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 income is a “loophole,” such deductions are a normal and proper part of the income tax 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 depreciation 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 tax) 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 taxes. 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.