How will the new tax laws impact Marquette? Part 1

Photo by Anthony Giacomino/ Paint Touches

(Editor’s note: As we at Paint Touches are nowhere near smart enough to interpret tax bylaws, we went out and recruited input from an actual expert, AJ Singh, to help us shed light on the topic.) 

The new tax bill, known as Tax Cuts and Jobs Act, was signed into law on Dec. 20, 2017 and kicked into effect beginning Jan. 1, 2018. While politics and tax policy are not an area we usually (or ever) cover, contained within this bill are some less well-known provisions that could drastically impact college athletics, specifically the focus of this site Marquette.

One particular section of the tax bill imposes a tax of 21% on any compensation in excess of $1 million paid to any employee.  The football and basketball programs of major universities will be directly impacted by this as most of the highest paid employees are the head coaches.  For example:  If a university pays their football coach $5 million, under the new law, the university will also have to pay $840,000 in taxes.

Marquette’s 990 tax form showed Wojo made about $1.67 million a year in base salary for the 2016 fiscal year, therefore Marquette would have to pay an additional $140,000 in taxes. This may not seem like a lot of money in the grand scheme of things, seeing as Marquette reported it spent $11.3 million on the men’s basketball team in 2016, but this isn’t simply a one-time penalty. This will be a recurring tax that will continue to grow in both size and impact. As Wojo’s longevity pay bumps accumulate, as he hits certain benchmarks (like team APR, Big East success, NCAA success), and as he renegotiates at steeper prices, Marquette’s excise tax burden will continue to rise, and this will be spending that doesn’t go back to the team or the university whatsoever.   

Take former coach Buzz Williams, in his final full fiscal year, 2013, he made $3.1 million from Marquette with $1.9M in base compensation, $200K in bonuses and then an additional $1.0M directed to his Team Buzz Williams LLC. Depending on how the IRS decides to address LLC issues, that would have resulted in an additional $441K in tax payments. This is not a marginal expense, and would have direct consequences on both what Marquette can offer and what coaches will accept. 

Of course, as with any new legislation, there are very few precedents to guide both athletic departments and accounting services. One way schools and coaches may work around this issue is to cap base compensation at $999,999 while providing the rest of the salary as indirect payments through an LLC, much like Buzz Williams had at Marquette. That is not to say schools are already altering contracts to minimize the tax burden, but these are loopholes that have yet to be ruled on definitively.    

Singh noted that it’s difficult to say what approach the IRS will take with that kind of setup, though historically, if a person performed duties and acted more like a employee than an independent contractor, the IRS would deem them an employee and make companies pay back taxes relating to payroll taxes.  

Again, this is still open to interpretation and a very gray area of the tax law. His best guess is that the IRS would take the approach of “Would the duties performed under the LLC fall under the job description of a coach?” In that case, structuring payment to an LLC to stay under the $1M threshold would have no effect, since the duties performed under the LLC still wold fall under a coach’s job description (camps, promotions, etc.).

Until there is more definitive guidance, I’d expect to see universities push the IRS to the limit, particularly those without as big of an investment from the administration as Marquette has been given. 

Yet even for Marquette, it’s still a big deal. Over Buzz William’s 6-year tenure, the 21% excise tax would have cost the university an extra $1.79M, which is about a year’s worth of Wojo. And one last time, this isn’t an expense going into the program, but straight to the IRS.

Although the new laws did make incorporating ones self into an LLC very lucrative, coaches, like athletes, are explicitly barred from doing so. That means they will still be taxed at the highest bracket, and won’t be looking to give their employers any discounts any time soon.  

With the arms race across high-major athletic departments raging as fiercely as it ever has, big-time programs will be forced to accept these “sunk costs” if they want to compete for the best coaches. Or more likely, season ticket holders may be on the hook in the form of increased ticket prices. And that is another story in and of itself that we’ll dive in to in Part 2.