How The Tax Code Impacts Certain Sports Teams

Besides luxury taxes imposed by professional sports leagues, high compensation can actually lead to increased income taxes as a result of Internal Revenue Code Sec 162(m).

The otherwise allowable deduction for compensation with respect to a covered employee of a publicly held corporation is limited to no more than $1 million per year for a covered employee. If an athlete is a covered employee of a publicly held corporation, their compensation above $1 million may not be deductible by the employer.

However, most professional sports franchises are not operated as publicly held corporations.

A covered employee means:

(1) the principal executive officer or principal financial officer of the corporation (or an individual acting in such capacity) at any time during the taxable year,

(2) any employee whose total compensation is required to be reported to shareholders by reason of being among the corporation’s three most highly compensated officers for the taxable year (other than the principal executive officer or principal financial officer) and

(3) any individual who was a covered employee described in (1) or (2) with respect to the corporation (or any predecessor) for any preceding taxable year beginning after December 31, 2016

4) Starting 2027, the definition of a “covered employee” also includes the next five highest-compensated employees of the corporation (regardless of whether they are officers), for a total of at least 10 covered employees for each taxable year.

The Joint Committee of Taxation in a report noted:

Only one U.S. baseball team, the Atlanta Braves, is operated as a publicly held corporation, Atlanta Braves Holdings, Inc. The Toronto Blue Jays are also publicly traded so they will be impacted as well.

Only one NBA team, the New York Knicks, is operated as a publicly held corporation, Madison Square Garden Sports Corporation.

In the National Hockey League, only one team, the New York Rangers, is operated as a publicly held corporation, Madison Square Garden Sports Corporation.