Tuesday, December 28, 2004
THE TAX MAN IS HERE
The Sox are paying the luxury tax for the 2004 year and will likely pay it again for 2005. But some media reports are misleading regarding the calculation of a team’s standing against MLB’s player compensation cap.
The notion that is not clearly stated often is that a player’s current salary, unless it is a one-year deal, has no bearing on his club’s luxury tax computation. The “Average Annual Value” of a player’s contract is the salary figure used to determine a club’s position regarding the luxury tax threshold. Basically, the “Average Annual Value” is the total guaranteed compensation of a player’s contract divided by its term or number of years.
For example, BK’s two-year deal guaranteed $10 million to be paid out as follows: $4 million in 2004 and $6 million in 2005. In terms of the luxury tax calculation, $5 million was applied for BK’s contract in both 2004 and 2005. In multi-year deals, a player’s current salary is necessarily the figure used to compute the club’s standing against the cap; it is the “Average Annual Value” of the deal.
Of course, there are other nuances involved in calculating a club’s luxury tax figure, but the above term in the CBA, regarding this topic, is the most critical.
I have my own spreadsheet of the Sox salary commitments that is fairly accurate from Dugout Dollars and various media reports. If you would like a copy, shot me an email.
The Sox are paying the luxury tax for the 2004 year and will likely pay it again for 2005. But some media reports are misleading regarding the calculation of a team’s standing against MLB’s player compensation cap.
The notion that is not clearly stated often is that a player’s current salary, unless it is a one-year deal, has no bearing on his club’s luxury tax computation. The “Average Annual Value” of a player’s contract is the salary figure used to determine a club’s position regarding the luxury tax threshold. Basically, the “Average Annual Value” is the total guaranteed compensation of a player’s contract divided by its term or number of years.
For example, BK’s two-year deal guaranteed $10 million to be paid out as follows: $4 million in 2004 and $6 million in 2005. In terms of the luxury tax calculation, $5 million was applied for BK’s contract in both 2004 and 2005. In multi-year deals, a player’s current salary is necessarily the figure used to compute the club’s standing against the cap; it is the “Average Annual Value” of the deal.
Of course, there are other nuances involved in calculating a club’s luxury tax figure, but the above term in the CBA, regarding this topic, is the most critical.
I have my own spreadsheet of the Sox salary commitments that is fairly accurate from Dugout Dollars and various media reports. If you would like a copy, shot me an email.
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Thank you - Red Sox!
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