*CORRECTION: Compensation of more than $1 million paid to any of the five highest-paid employees of a tax-exempt organization will be subject to an excise tax to be paid by the organization. This article incorrectly described the amount of compensation that will trigger a new tax for nonprofits.
Universities in the state competing at the highest level of athletics rely on donors as a major source of revenue.
Those providing the gifts -- sometimes die-hard fans, other times businesses -- often receive priority access to the best seats at football and basketball games.
But while those rewards can continue under the newly passed federal tax law, beginning next year the Internal Revenue Service will no longer allow donors to take an 80 percent tax deduction on gifts made for the right to purchase tickets or seating in collegiate sporting venues like Donald W. Reynolds Razorback Stadium in Fayetteville or Centennial Bank Stadium in Jonesboro.
Both stadiums are adding premium seats as part of major renovation projects expected to be paid for in part by such gifts.
The elimination of a tax break widely viewed as a major incentive for donors is one of several provisions in the law to partially offset revenue losses caused by new tax cuts for individuals and businesses. Several of these provisions, directly or indirectly, have the potential to alter the landscape of college sports.
"In college athletics, as an industry, we're going to have to decide how to price things, how to model things, what your financial structure is moving forward," said Adam Haukap, executive director of the Red Wolves Foundation, which supports athletics at Arkansas State University.
The law includes an excise tax on nonprofits with top employees earning $1 million or more. At the University of Arkansas, Fayetteville, both the men's head basketball and football coaches earn well above the threshold, but questions remain about how the tax will be applied. Another change is the elimination of a 50 percent tax deduction for business-related entertainment expenses.
Donors making gifts in support of athletics without receiving in return any ticket or seating rights continue to receive a tax break, just as they would when giving to any other charitable organization. The new law eliminated the tickets provision written in the 1980s to explicitly benefit colleges and universities.
Gifts have helped fuel revenue growth for UA athletics.
In 2015-16, $24.8 million in contributions made up about 20 percent of the university's $125 million in yearly operating revenue, according the school's most recent NCAA financial report. The school reported operating expenses of $105.6 million for the same year.
In a statement, Hunter Yurachek, UA's athletic director hired earlier this month, said the university continues to study the tax law "and its potential impact on the University of Arkansas Department of Intercollegiate Athletics." The department will work with the nonprofit Razorback Foundation "to determine how we can best assist those who provide vital support for our program," he said.
The foundation supports UA intercollegiate athletics, and donor gifts are helping pay for an estimated $160 million renovation to add more premium seats to the 72,000-capacity Razorback Stadium. Gift commitments for premium seats, along with donations to the stadium project, as of last month totaled $41.5 million, Scott Varady, the foundation's executive director and general counsel, said at the time.
UA issued about $115 million in bonds -- resulting in a debt-service requirement of $166.9 million over 20 years -- to help finance the stadium project, backed with "pledged revenues" that include Razorback Foundation "priority seating requirement proceeds," according to the official bond statement.
Varady in the past has explained the structure of gift commitments for seating. New suites in the stadium required a seven-year lease commitment and a donation of $3,700 to $4,100 per seat each year, Varady told WholeHogSports.com, a site related to the Arkansas Democrat-Gazette, in April.
In May, UA spokesman Kevin Trainor said the plan was to add 38 suites to the stadium for a total of 172 suites. Additional, outdoor premium seating also is part of the renovation, with construction ongoing.
Existing suites at Razorback Stadium can accommodate 12-44 people, including some standing-only spaces, according to a 2015 Democrat-Gazette analysis that found many suites leased to businesses.
Varady did not answer specific questions from the Democrat-Gazette but, after the tax bill was signed into law Friday said "we plan to review and evaluate the law thoroughly."
"Based on that assessment, we will determine how best to proceed in the future," Varady said.
Questions from the Democrat-Gazette included whether the foundation would be changing its practices for rewarding donors.
Scott Dicus, a Memphis architect, said in an email he's a longtime Razorbacks season-ticket holder. He said he's been following the tax law and its possible effects.
"As for myself, I plan to give at my current donation level next year as do most of my buddies," Dicus said. "I also think that some individual donors may pause and reconsider their donation due to this new wrinkle in the tax law."
ASU late this year began an estimated $29 million athletics facilities project that includes stadium renovations, with new premium seating to be offered to fans based on their "priority points." The Red Wolves Foundation doles out such points based on every $100 in giving for the year and also each consecutive year of giving, with alumni also getting a one-time boost in "priority point" totals.
The school this month announced $10 million in contributions for the project from the Johnny Allison family and Centennial Bank.
Haukap said he sees the "priority points" system as "a way to really reward folks."
With the new tax law, the foundation is "just moving forward slowly and cautiously," he said.
"We've talked through and thought about a number of different options for us and for our donors as we go forward," Haukap said.
Construction company Nabholz was recognized in 2015 as University of Central Arkansas' Purple Circle Member of the Year. The school's Purple Circle fund, similar in purpose to foundations at ASU and UA, helps support student-athletes participate in 17 varsity sports.
Bryan Bruich, Nabholz's chief financial officer, downplayed the effect of the tax law on giving by the construction company, which also has its own charitable foundation.
"We will take it into consideration, but we still will be supporting the athletic departments," said Bruich. He said the elimination of the deduction for gifts related to seating "will probably be minimal in our consideration" when it comes to giving.
Brad Teague, UCA's athletic director, said annual donations supporting athletics total a bit more than $1 million, with the department's yearly budget about $12.5 million.
"We were certainly hoping that the removal of the tax deduction for gifts to athletics for priority seating would be removed, but it wasn't," said Teague. Overall, the tax bill does cut the corporate tax rate, Teague noted.
"Maybe it will help us. Maybe they'll have more to give," he said.
When it comes to planning ahead, "we have not decided to budget a reduction right now," Teague said. "We're banking on the hope -- and what we feel will be, actually -- that we'll still receive gifts for priority seating like we have in the past."
UCA participates in NCAA Division I athletics, though its football team is in a different subdivision than ASU and UA.
Stark financial differences exist among the schools, with ASU's spending in fiscal 2016 about $43 million, less than half that of UA's. ASU's head football coach, Blake Anderson, earns $750,000 yearly based on documents released by the university in February.
At UA, Chad Morris, the newly hired football coach signed an offer letter providing a base salary of $3.5 million per year. Mike Anderson, the men's basketball coach, earns a base salary of $2.45 million a year. Like many athletic coaches, they also can earn big incentives. Morris can earn up to $1.2 million in additional compensation per year.
The new excise tax provision is an approximately 20 percent tax on compensation that's more than $1 million, if paid by tax-exempt organizations "generally including most public entities," according to the National Association of College and University Business Officers. The tax-exempt organization, as opposed to the employees, are taxed, and the provision applies to an organization's five highest-paid employees for the tax year, according to the association.
UA "is still reviewing the language in the tax bill and has not completed a formal estimate" on the excise tax it will have to pay, said spokesman Mark Rushing in an email. He added that "the tax is expected to be paid on the income of two coaches whose compensation is in excess of $1 million," Morris and Anderson.
Former UA Athletic Director Jeff Long, fired "for convenience," and fired UA football Coach Bret Bielema are expected to receive hefty payouts under separation agreements, though Bielema's buyout deal has not been made public. A UA spokesman last month said Long would be paid $1 million per year through June 30, 2022, with the payout lowered should Long earn pay from a new job.
The National Association of College and University Business Officers did not specifically address coaching or other buyouts in their analysis of the tax bill. The group noted the tax applies to compensation paid "for services" as well as "excess parachute payments," defined, generally, as "a payment contingent on the employee's separation from employment with an aggregate present value of three times the employee's base compensation or more."
Matthew Boch, a Little Rock tax attorney with the Dover Dixon Horne firm, said this part of the law includes some uncertainty.
"This is an area that I wouldn't be surprised to see a lot of creativity in tax planning, and so I will be curious to see how this plays out in practice," Boch said.
At the Red Wolves Foundation, Haukap said staff members are staying in contact with donors interested in making gifts to claim deductions before the law takes effect, and are also providing their own incentive.
"They can have their donation applied to next year's season," Haukap said, while still "taking advantage of this tax year." They would receive seating benefits for the 2018-19 season, he said.
Giving is "abnormally high for what our normal year-end giving would be," he said.
Looking ahead, "there's obviously some things that were eliminated that could make people less incentivized to donate," he said. "We'll see how it kind of all shakes out over the next couple of months and year, and we'll react accordingly."
A Section on 12/23/2017
Print Headline: College donors lose sports-seats tax break