Over the past few weeks the media has reported on how wealthy taxpayers who own sports teams lower their tax liability by deducting the cost of purchasing a sports team over 15 years. Contrary to claims that deducting the cost of a sports team from taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. is a “loophole,” such deductions are a normal and proper part of the income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system.
Under current law, owners of sports teams may deduct the cost of purchasing a team over 15 years from their taxable income. The deductions are known as amortization, and they are like taking depreciation deductions for the cost of physical assets but for intangible assets. Amortization and depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. deductions ensure that businesses are taxed on net income.
For example, imagine a sports team that is purchased by an investor for $10 million. From an accounting perspective, deducting the $10 million cost from taxable income over the next 15 years helps match the deductions to the revenue that is generated in the future to calculate a smooth measure of net income. If the $10 million deduction were not allowed, the sports team investor would effectively be taxed on the purchase of the team (like an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. ) and on the future revenue generated, rather than on the net income produced by the team.
The history of amortizing sports team expenses can also be instructive. Prior to 2004, many intangible costs related to sports teams could not be amortized, but other deductions were allowed—and were often subject to tax litigation between sports team owners and the IRS. Properly valuing teams, allocating costs, and matching amortization deductions with real-world changes in the value of the sports team proved difficult to administer.
In 2004, the tax law changed to allow sports team owners the right to amortize intangible expenses. The Joint Committee on Taxation (JCT) actually scored the change as raising federal revenue—about $382 million over 10 years—because it stopped the disputes between sports team owners and the IRS over allowable deductions that tended to decrease revenue collections.
One concern about the tax treatment of sports teams is that their purchase may partially be entertainment spending for the team’s owners, which would be a form of consumption and properly subject to tax under state sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es. Skeptics of providing amortization deductions for sports teams may argue that this is a good reason to disallow the deductions for federal income tax purposes, but the implications of doing so—essentially turning the federal income tax into an excise tax, but only in certain circumstances—would be a mess. And it would penalize the owners of sports teams who run them entirely for business purposes.
A more constructive alternative to concerns over tax-free consumption by the wealthy would be to levy taxes on consumption in a direct and progressive way. It would be less complicated and have fewer economic distortions than trying to create a fine-tuned system of amortization and depreciation deductions based on consumption within businesses—which history tells us is rife with valuation complexities and litigation.
Providing deductions for business expenses is a standard part of our income tax system, even when the business is a sports team.
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