainment is necessary, while appreciating that both groups remain very different.
"Professional athletes and entertainers are at the top of their game and they excel at what they do, so it's not surprising they expect the same from their accountants," he explained. "I always said that pros should only work with pros, which is why we have numerous processes in place to make data collection easier for our clients."
According to him, it truly takes several decades of experience to be comfortable with the complexity of sports accounting, because clients generally have very high net worth and a lot of money is at stake. Consequently, tax professionals learn to leverage the knowledge they've gleaned from other teams playing in the same region to provide the best answers, while at the same time remembering the differences between a team sports athlete and someone playing solo.
For example, National Basketball Association and Major League Soccer players all have similar tax situations, while fighters, tennis players and models who basically own their own companies and where a loan-out company could be involved. After serving over a thousand clients over the years, Karaffa said accountants learn how to optimize their clients' tax situations based on their experience and should keep in mind that their clients' careers generally have a short lifespan.
"These high-net-worth individuals are involved in many jurisdictions with a lot of moving parts, almost forming a triangle on some of these tax returns," said Karaffa. "So it often forces us to use every bit of our knowledge in different areas to make sure they pay the lowest legal amount of tax possible, and my team does a great job at that."
ProSport CPA prides itself on asking questions that no other firm has asked athletes, which Karaffa attributed to the rigorous training its sports accountants go through. He said the secret to success is getting clients involved in the process as much as possible, so they understand what's going on before signing anything. To fill out U.S. tax returns and declare worldwide income, accountants have to know how much in taxes athletes have been paying in other jurisdictions, and an effective client relationship is essential to that.
According to Karaffa, federal, state and city tax laws change constantly, especially in recent years with COVID relief programs. That calls for a lot of niche expertise, and Karaffa said it takes a lot of passion to work in a firm like ProSport CPA and it's fulfilling to see his clients succeed in the world sports arena. With the majority of his team being avid consumers of sports and entertainment, he added that knowing that some of their favorite athletes and entertainers don't need to worry about their taxes is gratifying, especially considering that taxes are many athletes' greatest expense.
"I definitely don't want the focus to just be on me as an individual because it's a 25-person effort and it takes an entire team to serve the clients we have," said Karaffa. "It's just like sports: There is no 'I' in team, and it takes a lot of different skill sets beyond traditional taxes. Everybody understands the service aspect of what we do and how important it is, which is why our business keeps growing by word of mouth."
This is the latest installment in our "Riches in Niches" series of accounting firms that are finding success in specific verticals. You can see other installments here:
