December is here, and for millions of college football fans, that means following their favorite coach to a New Year’s bowl game. In Birmingham, Alabama’s Nick Saban is reeling from the Crimson Tide’s last-second loss to arch rival Auburn in this year’s “Iron Bowl.” In Columbus, Ohio State’s Urban Meyer is celebrating 24 straight victories after his Buckeyes beat Michigan by just one point in “The Game.” And further west, Washington’s Steve Sarkisian is celebrating his Huskies win over the Washington State Cougars in the 106th “Apple Cup.”
As always, these coaches and dozens more will be paying attention to the latest Bowl Championship Series standings. But this year, they’ll also be paying attention to the IRS. That’s because a new strategy might help them block taxes when they switch jobs.
College football coaches can make a lot of money. Alabama’s Saban will make at least $5.65 million this year, and 51 coaches make more than the average pro player ($1.9 million). In 27 states, the highest-paid public employee is a football coach. Naturally, that means they pay a lot of tax. So this is more than just an academic discussion – there’s a lot of money at stake.
Let’s take a closer look here. Butch Jones led the University of Cincinnati Bearcats to a 23-14 record before the University of Tennessee hired him away to coach the Volunteers. As part of Jones’ new deal, Tennessee paid $1.4 million to buy out his contract with Cincinnati. The Bearcats, in turned, poached Tommy Tuberville away from Texas Tech – and as part of that deal, paid $943,000 to buy out Tuberville’s old contract with the Red Raiders. (Why not? They can take it from the $1.4 million they’re getting from Tennessee, and still have enough left over to pay an assistant or two!)
Now, traditionally, those payments Tennessee and Cincinnati made to buy out their new coaches’ obligations under their old contracts have been considered additional income to the coaches, and thus taxable to them. “What’s the big deal?” you might ask. “So Tuberville recognizes $943,000 in extra income. Can’t he just deduct that same amount as an employee business expense and zero out the income?” Well, yes . . . but. First, employee business expenses are a miscellaneous itemized deduction, subject to a 2% floor. (That means Tuberville gets no deduction for the amount equal to the first 2% of his adjusted gross income.) That alone would make over $60,000 of Tuberville’s payment nondeductible. Second, and even worse, employee business expenses are a preference item for the dreaded Alternative Minimum Tax, which could wipe out the deduction entirely!
Back in 2007, two law school professors argued that the buyout should be treated as a nontaxable business obligation. They reached that conclusion on two grounds: 1) the school’s reimbursement actually converts the coach’s payment into a nonitemized deduction, which avoids the 2% floor and AMT; and 2) the payment is made for the school’s benefit and not as compensation for the coach. Schools have taken notice, and both Tennessee and Cincinnati worded their new coaches’ contracts to take advantage of this interpretation. As coaches’ salaries and their corresponding buyout obligations go up, we should see more and more of these changes.
We realize most of you won’t ever tackle these sorts of seven-figure challenges. But you still need a strong defensive line when you suit up against the IRS. That’s where we come in. We give you the plan you need to keep the tax man out of your end-zone. But time really is running out to save tax this season