When you draw back the curtain made up of the fans, the celebrity athletes, the competition and the entertainment, at its heart, professional sports is a business. However, it is unlike any other business, which means that pro sports team owners face tax and accounting challenges the likes of which few other business owners or CEOs encounter.
For example, team owners must deal with unique issues as part of the acquisition and operation of a team. The first question is, What are they buying? The reason for the question is that many teams own and operate team assets as well as non-team assets.
Non-team assets may include: skating rinks, developable real estate, stadium interests and leases, as well as ownership in the overall sport operating leagues—and these scenarios are just the beginning.
It is unlike any other business.
In addition, during the acquisition, tax issues may come up as a result of the fact that most sports teams have a “season,” and often team transactions do not occur during that season. This “seasonality” factor creates significant issues related to unearned/deferred ticket and media revenues and player contracts/ signing bonuses.
The list can go on and on, but here are a few of the most “taxing concerns” for team owners.
REVENUE RECOGNITION AND EXPENSES
Because of the diverse and multiple revenue streams available to team owners, revenue recognition is one of their most pressing and unique challenges. For example, for certain sponsorship agreements, income received in one year may be recognized for financial statement purposes over the course of many years; but the IRS only allows the team to recognize income in accordance with the financial statement treatment for one year. In the second year, any unrecognized income is fully recognized for tax purposes.
Of course, the flip side of revenue is accounting for expenses. A typical pro sports team franchise incurs millions of dollars in operating costs while playing games and holding various activities in different venues, sometimes in multiple countries.
Once again, how to report these expenses is not as simple, nor as straightforward, as it is in other industries, particularly when teams are exposed to so-called “jock taxes” for playing in multiple jurisdictions. There is nothing that local government officials like more than imposing a tax on people/organizations that don’t live locally.
PLAYER CONTRACTS AND OTHER CHALLENGES
One of the other unique tax and accounting issues for team owners is the selection of players, the subsequent negotiations and the question of how to expense player contracts. Player contracts often run in the multi-millions of dollars, and are more intricate than many other employer/employee contracts drafted by other industries.
In addition to the direct process with the player, the team owner often must abide by strict league restrictions as to what can be agreed upon with the player and still remain within the “caps” imposed on the team itself.
Like any other business, team owners can expense player salaries; however, there are bonuses, incentives and other forms of compensation from leagues, etc., along with proper capitalization and amortization issues that makeaccounting and income tax implications of an athlete’s entire compensation package particularly complex.
Yet another tax challenge unique to sports team ownership is whether an owner is going to be categorized as “active” or “passive” for tax purposes. Sometimes it is an attractive option for a high net worth individual to avoid the huge financial investment of purchasing a sports franchise in its entirety, and instead become a “passive,” or limited, partner in the team.
For such limited partners, there are still major perks, such as flying on the team plane and enjoying exclusive access to players and special team events, but as you probably have gleaned by now, even such limited investment in a team franchise can have very unique tax implications.
For example, these “minority owners” may be subject to the Net Investment Income Tax, which, ever since 2013, levies a 3.8 percent tax on certain sources of “passive income.” In the event of a loss by the team, owners considered to be “passive” investors may be limited in how much they may deduct in flow-through losses.
THE END GAME
The goals of tax planning for pro sports team owners are the same as they are for any high net worth individuals: to develop strategies for maximizing income and minimizing tax obligations. This article has only scratched the surface of some of the “taxing concerns” of team owners.
You can insert your preferred sports analogy choice here, but for team owners, “crossing the finish line,” “hitting it out of the park” or creating a “slam dunk,” on their tax returns requires the help of financial professionals who are every bit as talented as the players on the teams they own.
This article was co-authored by Edward Blum, CPA, [email protected].
This article was originally published in the May–July 2017 issue of Worth.
