Most reporting about our new tax laws has been on the reduction of business taxes, real estate, and the loss of individual deductions. In this blog post, we will highlight some provisions that will impact the sports and entertainment industries.
The new 21% excise tax
Tax-exempt organizations are now required to pay a 21% excise tax on salaries over $1 million if that compensation is provided to any the organization’s top five highest paid employees. This includes “parachute” or “separation” payments such as buyouts.
This provision will impact many large schools with sports coaches who earn seven figures, and schools with NCAA Division I collegiate athletic programs are expected to pay millions in additional costs to run their programs. Texas A&M University, for example, which has a number of high salary employees (it recently hired Jimbo Fisher as head football coach at a total salary of $7.5 million per year for the next 10 years), has stated that that the new tax law will cost it roughly $90 million.
Tax attorneys and other financial professionals are now seeking ways to avoid the new excise tax, including:
- Reducing coaching salaries to less than $1 million
- Lowering or eliminating bonuses
- Exploring split dollar and other life insurance arrangements
- Renegotiating game contracts and production rights so that payments are made directly to the coaches
Elimination of charitable deductions for “quid pro quo” transactions
As a general rule, taxpayers are not allowed a charitable deduction for “quid pro quo” contributions, meaning that they get something in return for their donation – the value of dinner served or a concert ticket received must be subtracted from the charitable receipt for a fundraising event.
For many years, however, wealthy taxpayers were allowed to claim an 80% deduction for donations that provided them with personal seat licenses at college athletic events and other perks. Many people criticized this as unfair, asking: Why should people get a tax deduction for season tickets?
The new tax repeals this deduction, a change that could result in the reduction in both the number and level of annual gifts to colleges and universities each year – but could generate billions in federal revenue over the next decade.
Some note that this change will result in fewer resources for facilities and student scholarships. Others claim that the loss of the deduction is unlikely to have much of an impact because businesses now have significantly lower tax rates and individual taxpayers will be taking the increased standard deduction instead of itemizing.
Elimination of deductions for business entertainment
While taxpayers are still entitled to deduct 50% of their business meals, as noted above there is no further deduction for taking business prospects and clients out to sporting events. Note that the business meal deduction will be disallowed as of January 1, 2026.
Loss of deduction for other business expenses
Loss of the deduction for unreimbursed employee business expenses will profoundly affect athletes, who will no longer be able to deduct their agent fees, union dues, travel expenses, and training/gym fees.
SALT deduction limitation
The new $10,000 limit on deductions for state and local property taxes (SALT) provides an advantage to teams in low-tax states such as Texas, Florida and Nevada — their offers now have even greater value than before, and high-tax states looking to recruit talent will need to make up the lower take-home pay with other incentives.
Since most professional athletes earn in the top income tax bracket, the reduction of the tax rate for that bracket from 39.6% to 37% should make up for at least some of the lost deductions. In addition, athletes who use pass-through entities for income they receive from endorsements should meet with a tax attorney immediately to review qualification for the new Section 199A (20%) deduction. Note that there are limits to this deduction for “specified service trades or businesses,” which includes athletics and businesses whose income is generated from one’s reputation, and we are exploring alternate arrangements that may enable them to still benefit from the provisions of 199A.
Full service tax firm in San Francisco
The tax attorneys at Moskowitz, LLP assist many professional athletes and sports organizations with their tax planning. We are currently devising strategies to help minimize your tax liabilities under the new tax law. To learn more, contact our San Francisco office.