The Super Bowl tax trap: Why tax planning matters for business owners nearing exit

When Seattle Seahawks quarterback Sam Darnold helped lead his team to a Super Bowl victory at Levi’s Stadium in Santa Clara, California, the headlines weren’t just about the game. Within hours, financial reporters were running a different kind of scoreboard: by some media estimates, the California tax attributable to Darnold’s Super Bowl duty days could exceed his $178,000 winner’s bonus, creating the appearance of a net loss of roughly $71,000 for that specific event (though not for his overall income).

To be clear, Darnold’s overall compensation is substantial, and this was one slice of a much larger financial picture. But the story illustrates a principle we emphasize to every business owner we work with at Modern Wealth: the tax consequences you don’t plan for are the ones that hurt the most, especially when a major liquidity event is on the horizon.

The stakes are real. In some cases, combined federal and state taxes can consume 20% to 40% of business sale proceeds without proactive planning, depending on entity structure, state exposure, and timing. That gap often represents the difference between the retirement you envisioned and one that requires compromise. If you’re a small business owner who’s 5 to 10 years away from selling your business or transitioning into retirement, this story isn’t just entertaining. It’s a case study in what happens when tax planning is reactive instead of proactive.

Let’s break down what happened to Darnold and, more importantly, what it means for your exit strategy, your after-tax proceeds, and your retirement income.

How the “California jock tax” actually works

Most people assume California only taxed Darnold on his $178,000 Super Bowl bonus. The reality is more aggressive. California taxes a share of a non-resident’s total allocated season income, not just the event-specific bonus. It does so using a “duty days” formula:

A “duty day” is any day you’re working in your professional capacity: practices, team meetings, travel days, media obligations, and game day itself. Reports estimated that Darnold accumulated approximately 8 duty days in California during Super Bowl week.

The math behind the headlines

Assume a player has 200 total duty days in a season and spends 8 in California for the Super Bowl. That gives California a 4% claim on his entire season’s compensation, not just the bonus. If total compensation is $20 million, California would treat $800,000 as taxable income. At California’s top marginal rate (currently 13.3%, which applies only to income above approximately $1 million), that’s roughly $106,400 in state tax from a single week of work.

In Darnold’s case, media estimates placed his California tax liability at approximately $249,000, while the winner’s bonus was $178,000. By that math, the bonus alone would not cover the California tax triggered by being there, creating an apparent shortfall of roughly $71,000 for that specific event. It’s important to note that this doesn’t mean Darnold’s overall income for the year was negative. The tax was calculated against his full allocated season compensation, not just the bonus.

Two factors make this especially significant for high earners. First, because the formula applies a percentage to total compensation, the larger the contract, the larger the tax. Second, if you reside in a state with no income tax (like Texas, Florida, or Washington), there’s typically no home-state credit to offset what California charges. In those cases, the California tax becomes a pure additional cost.

Why this should matter to every business owner planning an exit

The jock tax makes for compelling sports headlines. But here’s what most people miss: the exact same dynamics apply directly to small business owners approaching a sale or exit. Unexpected tax exposure, income allocation across jurisdictions, and the outsized impact of taxes on a single large financial event are all risks that business owners face just as acutely as professional athletes.

If you’ve spent years building transferable value in your business and you’re within 5 to 10 years of turning that value into a liquidity event, the tax strategy you put in place when selling your business will determine how much of that value you actually keep. For many privately held companies, a significant portion of lifetime wealth is realized in a single, highly taxable transaction. Just like Darnold’s tax bill wasn’t about the bonus (it was about how his total compensation was allocated), your tax bill at exit won’t just be about the sale price. Your after-tax proceeds from selling a company are shaped by years of planning, or the lack of it.

In many exits, what you keep after taxes matters more than the headline sale price.

The tax traps lurking in your business exit

As an independent, fee-only fiduciary firm, Modern Wealth has no incentive other than our clients’ best interests. We see the same costly tax issues surface repeatedly when business owners begin preparing for an exit:

5 tax mistakes that can erode business sale proceeds

• Asset sale vs. stock sale structure: The way your business sale is structured can mean the difference between capital gains treatment and ordinary income rates. Buyers and sellers often have opposing interests here, and the tax impact can swing by hundreds of thousands of dollars.
• Entity structure optimization: Is your business organized in the most tax-efficient way for a sale? S-corp, C-corp, and LLC structures each carry different tax consequences at exit. Restructuring takes time (sometimes years), which is why planning 5 to 10 years out is critical.
• Installment sale and earn-out planning: Spreading sale proceeds over time can defer taxation and potentially reduce lifetime effective tax rates through bracket management, net investment income tax (NIIT) thresholds, and IRMAA avoidance. However, the terms need to be negotiated and structured properly before the deal closes.
• State and multi-state tax exposure: Just like the jock tax, your business exit may trigger tax obligations in states where your company operates, has employees, or generates revenue, even if you don’t live there.
• Qualified Small Business Stock (QSBS) exclusions: If your business qualifies, Section 1202 may allow you to exclude up to $10 million in capital gains from federal tax. But the requirements are specific, and the planning must start well before the sale.

Every one of these issues is manageable with the right planning. But like Darnold’s tax bill, the cost of not planning is often far larger than people expect.

If you’re within 5 to 10 years of an exit, the window for high-impact tax planning is now. Quantifying and working to reduce your future tax burden often requires action years before a deal is on the table. The earlier you start, the more options you have, and the more of your life’s work you may be able to keep.

Building transferable value with tax efficiency built in

At Modern Wealth, we believe that growing the value of your business and planning for tax efficiency are not separate goals. They’re two sides of the same coin. The steps you take to increase your company’s transferable value (the value a buyer is willing to pay for) should be coordinated with a tax strategy that protects that value when it’s time to sell.

This means asking questions now that many owners don’t ask until it’s too late: How will the proceeds be taxed? What can we restructure today to improve the outcome in five years? Are we maximizing retirement plan contributions that also reduce taxable income? Are there charitable strategies, like a donor-advised fund or charitable remainder trust, that align with your goals and help reduce taxes on a business sale?

The business owners who walk away from a liquidity event feeling confident aren’t necessarily the ones who got the highest sale price. They’re the ones who kept the most after taxes.

From liquidity event to tax-efficient retirement income

Selling your business is a milestone, but it’s not the finish line. It’s a transition. For many owners, the real objective isn’t simply selling a business. It’s gaining the freedom to choose how they spend the next chapter of life. The wealth you’ve built needs to fund a retirement that could last 25 to 35 years, and how you manage the tax implications of that transition will shape your quality of life for decades.

This is where many business owners stumble. After years of reinvesting in their company, they suddenly have a large pool of liquid capital and a whole new set of tax challenges. The decisions you make in the first few years after a sale about where to hold those assets, how to draw income, and when to take distributions can potentially save (or cost) hundreds of thousands of dollars over the course of a retirement.

Key tax-efficient retirement income strategies

Creating tax-efficient retirement income is a core part of what we do at Modern Wealth. Here are some of the strategies we use, in coordination with your CPA and legal advisors, to help business owners who’ve completed an exit keep more of what they’ve earned:

• Roth conversion planning: In the years immediately after a business sale, your income may temporarily drop before required minimum distributions begin. This creates a window to convert pre-tax retirement funds to Roth accounts at a lower effective rate, which may reduce your lifetime tax burden over a 25-year retirement.
• Tax bracket management: By carefully controlling which accounts you draw from each year (traditional IRAs, Roth accounts, taxable brokerage accounts), you can smooth your income to stay in lower tax brackets and avoid triggering surcharges like IRMAA on Medicare premiums.
• Social Security optimization: When you begin collecting Social Security affects not just the benefit amount but how much of it is taxable. Coordinating the timing with your other income sources is a significant tax planning lever.
• Charitable giving strategies: Qualified charitable distributions from IRAs, donor-advised funds, and bunching strategies can turn your philanthropic goals into meaningful tax savings during retirement.
• State residency planning: As Darnold’s story illustrates, where you live and where your income originates can create a substantial difference in after-tax wealth. For business owners who relocate in retirement, proper residency planning helps ensure you don’t pay more than you need to.

None of these strategies happen by accident. They require a coordinated, year-round plan that integrates your investment management, income projections, estate considerations, and personal goals, updated annually as your situation evolves.

Tax planning is an annual discipline, not a once-a-year afterthought

Too many people, including successful business owners, think of tax planning as something that happens in April. In reality, the most impactful tax decisions are made during the year, not after it’s over. By the time you’re filing your return, most of the moves that could have reduced your tax burden are off the table.

Whether you’re five years from selling your business or five years into retirement, proactive tax planning means regularly evaluating your income sources, timing of deductions, retirement contributions, investment gains and losses, multi-state exposure, and charitable giving. Each represents an opportunity to legally reduce your tax burden, but only if you plan ahead.

Sam Darnold’s Super Bowl tax situation was foreseeable. California’s rules aren’t a secret. The duty days formula has been in place for years. The difference between owing a surprise tax bill and having a plan for it is the same difference that separates business owners who are prepared for their exit from those who are blindsided by it.

How Modern Wealth helps business owners plan for what’s next

Modern Wealth is an independent, fee-only fiduciary advisory firm. We don’t earn commissions, and we don’t sell products. Our only obligation is to act in your best interest, and that commitment shapes everything we do, from investment management to integrated, tax-aware exit and retirement planning. We provide financial planning and investment advisory services but do not provide tax preparation or legal advice.

We specialize in working with small business owners who are 5 to 10 years from exit, helping them grow transferable value, prepare for a successful liquidity event, navigate the transition into retirement, and build a tax-efficient retirement income plan designed to last. As your exit planning advisor, we coordinate with your CPA, attorney, and other advisors to make sure every piece of your financial plan is working together, not in isolation.

Because the cost of fragmented planning is exactly what the jock tax story illustrates: a tax bill you didn’t see coming, for an amount you didn’t expect, at the moment it matters most.

When should you start tax planning before selling a business?

The ideal planning window is typically 3 to 10 years before a potential sale. Starting earlier expands the range of available tax-reduction and structuring strategies, many of which require time to implement and cannot be applied retroactively once a transaction is underway.

Disclaimer: This blog post is for informational purposes only and should not be construed as tax, legal, or financial advice. Tax laws and regulations are complex and subject to change. The examples and illustrations provided are hypothetical and do not represent specific client outcomes. Please consult with a qualified tax professional and legal advisor regarding your specific situation. Modern Wealth LLC is a fee-only registered investment advisory firm. Modern Wealth LLC does not provide tax preparation or legal services.