How Tristan Thompson Deal Affects Cavs Tax Bill

Courtesy of USA Today Sports Images

Courtesy of USA Today Sports Images

The Cavaliers finally struck a deal to sign Tristan Thompson on Wednesday night when the sides reached agreement on a five-year, $82MM arrangement, as Chris Haynes of the Northeast Ohio Media Group and the Cleveland Plain Dealer reported. The precise value of the contract is still unknown, but Thompson will draw a salary of $14.2MM this season, a source told Jeff Zillgitt of USA Today (Twitter link). [UPDATE, 4:00pm: The precise value of this season’s salary for Thompson, who has officially re-signed, is $14,260,870, reports Eric Pincus of Basketball Insiders (Twitter link). So, we’ve revised the numbers you see below accordingly.] That’s the key figure in what likely proved a stumbling block as negotiations dragged on for months: the luxury tax.

The Cavaliers already had a payroll well above the $84.74MM tax threshold before coming to terms with Thompson, and signing him means Cleveland is in line to shell out a total that’s second only to the $190MM-plus the Nets paid in taxes and salary during the 2013/14 season. The league makes its tax calculations according to payrolls on the final day of the regular season, so it’s still too early to determine exactly how much the Cavs will pay. However, the $14,260,870 figure for Thompson shows the sort of financial straits the Cavs are getting themselves into.

Cleveland was a taxpayer this past season, but the team is not in line for repeat-offender penalties, which kick in when a team pays the tax in at least three years out of the previous four. That’s a saving grace, but the Cavs will still be paying plenty. Their existing amount of guaranteed salary, before Thompson, was $94,907,206, according to Eric Pincus of Basketball Insiders. All of it was committed to the 13 Cavaliers aside from Thompson who have fully guaranteed salaries this season, since the Cavs aren’t carrying any partial guarantees. Adding $14,260,870 to that figure would bring it to $109,168,076, or $24,428,076 more than the tax line.

That number reflects the team’s salary as it relates to the cap, but the tax incorporates other calculations. Any Cavs player who triggers an incentive clause in his contract that the league deems they’re unlikely to achieve would make the number rise accordingly for tax purposes. Conversely, if any of the Cavs fail to meet likely incentives, the team’s tax number would go down. The tax also treats all minimum-salary contracts equally, except for players whom teams signed as draft picks. That makes Joe Harris, last year’s 33rd overall pick, cheaper for the Cavs than most other players on minimum-salary contracts would be. His $845,059 one-year veteran’s minimum salary, which is fully guaranteed, is reflected on the team’s payroll as just that. If the Cavs were to keep Jack Cooley on his $845,059 one-year veteran’s minimum contract for the entire season, it would show up at $947,276 when the league adds up Cleveland’s payroll at season’s end.

The estimated $109,168,076 payroll figure for Cleveland, which includes Thompson, entails a roster of 14 players, one shy of the regular season maximum. Most teams carry 15 on opening night, and almost every team has a 15th player at some point during the year. Teams usually make at least slight changes to their personnel over the course of the season, so it’s a stretch to assume that Thompson and the 13 other fully guaranteed players will constitute the Cavs roster by season’s end. However, here’s how the league would tax the Cavs in the event that $109,168,076 figure holds:

  • Cleveland would first have to pay a $7.5MM penalty for exceeding the tax line by at least $4,999,999.
  • Penalties of $8.75MM, $12.5MM and $16.25MM would follow, since the team would also burst through the next three tax brackets.
  • The Cavs would have to pay $3.75 for every dollar they spent above $20MM. Since the Cavs would be $24,367,206 above the tax threshold, they would pay $4,428,076 times $3.75, or $16,605,285.
  • Add $16,605,285 to $7.5MM, $8.75MM, $12.5MM and $16.25MM, and you get a total tax bill of $61,605,285.

This scenario would mean a payout of $170,773,361 in salary and taxes. Again, that’s an estimate, since the Cavs are bound to make roster changes between now and the end of the season and incentives clauses could come into play. Still, it demonstrates the kind of financial commitment that owner Dan Gilbert is making. Cleveland’s first pro championship since 1964 would carry tremendous psychological value to the city’s sports fans, and for Cavs ownership, the prospect of delivering that title is apparently worth plenty in actual value, too.

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