New Tax Bill to Cost College Athletics

The tax bill that has passed the House and Senate will have wide-ranging impact on the college sports world if, as expected, President Trump signs it into law.

Major-college athletics programs are facing significant increases in the cost of already highly paid coaches and administrators due to a tax that will be imposed on the compensation of all non-profit organizations' most highly paid employees. For example, as currently constructed, Alabama's contract with football coach Nick Saban likely will cost the university at least $1.2 million in addition to the $7.125 million in basic compensation he is scheduled to be paid if he remains the Crimson Tide's coach throughout the 2018 calendar year.

Meanwhile, athletics departments will have to mitigate potential fallout from the elimination of tax deductions that donors have been able to receive for contributions tied to rights to purchase tickets and that businesses have been able to receive for entertainment costs such as taking clients to sports events.

Another potential wrinkle is a change in the rules governing taxation of income from non-profit organizations' unrelated businesses. In the collegiate setting, this could affect revenue from sports camps, a university golf course or a sports medicine/physical therapy center that is open to the public.

Overall for schools, "this is going to cost hundreds of millions of dollars a year," said Tom McMillen, a former congressman who is now president and CEO of the LEAD1 Association, which represents athletics directors at schools in the NCAA's top-level Football Bowl Subdivision. "It's literally half a College Football Playoff (worth of money). When you put it at that kind of magnitude, it wakes you up a little bit."

It also shows why college sports administrators are not likely to get a lot of sympathy as they go forward under the new tax rules.

The College Football Playoff paid out $441 million last year, according to NCAA financial records.

Like other non-profit organizations, colleges will be responsible for paying a 21% excise tax on annual compensation above $1 million that goes to any of the organization's five most highly compensated employees. The tax is set to take effect on compensation earned, beginning Jan. 1. It also will be applied to certain types of what the legislation calls "parachute payments," or separation payments such as a buyout. At many FBS schools, coaches and/or the athletics director are among the institution's five highest-paid employees and making more than $1 million.

"That's not tax reform — that's trying to discourage seven-figure payments to college sports figures and pick up a little revenue," said Duke law professor Richard Schmalbeck, a longstanding critic of the deduction for college sports donations that provide seat-purchase privileges.

According to data compiled by USA TODAY, in the sport of football alone there are 90 head or assistant coaches making more than $1 million this season. It's possible not all of those coaches are among their respective schools' five highest-paid employees, and certain forms of deferred compensation will not be subject to the excise tax. But based on pay for the 2017 season, 65 public schools would have faced a combined total of about $30 million in tax just for their football coaches. (Private schools will be subject to the tax.)

Cincinnati AD Mike Bohn said Tuesday: "We were doing some quick math on this today, and (with the compensation being paid to men's basketball coach Mick Cronin and football coach Luke Fickell) it's half-a-million dollars."

Iowa State AD Jamie Pollard estimates his school is facing $700,000 in additional costs from this provision.

"That figure will have to either be passed on to ticketholders and donors, or taken out of the budgets of sports that are not ... being targeted by the federal government," Pollard said in an email. "It is ironic that the compensation paid in those two sports, by sheer market pressure, will actually now generate an additional financial burden for athletics directors to try and solve in our industry. It will be interesting to watch the new wave of creative ideas and suggestions that will be developed by lawyers, agents and financial advisers, to try and get around the new excise tax."

That process already is underway, according to Roger Denny, a St. Louis-based lawyer with Spencer Fane LLP whose practice areas include representation of coaches, ADs and schools.

"Our athletic director/university clients are certainly asking about this and other issues in the bill, and we've been asked to start consider ways to mitigate the effects of the tax," said Denny, who assists USA TODAY with the compilation of its coaches' compensation surveys.

Pollard said he believes many ticket buyers will retain their seats even with the elimination of the deduction for donations connected to those purchases. He said the increase in the standard deduction might offset the loss of the itemized deduction.

But Marc Ganis, a sports business consultant who used to work with colleges but now focuses on pro sports, had concern about not only the mathematic effect but also what he called "the perceptive effect."

"Certainly one of the things used to market (season tickets and suites) is the deductability," he said. The loss of the deduction "may chill the sale to some people even more than the actual additional cost," which, for businesses, might not be that significant because business-tax rates are being lowered.

Even before the legislation passed in Congress, some athletics departments were reaching out to donors to act while the deduction remains available. In a posting Tuesday on Baylor's athletics website, AD Mack Rhoades wrote: "(W)e encourage you to consider completing your 2017-18 Bear Foundation commitment and/or pre-paying for 2018-19 before December 31, 2017, in order to claim the maximum deductions from your giving."

The end of the business-entertainment deduction could impact pro sports franchises, as well. "Everyone is going to feel it," Ganis said. "Pro, collegiate. Operas, symphonies — they all sell seating rights."

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