For-Profit Non-Profits

By | September 8, 2016 at 12:35 am | No comments | Columns, Haddon Libby

By Haddon Libby

This year the NFL is giving up the non-profit status that it has maintained since 1942. While each team in the league is a for profit business in this $10 billion a year industry, the league itself was a non-profit despite revenues of more than $300 million and a CEO (Roger Goodell) who earned $44 million with six other executives earning more than $1 million a year.

While a non-profit is created to fulfill a mission, IRS codes state that the compensation paid must be ‘reasonable’. Most people, including any New England Patriots fan, would say that Goodell’s salary was excessive.

The NFL giving up its non-profit status action follows similar actions by Major League Baseball, the National Basketball Association and NASCAR. Other leagues like the National Hockey Association and the PGA Tour remain non-profits as they state that their purpose is to promote their sport without the intent of profit.

More specifically, the PGA Tour earned $1.1 billion in revenues in 2014, the last year for which its financials are available. The PGA Tour has more than $2 billion in assets with Commissioner Timothy Finchem earning over $11 million annually and at least one dozen executives earning more than $1 million a year.

Looking at the NHL, Gary Bettman earned about the same amount as Finchem despite revenues that, at $125 million, were only a fraction of that created by the PGA.

The most obvious benefit of a non-profit status is that this type of business entity does not have to pay income taxes like other businesses. With approximately $1.8 trillion in annual revenues going to non-profit entities, that is a whole lot of tax savings.

According to the National Center for Charitable Statistics, the United States has 1,571,056 non-profit organizations. Of these, 1.1 million are public charities, 105,000 are private foundations and 368,337 are other types of non-profits. Nearly 10% of all wages paid in the United States go to the employees of non-profits.

While many non-profits rightfully fulfill a business purpose that should be tax-exempt, should a bank be classified as non-profit? If you said ‘no’, did you know that all credit unions are non-profit? Their mission is to serve their client base yet that mission is identical to most for-profit community banks.

What about insurance companies? The Blue Cross system started out as a non-profit but lines have blurred as some have become for-profits while others remain non-profits. For all intents and purposes, each do the same thing.

What about an investment management company? Should that be tax exempt? That is the case with the International City Management Association Retirement Corporation. What is their purpose? Managing retirement plans for city workers. With revenues of approximately $250 million and assets of nearly $500 million, two ICMA-RC employees earn more than $2 million annually with at least twenty more employees earning more than $500,000.

This same practice is done by medical groups, universities and insurers. Some businesses that you would not think are non-profits include Forest Lawn, Delta Dental and most country clubs.

While you and I can question whether all of these organizations should be able to avoid paying taxes, another question arises – why would any business be for profit? If you can pay yourself large ‘reasonable’ salaries as a non-profit and avoid the double taxation that income taxes on for-profits causes, why wouldn’t every business do it?

The answer may be in the way a savvy business uses the tax code to their advantage as 20% of the largest companies in the United States paid no income taxes last year.

Haddon Libby is an Investment Advisor and Managing Director at Winslow Drake and can be reached at 760.449.6349 or HLibby@WinslowDrake.com.

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