The infamous Donald Sterling is still affecting NBA owners (at least those in California) even though he no longer owns the L.A Clippers. California Governor Jerry Brown recently approved a new bill that prevents owners of professional sports teams from writing off league fines as operating expenses on their taxes.
The legislation was inspired after Donald Sterling was fined $2.5 million by the National Basketball Association for comments he made about African Americans. It is a good thing that Mark Cuban’s team is not in California, as he amassed $1.9 million in fines from the NBA as well. The bill’s sponsors used Mark Cuban’s numerous fines as an example to support the bill.
What are lawmakers saying about the new bill?
Assembly member Raul Bocanegra (D), a co-sponsor of the bill, stated that “Donald Sterling’s outrageous comments and historic fine should not be rewarded with a multi-million dollar tax refund,” and stated that his fine should not be used to take advantage of a tax loophole. These types of fines were not the “ordinary and necessary” business expenses meant to be tax deductible, unlike salaries, equipment, or operating expenses.
In addition to closing the tax loophole, California was concerned that this tax loophole rewarded people for bad behavior. Assembly member Reggie Jones-Sawyer (D) believes “[t]his bill will not only prevent that from happening, it will assure the people of California that certain types of action and mindset will not be tolerated in any work environment.”
The Assembly passed the bill 61-17, and the Senate approved the bill 27-9. The new bill covers taxable years beginning on or after January 1, 2014 and becomes effective immediately.
What does this new law mean for businesses?
Under federal and state law, businesses are permitted to deduct a fine or penalty (other than one from the government) as an ordinary and necessary expense. The bill, however, is narrowly tailored to prevent deductions only for fines or penalties “assessed or imposed by the professional sports league that includes that franchise.” While the bill was meant to punish Donald Sterling for his racist comments, there are 25 professional teams in California that will be subject to the new law.
Given the narrow drafting of the bill, businesses other than professional sports teams will still be able to deduct fines or similar penalties paid to an entity (besides the government) as an ordinary and necessary business expense.
Contact a California Tax Attorney
If you have any questions regarding tax preparation and compliance for your business, our experienced California tax attorneys can help. Our tax attorneys at Janathan L. Allen, APC, together with our accountants at Allen Barron, Inc., enable us to provide comprehensive legal advice and accounting services for our clients.
Contact our tax attorneys today for a free initial case consultation to discuss your tax planning needs. We have several offices throughout Southern California.
