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Dec
23
2017

New Tax Law and the Impact on Athletic Fundraising

 

Good evening, Atlantic Coast Conference (ACC) fans.

Hope you are having a great holiday season.

Seat Donations

Today, the President recently signed tax legislation – and there are two very significant changes to the tax code that will impact college athletics.  First, Forbes summarizes the current law governing tax deductions directly tired to the right to purchase tickets for athletic events and how the next tax law removes this deduction entirely: 

“…the payor may treat 80 percent of a payment as a charitable contribution where: (1) the amount is paid to or for the benefit of an institution of higher education…and (2) such amount would be allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) as a result of the payment the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.”

The new tax law will essentially remove that 80% deduction entirely; any contributions that are linked to the right to purchase season tickets will no longer be considered charitable donations. It’s a very common practice for athletic departments to require donations before alumni are able to purchase season tickets. To get an idea of just how significant the total impact will be, the House Ways and Means Committee projects the adjustment will net the government $200 million per year.

While it is too soon to know the impact of this tax law change on universities and to make any projections on lost donation revenue, there clearly are some universities that are worried about this change.  From The Morning Call:

Even a small decline could hurt many schools. The University of Virginia receives roughly $20 million in annual athletic donations tied to seat priority, and it still needs millions in student fees to cover its costs. The department doesn’t anticipate getting any more help.

“We have zero room for error,” said Dirk Katstra, executive director of the Virginia Athletics Foundation.

Like their peers around the country, UVA administrators are working with the university’s governmental affairs team to lobby local senators and representatives.

Those good seats at the KFC Yum Center for a UofL basketball game require a $2,500 donation. Under the current law, the alumni donor can deduct 80% of that cost.

But with the new law, that’s over. Any contributions linked to the right to purchase season tickets will no longer be considered charitable donations.

WAVE3 News reported that the University of Louisville is still feeling out the impact of the tax law change:

In the 2015-16 fiscal year, more than $30 million in contributions were made to UofL athletics.

Athletics departments at schools like the University of Louisville are wondering what this will mean for their donor pool.

Interim UofL Athletics Director Vince Tyra is hoping people are more passionate about the players than their pocketbooks.

“It’s hard to calculate what the ramifications are going to be right now,” Vince Tyra said.

UofL is also looking at a loss of donors due to the recent controversies surrounding its basketball program. The university has sent letters to donors informing them of the change to the tax law.

“Most of these donors are supporters. When I say supporters, they are supporters of the program. They care about the kids and wins and losses as much as they do tax deduction,” Tyra said.

According to Forbes, donor contributions are 27% percent of Louisville’s athletic revenue.  Forbes provided an example regarding the impact of a 15% drop in contribution revenue:

Not all contributions are tied to season tickets, but those numbers give an idea of just how important that revenue stream is to the nation’s top athletic departments. Even a 15% dip in contribution income would cost Louisville some $5 million, and a far bigger drop isn’t inconceivable once you consider just how much money top schools require from season-ticket donors.

Louisville is also going through some problems with the Pitino scandal, which is probably also impacting donations.

Excise Tax

Second, the new tax law also requires that colleges pay an excise tax of 21% on salaries above one million dollars, which generally will impact an institution’s athletic director, football coach, and men’s basketball coach.  Athletic Director U has a great summary of this new excise tax:

For all taxable years beginning after December 31, 2017, §4960 imposes a new excise tax, at the rate of 21%, on tax-exempt organizations, including colleges and universities, and organizations that support them (e.g., most university athletic associations and foundations), to the extent that annual compensation paid to any of its five highest compensated employees exceeds $1,000,000. In any case in which remuneration from more than one employer is taken into account (e.g., the university and its athletic association), the tax is imposed pro-rata. This excise tax also applies to any excess parachute payments paid to such employees.

For purposes of the applying the excise tax, excess parachute payments are compensation paid upon the termination of the employee’s employment if the aggregate present value of such payment equals or exceeds three times the employee’s “base amount” (generally, the employee’s average annual compensation over the five year period preceding termination).

Across all institutions participating in college athletics and individuals employed thereby, application of the tax is significantly limited by the relatively-restricted cluster of the top five highest paid employees receiving compensation in excess of the relatively high threshold of $1,000,000 annually. While the reach of this tax is restricted and seemingly immaterial to a large number of college sports industry participants overall, it represents a high-powered rifle shot to Autonomy 5 institutions.

Based on our most recent compensation analysis of college coach and executive compensation undertaken in partnership with USA Today, there are at least 240 coaches and athletics directors across the FBS that receive compensation in excess of $1,000,000 (bonuses and forfeitures affect this total). Not surprisingly, the majority of these individuals are employed by institutions in one of the Autonomy 5 conferences.

Numerous Autonomy 5 athletic departments currently employ at least two, and often three, individuals that exceed the $1,000,000 annual compensation threshold (perhaps not surprisingly, Alabama and Florida State each have at least six athletic department employees whose compensation may exceed $1,000,000). [Emphasis mine] With limited exceptions, these individuals are among the five highest paid employees of their institutions.

Consider the University of Kentucky, which paid Head Coaches Calipari (MBB) Stoops (FB) and Mitchell (WBB) $7,435,376, $3,763,600 and $1,200,000, respectively during the contract years of their most recently completed seasons. Applying the 21% excise tax to those amounts results in an excise tax obligation of $1,973,785, exclusive of Athletic Director Barnhart’s total compensation that is scheduled to exceed $1,000,000 in the near future (and may top that threshold already with the inclusion of bonuses). The exponential impact of this tax on Autonomy 5 institutions is further illustrated when considering that the compound annual growth rate of Autonomy 5 head football coaches compensation alone over the last five years has been approximately 11%. §4960 could also have a regressive effect by imposing relatively more significant consequences on non-Autonomy 5 institutions, which don’t enjoy the option to off-load the compensation obligation to third parties (discussed below).

Now consider the application of the tax on “parachute payments.” Assume a coach is earning total annual compensation, exclusive of retirement contributions, of $500,000 and that such compensation amount would place that coach in the top 5 highest compensated employees of the employer. If her employment agreement prescribes a payout equal to the balance of her annual compensation due through the end of the agreement’s term upon a termination without cause, then the excise tax may be invoked, even though the coach is not receiving annual compensation in excess of $1,000,000. If the coach is terminated with four years remaining on her contract, the excise tax would apply to approximately $500,000 (the present value of the amount in excess of three times her “base amount”) resulting in a tax obligation to the university of $105,000.

Importantly, a termination without cause frequently triggers the universities’ obligation to pay the coach/executive the balance of annual compensation due in the contracts of Autonomy 5 head football, head men’s basketball, and head women’s basketball coaches and athletics directors. And since the excise tax applies at the time the payment is no longer subject to forfeiture (in other words, immediately upon the termination), the benefits of mitigation are devalued as a result of the tax. Without termination payments originating from sources exempt from the excise tax (discussed below), the reasonably foreseeable outcomes of this situation are coach payouts at or below the excise tax threshold (the university’s demand), which are not subject to mitigation (the coach’s demand). This has the practical effect of limiting compensation guarantees to three years of average includible compensation.

This is going to have a major impact on the athletic budgets of ACC institutions (a 21% tax is a lot of money).

A representative from a major lobbying organization for Football Subdivision Schools feels that the new tax law changes could have an impact of hundreds of millions of dollars in lost donations. (h/t @WashingtonPost)

Impact of Legislation

So, what’s the impact of this new legislation?  While, it’s too early to tell, there are some indicators:

1.) Institutions are making pitches to their donors to send in as much money as they can in tax year 2017.  Syracuse is one that fits that bill.  Syracuse is openly asking its donors to pre-pay donations for future year seat allocations.  So is Oklahoma. (h/t @WashingtonPost)  So is Georgia. (h/t @Bloomberg)

2.) If there are losses in revenue, you can certainly expect institutions to pass the costs onto fans in terms of increased ticket prices.  You can also expect athletic directors to make cuts to Olympic sports because football and men’s basketball aren’t taking cuts.

3.) To get around the excise tax, colleges could restructure coaches contracts so that coaches and athletic director salaries come from multiple sources and not just the school. (h/t @WashingtonPost)   Athletic Director U provides a great example of what is happening at Virginia Tech right now in terms of external parties paying salaries:

It is reasonable to assume that Universities will renegotiate sponsorship agreements in a manner to allow the vendors/rights holders (including shoe and apparel companies, media partners and other licensing partners) to contract directly with and provide more cash directly to its coaches. In exchange for offloading compensation obligations to the vendors/rights holder, Universities may accept less favorable terms and/or lower product and in-kind discounts from its sponsors for their products and services.

For example, Virginia Tech’s current Nike Contract provides for $275,000 of Base (Cash) Compensation and a Supplied Product Limit of $1,625,000. A more efficient structure, in light of §4960, may be to (1) allow current coaches to contract directly with Nike, using university marks and other university property, and in exchange therefor, (2) agree to a lower Supplied Product Limit. Virginia Tech would then be able to use the increased cash available (from the offloaded coach compensation) to purchase additional product (presumably at an increase of less than 21%).

Importantly, this structure not only avoids or mitigates the excise tax it also commensurately decreases universities’ payroll taxes. And, the increased costs to and/or reduced discounts from such sponsors are not intensified by sales tax for which the colleges and universities remain exempt. Coaches that are independent contractor parties to these agreements, however, increase their income tax bill by the difference between the employee portions of income taxes relative to their increased exposure to self-employment tax for the off-loaded compensation.

There are five other options that Athletic Director U discusses in the article above on how to address the excise tax and paying for coaches salaries, including 1.) Capping coach compensation at the excise tax level, 2.) Paying the excise tax for a while, 3.) Limiting university compensation (from all applicable sources) up to the excise tax threshold, 4.) Game/Venue revenue sharing, and 5.) Insurance, annuities, and other forms of deferred compensation (Bud Foster is getting an annuity at Virginia Tech as part of his contract).  I encourage you to read this article from Athletic Director U.

Conclusion

My own sense on this is that this is going to a much bigger impact on the non-Power 5 institutions, but Power 5 institutions will also be significantly challenged.  Because this is a new tax law, we don’t have the data to project whether institutions are going to lose money for seat donations (my own sense is that some people will donate less to universities but that’s just my personal opinion).  The bigger issue is going to be addressing the excise tax because Power 5 coaches make a lot of money – and that’s a lot cash that has to be made up.  In the mean time, expect to receive a lot of end of the year calls from your ACC university asking for cash.

Merry Christmas!!

Merry Christmas to all of you readers from all of us at All Sports Discussion!!

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