The federal government has pulled the plug on a lucrative tax benefit previously enjoyed by the athletics departments of major colleges and universities. There are two parts to the major changes.
The first forces non-profits, including higher education institutions, to follow the same tax rules as private corporations on the tax liability for the most highly compensated employees. Going forward, that means the schools will be subject to a 21 percent excise tax on the salary amount above $1 million annually for the five highest paid employees.
For example, if a coach makes $5 million, $4 million of that will be subject to the 21 percent excise tax and the school will owe the federal government $840,000. Duke law professor Richard Schmalback, who has been a critic of the tax benefits to big time college athletics, told USA Today, “That’s not tax reform—that’s trying to discourage seven-figure payments to college sports figures and pick up a little revenue.”
West Virginia University Athletics Director Shane Lyons has done some calculations based on the salaries of basketball coach Bob Huggins and football coach Dana Holgorsen. “Coming out of the chute we know there’s about a $1.3 million impact (for 2018),” he told me on Talkline last week.
Some rough calculations show that for the duration of both contracts, WVU will owe the federal government close to $5 million. “We’ll just have to figure it out going forward,” Lyons said.
The second part of the tax reform bill eliminates the tax deduction for some donors. Currently, fans who make a donation to an athletic department to obtain priority seating at sporting events can take an 80 percent deduction on their federal taxes. That’s been eliminated.
One reason tax writers made the change is that generally when a taxpayer expects to receive a substantial benefit for their contribution to charity, that payment is not deductible. The Congress rationalized that priority seating is a significant benefit, thus the deduction should not apply.
The impact of this change is less clear. For example, WVU emphasizes on its Mountaineer Athletic Club website in the very first sentence on priority seating that “80% of your contribution is tax deductible.”
Marc Ganis, a sports business consultant, told USA Today, “Certainly one of the things used to market (season tickets and suites) is the deductibility,” adding that the loss of the deduction “may chill the sale to some people even more than the actual additional cost.”
Representatives of colleges and universities lobbied Congress to try to stop the changes, but got the cold shoulder. College athletics have rapidly evolved from just another part of the higher education experience to a multi-billion dollar a year industry and the salaries of big time coaches stand out.
When college athletics were more parochial, the nation’s policy makers were unconcerned about a school’s tax benefits. After all, they are non-profit institutions, right? However, big time college athletics have shed that innocence, and they are now finding that they will have to play by some of the same tax rules as any other business.