On Tuesday, April 28th, 2015, the National Football League (NFL) announced that it would be revoking its status as a tax exempt organization effective for their 2015 tax filings. The NFL believes that this will have minimal impact on the function of their operations.
The NFL’s tax exempt status is very different from that of a church or other public benefit service, in that they are exempt under Section 501(c)(6), which means they are organized as a trade association or industry group similar to a chamber of commerce or association of realtors. Still, being a multi-billion dollar business, this classification has been the cause of much controversy in recent years. The change only affects the NFL’s league office and their Management Council.
Even though the NFL was a tax exempt organization, that does not mean that the individual clubs, such as the Jets and Giants, also shared in their tax exempt status. These clubs still operated as taxable or flow through entities which paid tax on receipts for television rights, merchandise and ticket sales. The NFL also has a taxable entity called NFL Ventures, which owns the rights for the NFL Network and any league wide sponsorship revenue.
The NFL league office currently receives its funding from all member clubs paying an annual fees to be a member of the NFL, which in turn covered their expenses of rent, overhead salaries (such as referees and Commissioner Roger Goodell) and legal lobbying. It is likely that the entity charged a fee which was only enough to cover these expenses, and did not try to create an excessive surplus within the League Office or Management Council entities. Much of the expenses listed above will still be valid deductions against the now taxable league dues; however, political lobbying expenses may be limited under Section 162(e). Traditionally, for both business and individuals, contributions to political campaigns are a nondeductible expense and so are expenses which are paid to “influence legislation”.
Estimates from prior congressional studies and from NFL press documents say that this removal of legislation will cost the NFL approximately $109 million in tax over the next decade. Considering the fact that this exemption has a been a public relations challenge as well as a perpetual black cloud requiring extra diligence, the NFL may welcome this change with open arms.
The NFL League Office and Management Council showed us the power that an organization like this can have and how it can help grow an industry. Estimates have the NFL as a $10 Billion per year industry, up from $6 Billion per year just a few years ago.
Organizing a 501(c)(6), whether it is a networking group, trade association, or chamber of commerce is relatively simple to accomplish. The organization must first form a business entity, typically a corporation, and then must complete Form 1024 to get the proper recognition from the IRS. From there, annual tax return, Form 990, must be done to report the activity of the entity to the IRS, similar to a business tax return. The dues paid to the entity are a deduction for the person or business paying the dues, and not taxable income to the nonprofit trade association that receives the dues. As the NFL has shown, forming a group like this can have incredible results on your bottom line without causing any additional tax due.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.