On January 16, the IRS announced a campaign to “identify partnerships within the sports industry that report significant tax losses and determine if the income and deductions driving the losses are reported in compliance with the applicable sections of the Internal Revenue Code.” As rapidly escalating prices limit the pool of potential buyers, ownership of sports teams is increasingly limited to the ultra-wealthy. Many sports partnerships are structured as pass-through entities (e.g., LLCs, S corporations), with important tax implications.
There are various means by which a sports partnership can generate tax losses. While it is possible for operating expenses to exceed revenues, salary controls in most US sports leagues limit the likelihood that a team will not be able to operate profitably on a cash basis. However, depreciation, amortization, and the deductibility of interest payments on debt can allow sports partnerships to report financial losses.
Ownership of sports teams often includes a stadium, arena, or other facilities, the value of which can be depreciated over time, reducing taxable income. The value of intangible assets such as player contracts, brands, and broadcasting rights can similarly be amortized to reduce taxes. If a sports partnership takes on debt to finance an acquisition or improvement of a team, interest payments on that debt will generally also be tax-deductible.
Sports partnerships that are structured as pass-through entities do not pay income tax directly, and any losses are allocated to individual partners. Considering the scale of the sports business and the net worth of individual owners, the size of the tax benefits can be quite substantial.
Understanding the potential tax benefits of sports team ownership starts with a valuation of the underlying assets, which form the basis for depreciation and amortization schedules. As scrutiny of sports teams and their owners increases, accurate and defensible valuations are critical. The team at Appraisal Economics brings deep experience in the sports industry and expertise in applying the correct methodologies for valuing both tangible and intangible assets. Contact us today to learn how we can help.