Hoops Rumors Originals

If an NBA team’s salary continues to rise after it surpasses both the salary cap and the luxury tax line, it may reach or exceed one or both tax “aprons.” The level of the first tax apron is several million dollars above the threshold at which a team becomes a taxpayer, while the second tax apron is another $10MM+ beyond the first apron.

A team whose salary exceeds the first apron is prohibited from making certain moves during that league year, while a team whose salary goes beyond the second apron faces even more restrictions. The goal is to encourage competitive balance by limiting the ability of the teams with the NBA’s highest payrolls to further upgrade their rosters.

Although the tax apron isn’t a new addition to the NBA’s Collective Bargaining Agreement, the 2023 CBA represents the first time that the league’s cap system features multiple aprons. The 2023 CBA also introduced several new rules that apply to teams whose salaries are above one or both aprons.

Let’s dive in and break down the tax aprons in greater detail…

How are the tax aprons calculated?

The formula that determined the level of the first tax apron in 2024/25 was as follows:

• Formula: $172,345,814 x ($140,588,000 / $136,021,000)
• Result: $178,132,000
  • Note: The result was rounded to the nearest thousand.

These may just look on the surface like a collection of random numbers, but there’s a method to the madness. $172,345,814 was the result of last season’s first apron calculation (it was rounded to the nearest thousand, $172,346,000, for functional purposes); $140,588,000 is this season’s salary cap; and $136,021,000 was last season’s cap.

In other words, the first apron is simply rising by the same rate as the salary cap. That will continue to be the case going forward.

Like the first apron, the second apron will increase at the same rate as the cap each season, meaning the formula for 2024/25 was as follows:

• Formula: $182,793,814 x ($140,588,000 / $136,021,000)
• Result: $188,931,000
  • Note: The result was rounded to the nearest thousand.

In future seasons, the current-year salary cap amount will be substituted into these two formulas in place of $140,588,000 to determine that season’s first and second tax aprons.

What restrictions does a team face if its salary is above the first tax apron but below the second apron?

When implementing its new CBA in 2023, the NBA gradually phased in the restrictions facing teams operating above the tax aprons over the course of two seasons. That gave those teams an opportunity to adjust their rosters to account for the new apron-related rules.

As of the 2024/24 season, all of the new restrictions are in effect.

Here are the moves that a team whose salary is above the first tax apron – but below the second apron – is prohibited from making in 2024/25 and beyond:

1. Acquiring a player via sign-and-trade.
2. Using any portion of the bi-annual exception for any transaction.
3. Using any portion of the non-taxpayer mid-level exception to acquire a player via trade or waiver claim.
4. Using more than the taxpayer portion of the mid-level exception to sign a player.
5. Signing a player who was waived during the current season if his pre-waiver salary for that season exceeded the amount of the non-taxpayer mid-level exception.
6. Using one or more outgoing players in a trade for matching purposes to take back more than 100% of the outgoing salary.
7. Using a traded player exception generated during the prior year (ie. between the end of the previous regular season and the end of the most recent regular season).

It’s worth clarifying a few points related to these restrictions.

A team operating above the first apron doesn’t have access to the bi-annual exception or non-taxpayer mid-level exception, both of which can be used to sign a player or to acquire a player via trade or waiver claim. First-apron teams can use the taxpayer mid-level exception, but it can only be used to sign a player, not to acquire one via trade or waiver claim.

A team restricted to the taxpayer form of the mid-level can’t exceed its limits in dollars or years. For instance, in 2024/25, the taxpayer mid-level exception can be used to sign a player to a deal with a starting salary of up to $5,168,000 for up to two years. That means a team using its mid-level exception to sign a player to a three-year contract worth $3MM annually would have to use the non-taxpayer MLE to do so, since the deal would only fit within the taxpayer MLE in terms of money, not years.

The fifth item in the list above is important to remember after the trade deadline when certain veterans negotiate contract buyouts. If the player’s salary exceeds the full value of the non-taxpayer mid-level exception ($12,822,000 in 2024/25), he would be ineligible to sign with a team operating above the first apron once he clears waivers and reaches free agency — even if he negotiates a buyout that reduces his salary to below that non-taxpayer MLE amount.

The sixth item in the list only applies in instances where salary-matching is necessary. For example, a team operating above the first tax apron could send out a player earning $10MM in exchange for a player earning $9.5MM and a second player on a one-year, minimum-salary contract — even though the club would technically be taking back more total salary than it’s sending out, the minimum-salary player can be acquired using the minimum salary exception, so the $10MM player is only being used to match the $9.5MM player’s incoming salary.

In regard to the seventh item, let’s say a team operating above the first apron currently has one traded player exception worth $5MM, then generates another one worth $8MM at the 2025 trade deadline. Both of those exceptions would become unavailable once the team’s 2025 offseason begins.

That club could subsequently make a draft-night deal that generates a new $7MM trade exception and use it at any point between its creation and the end of the 2025/26 regular season. But if that team continues operating above the first apron, that $7MM TPE would once again become unavailable once the 2026 offseason begins, prior to its typical one-year expiration date.

What restrictions does a team face if its salary is above the second tax apron?

A team whose salary is above the second tax apron is prohibited from making any of the moves unavailable to teams above the first apron, as described above. That includes acquiring a player via sign-and-trade, using any portion of the bi-annual exception, and so on.

Additional restrictions also apply to teams operating above the second apron. Here are the moves that teams above the second tax apron are prohibited from making in 2024/25 and beyond:

1. Using any portion of the mid-level exception.
2. Aggregating two or more player salaries in a trade.
3. Sending out cash as part of a trade.
4. Acquiring a player via trade by using a signed-and-traded player for salary-matching purposes.
5. Acquiring a player via trade using a traded player exception if that TPE was generated by sending out a player via sign-and-trade.

Teams above the second tax apron will face one more draft-related restriction beginning in the 2025 offseason. If the team’s salary exceeds the second apron at the end of a season, its first-round pick in the draft seven years away will be “frozen” — in other words, that pick would not be tradable.

If the team’s salary exceeds the second apron in at least two of the following four seasons (three of five in total), the frozen pick would move to the end of the first round for that draft. Conversely, if the team stays below the second apron for at least three of the subsequent four seasons, its pick becomes “unfrozen” and is once again tradable.

Let’s use the Suns as an example, since they’re a lock to finish the 2024/25 league year above the second tax apron. That would result in their 2032 first-round pick becoming frozen, ineligible to be traded once the ’25/26 league year begins. If their team salary remains above the second apron for at least two more seasons between ’25/26 and ’28/29, their frozen pick would move to the end of the 2032 first round and would remain ineligible to be dealt.

If multiple teams have a frozen pick moved to the end of the first round in a particular draft, they would make their selections in reverse order of their place in the NBA standings in the season prior to that draft. For example, if both the Suns and Celtics have their 2032 first-rounders moved to the end of the round and Boston finishes ahead of Phoenix in 2031/32, the Suns would pick ahead of the Celtics in that draft.

Can a team that begins a league year above the first or second tax apron gain the ability to make additional moves by reducing its salary and dipping below the apron(s)?

Yes. If a club were to open the 2025/26 league year carrying $200MM in salary, then engaged in a series of salary-dump trades that reduce its team salary to $150MM, it would no longer be subject to the restrictions facing an apron team.

The apron restrictions that apply to a team are determined by its salary position upon the conclusion of a given transaction. That means that if a second-apron club agrees to a trade that will move its team salary below the second apron, it could aggregate salaries and/or send out cash as part of that deal.

However, as long as the team’s salary remains above the first or second apron – or if the team is completing a transaction would push its salary above one apron or the other – that team is subject to the rules that apply to that apron level.

Critically, it’s worth noting that once a club engages in a roster move that is prohibited for a team above the first or second apron, that club will be hard-capped for the rest of the season at that apron level.

In 2024/25, for instance, teams like the Kings and Hornets acquired players via sign-and-trade, the Warriors and Mavericks used the non-taxpayer mid-level exception, and the Thunder and Pelicans took back more than 100% of their outgoing salary in trades. As a result, those teams are a few of the many that are hard-capped at the first apron ($178,132,000) and aren’t permitted to surpass that salary level for the rest of ’24/25.

The Nuggets, Pacers, and Knicks are the three teams currently hard-capped at the second apron ($188,931,000) this season. Denver used the taxpayer mid-level exception, Indiana sent out cash in a trade, and New York aggregated salaries in a trade.

Finally, there’s one more important point related to apron level restrictions and hard caps: A team that engages in any of the trade-related transactions prohibited for first or second apron teams between the end of the regular season and the end of that league year on June 30 will not be permitted to exceed that apron level during the following season.

If, for example, a team sends out cash in a trade in June of 2025, that team won’t be allowed to exceed the second tax apron during the 2025/26 league year. The inverse is also true — a team whose 2025/26 salary projects to be over the second apron won’t be able to trade cash in June 2025.

This rule only applies to trade-related transactions because the ones related to free agency don’t come into effect between the end of the regular season and the start of the next league year.

Anything else I should know about the tax aprons?

It’s worth pointing out that a club with a number of incentive bonuses on its books may find itself operating above the first or second apron even if its base team salary doesn’t exceed those levels.

For the purposes of calculating a team’s salary, a player’s likely incentives are included in his cap hit, but his unlikely incentives aren’t (an incentive is considered likely to be earned if it was achieved last season and unlikely to be earned if it wasn’t). However, for the purposes of determining a team’s apron level, all those incentives are counted.

That means a team with a $175MM base salary and an additional $5MM in unlikely incentives in 2024/25 would be considered a first apron team and would be unable to make certain roster moves, since there’s a chance those incentives could be earned, pushing the club’s salary above $178,132,000.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement.

An earlier version of this post was published in 2023.

The term “tax variance” doesn’t technically show up in the NBA’s Collective Bargaining Agreement, but it’s used colloquially to refer to instances in which a team’s salary for the purposes of calculating its end-of-season luxury tax bill diverges from its standard salary relative to the cap.

This can occur for a number of reasons, including player suspensions, incentives being met (or not), and certain free agent signings. Here’s a breakdown of how each of those occurrences affect a team’s salary for tax purposes:

Suspensions

When a player is suspended by the NBA, he forfeits a percentage of his salary. That percentage ranges from as low as 1/174th for a standard one-game suspension to as high as 1/91.6th for a suspension related to a failure to render services.

In each instance, a team receives a tax variance credit for 50% of the player’s forfeited salary. That means that if a player loses $1MM as a result of a suspension, his team receives a tax variance credit worth $500K.

That amount doesn’t come off the player’s cap hit or the standard team salary, which remain the same for the rest of the season. But for the purposes of calculating a team’s tax bill at the end of the season, the club’s total taxed salary is reduced by $500K as a result of the suspension.

The tax variance credit doesn’t apply to a suspension imposed by the player’s team, since it could open the door for clubs to try to reduce their tax bills or duck the tax entirely by suspending their players.

A player still forfeits a portion of his salary when he’s suspended by his team (subject to appeal), but his team doesn’t generate any cap or tax savings.

For instance, when the Heat suspended Jimmy Butler for seven games, it cost him $2,355,798 (7/145ths of his $48,798,677 salary), but it didn’t change Miami’s cap or tax situation at all.

Unlikely incentives that are earned / Likely incentives that go unearned

When a player’s contract includes incentives, they’re considered either “likely” or “unlikely” to be earned. Likely incentives count toward a player’s cap hit for that season, while unlikely incentives don’t.

An incentive is deemed likely or unlikely based on whether or not the player and/or his team met the incentive criteria the previous season. So if a player’s contract calls for a bonus if his team wins the title, he’s considered “likely” to earn it if his team won the championship the year before — even if, in reality, his team isn’t literally likely to repeat.

Here’s a more detailed example. Let’s say a player has a $20MM annual base salary, plus a $1MM incentive if his team wins at least 40 games, another $1MM incentive if his team makes the playoffs, and a third $1MM incentive if he appears in at least 65 games.

If the player appeared in 70 games the prior season and his team finished 41-41, missing the playoffs, he would’ve earned two of those three $1MM bonuses. That means that for the subsequent season, his cap hit would be $22MM, with $2MM in likely incentives counting against the cap and $1MM in unlikely incentives not counting toward his cap charge.

That $22MM is the player’s cap hit for the rest of the season, but his team is subject to tax variance depending on whether or not he earns those incentives again. If the player appears in just 50 games and his team wins 35, missing the postseason, he’d miss out on all three bonuses and his team would receive a tax variance credit of $2MM for the two likely incentives he didn’t end up earning.

Conversely, if the player stays healthy, appears in 75 games, and leads his team to a 50-win season and a playoff berth, he’d earn all of his incentives, including the $1MM that had been considered unlikely. That tax variance would be taken into account for the team, with $1MM being added to its salary for the purposes of calculating its tax bill.

If we assume our hypothetical team entered the season with its player counting toward the cap for $22MM and its total salary at $180MM, tax variance could result in that total ending up as low as $178MM or as high as $181MM by the end of the season, which could significantly change the team’s final tax payment.

Signings of free agents with fewer than two years of NBA service

A rookie’s minimum salary is significantly less than that of a veteran player. But a team looking to duck the tax while filling out its back-end roster spots can’t simply sign a handful of rookie free agents to maximize its savings.

When a player with fewer than two years of NBA service signs a free agent contract worth less than a two-year veteran’s minimum salary, tax variance applies — for tax purposes, that player counts for the same amount that a two-year veteran on a minimum deal would.

The rookie minimum salary for 2024/25 is $1,157,153, whereas the minimum for a two-year veteran is $2,087,519. If a team signed a rookie free agent to a minimum-salary contract this season, that player’s salary and cap hit would be just $1,157,153, but he would count for $2,087,519 toward the tax.

If that player signed a two-year, minimum-salary contract, his salary and cap hit in 2025/26 would be $1,955,377, but he’d count for $2,191,897 toward the tax (those figures can be found in the second column of our minimum-salary chart).

Because this tax variance only applies to free agents, teams can avoid it by signing a rookie draft pick to a minimum-salary contract. That’s why we often see taxpaying clubs prioritize second-round picks — they can use those selections to draft a player who will sign a rookie minimum contract and actually have that modest rookie-minimum figure count for tax purposes. Tyler Smith of the Bucks and Oso Ighodaro of the Suns are a couple 2024 second-rounders on second-apron teams who fall into this category.

It’s worth noting that the same rule applies when a team is converting a player to a standard contract from a two-way deal. If the player was initially signed as a draft pick, tax variance won’t apply to him. If he signed as a free agent, it will.

This is why the Knicks, when they were looking to remain below their hard cap while filling out their roster back in the fall, had the option to convert Ariel Hukporti or Kevin McCullar (both 2024 second-rounders) from two-way deals to rookie-minimum contracts to stay below the hard cap, but couldn’t do so with Jacob Toppin, who signed initially as a free agent. Tax variance would’ve applied to Toppin, who would’ve counted for tax (and apron) purposes as if he were a veteran free agent, even though he only had one year of NBA service on his résumé.

New York ultimately converted Hukporti, whose prorated minimum deal is worth just $1,064,049 for cap, tax, and apron purposes.

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Information from ESPN’s Bobby Marks was used in the creation of this post.