A few days ago, the National Football League (NFL) announced that it will be relinquishing its nonprofit status, because “the owners have decided to eliminate the distraction associated with misunderstanding of the league office's status,” according to Robert McNair, chairman of the league finance committee. What will actually be the impact of this change?
First, tax-exempt status does not mean that the NFL is considered a charity (serving the public good and accepting tax deductible contributions). Actually, it is classified as a nonprofit “trade organization” under IRS Code Section 501 c6, a category that also includes business leagues, chambers of commerce, and real estate boards. Currently, the NCAA, NHL, and PGA Tour have nonprofit status as 501 c6s, while Major League Baseball gave up its nonprofit status in 2007, and the NBA and NASCAR have always been for-profit companies. Tax-exempt status brings the advantage of not paying corporate taxes, along with the disadvantages of public disclosure of finances and executive compensation, plus public confusion about how such a profit-making enterprise could possibly be designated a nonprofit.
The thought of the NFL as a tax-exempt organization is puzzling to most and infuriating to many – recent actions include a congressional proposal to strip the NFL’s nonprofit status and a petition signed by hundreds of thousands of people at Change.org requesting that the league start paying taxes. While the NFL constantly responded to criticism that its annual revenues of $10 billion were mostly from its member teams, set up as for-profit companies and paying taxes, it was far too fine a nuance for many observers. The NFL oversees those teams and itself only brings in around $326 million (from 2012).
The bottom line is that, with the loss of nonprofit status, the NFL will probably pay about $10 million in taxes each year. Comparing annual revenues to the increase in the tax bill, the status change seems a relatively inexpensive way for the NFL to improve public relations.
But the change also means that no more annual IRS Forms 990 will be filed providing compensation information on the top executives. The NFL’s most recent Form 990 revealed that Commissioner Goodell received $44 million, six other executives drew seven-figure salaries, and 298 employees made $100,000 or more in 2013, numbers that raised eyebrows for an organization not paying taxes. So why is the IRS not questioning these salaries? The answer is that the IRS requires that organizations exempt under 501 c3 (charities) and 501 c4 (advocacy) must set executive salary levels looking at compensation data from similar organizations (typically defined as similar in type of service provided, size, and geographic location). But organizations classified as tax-exempt under 501 c6 are not covered by the regulations on unreasonable compensation (see http://www.erieri.com/Blog/post/2014/10/27/Tracking-Nonprofit-Executive-Salaries-RecreationSports-Organizations for more details). The only requirement is that compensation must be reported annually on Form 990; but this compensation is determined by the board of each organization. And, from now on, there will be no information about what the NFL pays its executives.
Even if the NFL starts paying taxes, concerns remain about other tax breaks it receives, such as taxpayer dollars for stadiums and tax breaks on bonds used to finance stadiums. And, of course, companies that buy luxury suites, tickets, naming rights, and other sponsorships get hundreds of millions more in tax write-offs for business expenses every year.
To summarize, the NFL’s action to become for-profit means paying over $10 million in taxes, perhaps a small cost to pay for ending disclosure of salaries for top executives and criticism of tax-exempt status for a $10 billion company. As the league deals with concussion settlements and domestic abuse scandals, this may be its best strategic play.