TAX BILL CONSEQUENCES: Higher costs for big-time athletics.


USA Today reports
a little-noticed element of the tax cut legislation approved this week means increased expenses for major college athletic programs.

The reasons:

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* A new excise tax on highly paid employees.

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 like a buyout. At many FBS schools, coaches and/or the athletic director are among the institution’s five highest-paid employees and making more than $1 million.

It occurs to me that this new law should encourage the University of Arkansas to quickly settle up its severance payment to fired football coach Bret Bielema, an amount still in dispute though ESPN has reported it, based on an anonymous source to be $11.8 million. That figure would be in line with a summary of Bielema’s contract in a letter from the UA chancellor that mentioned the Razorback Foundation as third-party guarantor.

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* Elimination of tax deductions for contributions made for the right to get preferred seating at athletic events. This is a major source of revenue for the Razorback Foundation. The legislation will put a crimp in the tax advantage of claiming entertainment business expenses for taking friends and clients to football games. That might discourage some purchasers.

Some questions about what constitutes compensation and other issues make it hard to immediately assess an impact on the University of Arkansas, but I’ve asked UA and Razorback Foundation officials whether they’ve done any assessment yet.

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In 2017, USA Today figured 65 public schools would have faced $30 million in taxes for football coaches paid more than $1 million. Bielema made around $4 million from public and private sources.

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

“That figure will have to either be passed on to ticket holders and donors, or taken out of the budgets of sports that are not … being targeted by the federal government,” Pollard said in an e-mail. “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 advisors, to try and get around the new excise tax.”

Marketing tip for Varady: Good time to sell any remaining suites in the Razorback Stadium expansion while the cost is still deductible. (I’m guessing he’s ahead of me on this.)

PS: At the last minute, Congress preserved the ability of colleges to use lower-cost public activity bonds to pay for construction of athletic facilities. That had been on the table as a way to offset revenue lost in the major tax cuts.