The Roster Depreciation Allowance and the NHL
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11-24-2012, 07:27 PM
Join Date: Jul 2007
Originally Posted by
Very good points made here about ownership of professional sports teams, and why it can attract brilliant billionaires to what seems to be a money-losing venture.
I'll go through a rough example that might help illustrate the true value of "money-losing" sports teams:
- Buy a team for $100 million
- The team earns pre-tax revenue of $5 million a year
- The team depreciates virtually all of the purchase price over the 15 year period, as explained in the report
- The team sells in 15 years for $150 million
Before getting into taxes, this team generates $5 million a year in cash, or $75 million over the 15 year hold period.
If there were no "Roster Depreciation" loop hole, the owner would basically have to pay taxes on $5 million a year. Using a rough 35% tax rate that would work out to $1,750,000 per year in taxes, or $26.25 million in taxes over 15 years. Then when he sells the team he realizes a $50 million capital gain, paying roughly 20% on that, or $10 million in taxes. Total taxes over 15 years are $36.25 million.
Along comes the Roster Depreciation Allowance. The owner depreciates his $100 million investment in the team, even though essentially everyone knows the value will go up over time, not down. $100 million in depreciation over 15 years works out to $6.5 million a year (rough numbers) so now the owner shows a $1.5 million loss each year instead of a $5 million gain.
Keep in mind he still pockets the $5 million in cash the team generates each year, while claiming a $1.5 million loss.
When he sells the team he pays capital gains taxes on the difference between the sale price ($150 million) and the net book value of the asset ($0, since it has been depreciated). Now he has a $150 million gain, but pays a much lower tax rate on this (around 20%?) so the tax bill at sale is $30 million.
This does a few advantageous things for the owner:
(1) Taxes are basically deferred. The owner pays no income tax at all on the team until it is sold.
(2) Taxes are minimized. Basically his entire tax bill is capital gains since there is no annual "income" due to depreciation. Capital gains have a lower tax rate (for now) in both the US and Canada.
(3) He can take the $1.5 million loss from the team, and roll it up to a personal level to offset $1.5 million in net income from other businesses, reducing his non-sports-team tax bill by roughly 35% of $1.5 million, or $525,000. That works out to a $7.8 million savings on taxes that he otherwise would have had to pay over the 15 years.
Overall, with the Roster Depreciation Allowance, the owner is going to pay $30 million in taxes 15 years from now, while saving $7.8 million in taxes from other ventures. Net $22.2 million in taxes, and it is essentially all back-dated. The NPV of that is minimal. If there were no RDA, he would have to pay $36.25 million over the same 15 years, and pay an annual amount of at least $1.75 million.
The owner makes out about $14 million better off because of this scam.
Rough numbers, rough tax rates, assumes owner has income from other sources, blah blah blah.
Thank you for the example, I missed the capital gains part that occurs when he sells the team. The 15 year rule is interesting, as it gives strong motive for an owner to sell the team when his RDA is all used up.
To kdb, obviously an "expense" has nothing to do with calculating revenue. And arent the Forbes numbers' estimates anyways? As I said, Im sure the PA auditors arent stupid and are aware of this when assessing teams' financial documents. But when owners claim that they are losing money, Im sure they are crossing their fingers behind their back with this in mind.
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