November 25, 2013

Most businesses assume that compensation is deductible when it is paid.

However, a recent statement by the IRS raises the question of whether some upfront “signing bonuses” paid to employees who sign a multi-year employment contract must be amortized over the term of the contract, rather than deducted when paid to the employee.

Signing bonuses paid by a minor league baseball team to its players must be amortized over the term of the player contracts, according to an IRS Legal Advice Issued by field attorneys.

Based on its experience, the taxpayer who operates the minor league baseball team wanted to amortize the signing bonus over a shorter period, which historically was shorter than the term provided in the contracts. (IRS Memorandum 20133901F, released Sept. 27, 2013)vp0214d

When the contract’s termination clause comes into effect, however, the contract stipulates that the player is required to provide services to the team for seven separate baseball seasons. At the end of this seven-year term, if the player has not entered into another contract with the team, he becomes a free agent.

Under the termination clause, the player can terminate his contract only if the team is in default on its contractual obligations for more than 15 days. The team can terminate the contract for many reasons, including if the player signs a major league contract, the player is traded, the player becomes disabled, or the team judges that the player has failed to play well enough.

The team compiled a report that showed the average life of all of its minor league player contracts over a period of years and sought to amortize the signing bonuses over that average number of years.

The IRS has previously ruled (Rev Rul. 67-379) that a signing bonus paid to a player is required to be capitalized and amortized over the useful life of the player’s contract. To the IRS, the useful life for a baseball player’s contract generally is the period over which the team controls the player’s ability to sign a contract with another team.

In the Legal Advice, the IRS concluded that, because the team controls the player for the term of the contract, the useful life of the player contract is that term – seven years – and the player bonus is amortizable over the seven-year right of the team to receive services from the player.

This article was originally posted on November 25, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at