IRS Rules Target Coaches at Duke, Notre Dame, Hospital Chiefs

(Bloomberg) -- Heads up, Duke basketball's Mike Krzyzewski and Notre Dame football's Brian Kelly, the Internal Revenue Service has new rules that could take a hefty chunk of your multimillion dollar salaries.

The IRS issued guidance on Friday that implements a change in the 2017 tax overhaul, and levies a 21% excise tax on some non-profit employees' salaries above $1 million. The tax could also hit many highly-compensated private college coaches as well as non-profit hospital executives, such as Kenneth Davis at Mount Sinai in New York or Yale New Haven Hospital's Marna Borgstrom.

The 2017 Republican law included a tax on a non-profit's five highest-paid employees earning $1 million a year or more. It targets many elite college basketball and football coaches -- such as Krzyzewski, who earns more than $7 million, or Kelly at $2 million -- but also applies to all tax-exempt organizations under that tax code's section 501.

Yet there's a big loophole: The law doesn't apply to employees at many public colleges. That means Clemson University football coach Dabo Swinney is able to duck the tax on his more than $9 million salary, as is University of Kansas basketball's Bill Self on his $4 million income. Those institutions can claim tax-exempt status as a government unit, and not as a tax code section 501 organization.

“I've never seen anything looking and telling us exactly what Republican lawmakers were trying to do,” said Phil Hackney, a law professor at the University of Pittsburgh. “It wouldn't seem to make sense to apply it to say Stanford but not Alabama. It's kind of crazy.”

The organization, not the employee, pays the tax to the IRS. They've been on the hook for this tax since 2018, but the new rules give non-profits clarity about how to calculate their employee's wages, bonuses and other compensation to determine if they're required to pay the tax.

The guidance also addresses excise levies on so-called parachute payments, or generous severance pay, roughly equal to or exceeding three times the person's base salary.

The IRS first put out preliminary guidance in December 2018, which confirmed that public colleges and universities aren't subject to the tax if they don't also have a 501 destination. It even advised that public schools with tax-exempt status could relinquish that as a way to avoid the tax.

Crimson Tide, Wolverines

Among the universities in that group are football powerhouses the University of Alabama and the University of Michigan. Their coaches, the Crimson Tide's Nick Saban and the Wolverine's Jim Harbaugh, are also among the highest paid in college sports.

The excise-tax provision aligns some of the tax rules for non-profits and public corporations. Public companies can't deduct compensation greater than $1 million for certain employees and are now subject to a income tax rate of 21%.

Private universities also saw their endowments tapped as a way to pay for the 2017 tax overhaul. The law put a 1.4% excise tax on private schools with endowments of at least $500,000 per student. That hit some of the richest schools including Harvard, Yale and Stanford.

“The 2017 act was just bizarre in the context of non-profit world,” Hackney said. “It just it created enormous new paperwork for lots of folks that never had to deal with this ever before.”