Why the NFL and other professional sports don’t deserve nonprofit status

The NFL’s winning formula has made it the most popular and profitable professional sport. Football closeup via www.shutterstock.com

Recently, the National Football League (NFL) announced it was giving up its nonprofit status. This is a much-coveted designation because it exempts the entity from taxation.

Some lawmakers have been trying to take away its tax-exempt status for years, with Senator Tom Colburn and Congressman Jason Chaffetz leading the charge. But their bills to limit who qualifies have gone nowhere.

So why would the NFL want to unilaterally give it up and become a private, for-profit company? Before answering that question, we need to consider how the league operates and the benefits and costs of being a nonprofit.

Will becoming a for-profit turn into a touchdown for the NFL? Stadium via www.shutterstock.com

How the NFL became a nonprofit

Professional football in the US is organized into two parts: there’s the league itself and then the 32 teams within it that compete every year for glory and the Vince Lombardi trophy. Thirty-one of those teams are private, for-profit organizations, while just one, the Green Bay Packers, has public shareholders.

The league, however, is a nonprofit. The NFL was organized in 1920 to be a trade association to promote the interests of its member clubs (a job it’s done exceptionally well since football has been the most popular sport watched in the US for the past 30 years and most profitable). In 1966, the year the NFL merged with the American Football League, it became a nonprofit after the tax code was changed to allow professional football leagues 501(c)(6) status.

Nonprofits are given their status because the government wants to provide extra incentives for organizations to tackle problems and for individuals to donate money to solve them.

The obvious advantage of being a nonprofit is avoiding taxation. The major disadvantage is that the nonprofit has to file an annual public form with the IRS that discloses all financial information. This is very intrusive since the vast majority of for-profit businesses reveal their finances to the IRS alone. The only ones that have to provide detailed public disclosure are those with publicly traded stock or more than 300 shareholders.

And the only nonprofits that do not have to make annual public disclosures are religious organizations, like churches. The annual nonprofit disclosure form is called the 990. It shows a nonprofit’s revenue, expenses, profits, assets and salaries of top leaders. Using websites like GuideStar, anyone with an internet connection can see scanned images of the actual forms filed by each nonprofit.

Analyzing the NFL’s finances

The NFL’s most recent 990 form, shown in the image below, reveals that from April 2012 to March 2013 the NFL took in $327 million in revenue and had assets worth $788 million at the end of the period.

The NFL’s latest 990, with revenue and profit highlighted. GuideStar

Even with all this money, the NFL earned a “profit” of only $9 million. One reason the gain was so low was that the NFL gave its top employees more than $60 million in pay for just that year, or almost one-fifth of all revenue! The commissioner, Roger Goodell, received $44 million in salary, bonuses and other compensation, while five other key employees took home $19 million.

Nonprofits are expected to do some charitable work. So even with millions in revenue, it gave away just $1.4 million of it, the majority of which went to either the NFL Foundation or the NFL Alumni Association. The rest was relatively small donations to organizations like the March of Dimes and Big Brothers.

In the tax code, the NFL is considered a 501(c)(6) nonprofit, a category intended to exempt local chambers of commerce and business associations from paying taxes as long as they benefit an entire industry or help a common business interest.

The 501(c)(6) category, however, has one extra type included in the list of exempt organizations: “professional football leagues,” added in 1966. Other sports, such as the National Hockey League, which makes $80 million in revenue, and the Professional Golfers’ Association, with $91 million, also gained nonprofit status under this 501(c)(6) provision.

This special category has earned Congressional ire. Most recently, Representative Chaffetz of Utah introduced a bill in January to revoke the nonprofit status of professional sports teams with revenues of more than $10 million.

Nonprofit no more: what the NFL gives up

What does the NFL lose by giving up its tax-exempt status? A key tax deduction.

The IRS tax code’s Section 162(m) allows for-profit companies to deduct only $1 million each for the CEO and the next four highest-paid officers. This means that if the NFL were classified as a for-profit business, its taxable profits would have been much higher.

Exactly how high is hard to say, but if the NFL could only deduct $1 million of commissioner Roger Goodell’s $44 million in salary and bonuses, its profits would be at least $43 million higher. Given the lowest-paid league key employee reported on the 990 form earned over $2.1 million, the $43 million boost in profits is likely an under-estimate.

Rober Goodell received a total of $44 million in compensation in the fiscal year ended March 2013. Once the NFL is no longer a nonprofit, it will lose a valuable tax deduction. Reuters

And what does it gain?

So what will the NFL gain by giving up its non-profit status? It turns out, quite a few things. Here are four.

First, image. the NFL believes the nonprofit status is a “distraction” because it is any easy target for Congressmen, bloggers and sports writers. By giving up the status, it improves its image for a relatively low cost. While paying a few million more in taxes is a huge sum to most people, it is a tiny fraction of the $6 billion or so the league distributes every a year to its member teams.

On that point, a few words on how the league and its teams make money. In general, professional football is a financially opaque operation that earns a lot of money. Estimates based on only partial information are that the league distributes about $6 billion a year to its member teams. Most of that money comes from national television contracts, while about $1.6 billion comes from NFL Ventures through broadcasting rights, sponsorships to use the NFL name and logo and licensing fees.

In addition, the 32 teams also are estimated to have earned more than $3 billion from local ticket sales, stadium parking fees and concessions – revenue that isn’t shared equally unlike the TV contracts and sponsorships. Subtracting professional football’s costs result in estimates that the NFL and its teams share annual profits of about $1 billion.

A second benefit of giving up its nonprofit status is that the NFL no longer has to disclose so much financial information about its activities or salaries. Major League Baseball reportedly chose to give up its nonprofit status in 2007 so it wouldn’t have to disclose the salaries of its top brass.

The NFL’s 990 form is very detailed. For example, the most recent 990 shows that league officials gave $20,000 to the Congressional Black Caucus and spent about $12 million in travel with almost $8 million of that going to pay off their American Express bill.

Even most publicly traded companies don’t reveal the amount of their donations. Instead, a few set up separate charitable arms.

Third, it will help teams negotiate with their star players. Few fans care about how much the high paid “suits” in the league office make. It is the star players who put fans in the seats. These players and their agents want to ensure the stars earn more money than executives seemingly responsible only for doling out fines and arranging TV coverage. Reducing the pay for one or two marquee players ensures teams are able to stock their rosters with other talented players, resulting in a more exciting game.

As a for-profit, the NFL won’t have to disclose as much financial info, so the cities it hopes will build stadiums won’t know just how wealthy the league is. Football stadium via www.shutterstock.com

Fourth, the NFL currently has almost $800 million dollars in assets. Being a nonprofit means revealing exactly how much cash is on hand ($86 million) or how much money has been loaned to key executives ($1.8 million). It is hard for the league and its teams to demand cities provide new tax-payer funded stadiums and infrastructure improvements when the league’s wealth is so glaringly obvious year after year.

As we can see, there are many financial and other benefits for the NFL to willingly shed its nonprofit status and relatively few drawbacks. Other rich sports-related nonprofits should follow suit, both for the reasons the NFL is doing so and because they shouldn’t be tax-exempt in the first place. Either way, Congress should strip “professional football leagues” and other sports leagues from the 501(c)(6) provision.

Sports in the US are no longer a small recreational pastime. They’re big business. As sports become larger and more profitable, there is no rational criterion for the largest of them to be considered a nonprofit. It is time to stop playing games with taxpayers’ money and revoke the nonprofit status of any sports activity that brings in millions in revenue.