The tax man is, very slowly, making it slightly less attractive to buy a team.
For the past five years, the ultrawealthy buyers of sports franchises have taken advantage of a tax incentive designed to spur business investment. The loophole, called bonus depreciation, allows business owners to write off the entire cost of buying equipment and other tangible assets in year one instead of doing so incrementally over longer periods of time. That holds true whether it’s the $900 that a self-employed person spends on a new laptop or the hundreds of millions a billionaire pays for a stadium housing a major league franchise.
“You’d obviously rather get your money today than you would in two years, three years, five years, 10 years—that’s the bonus,” said Michael J. Kuh, a partner at the law firm of Hogan Lovells who advises on mergers and acquisitions for industries including sports. “It is effectively the government helping to subsidize the acquisition of a team.”
Since it’s the U.S. tax code, eligibility and accounting is complex, but, generally speaking, the government allows businesses to write off the cost of equipment over time, from five years for a desk to 27.5 years for an apartment a landlord rents out. This is how the IRS accounts for equipment that wears out and has to be replaced. Being able to deduct all those expenses almost immediately is a boon for people with the wherewithal to buy a pro sports team.
But starting with 2023, the ability to quickly write off all the tangible assets included in a team purchase—from the arena itself to the fryers in the concession stands to the trainer’s table—is getting phased out.
Given the skyrocketing values of sports franchises, the vast majority of the price paid for a team is what accountants call goodwill—the price that exceeds the net value of the assets of a business and its debt. Bonus depreciation doesn’t cover goodwill, which itself is tax deductible over 15 years. While a minority of a team’s cost are tangible assets that can be written off under bonus depreciation, it is still sizeable.
For example, in Sportico’s latest Major League Baseball valuation, the Atlanta Braves are worth $2.54 billion, of which Truist Park and the adjacent mixed-use real estate development called The Battery Atlanta are worth $270 million, based on current property tax assessments. If the Braves were up for sale, available bonus depreciation on the tangible assets could result in an immediate $135 million in tax savings to a billionaire buyer who lives in New York or California and faces a 50% combined federal, state and local income tax rate.
“That tax savings is effectively cash in the investing owner’s pocket, which means they can probably afford to pay a little more for the team,” said Mark Weinstein, a tax expert and partner also at Hogan Lovells. “From a seller’s perspective, it’s increased the value the team if they’re able to extract additional purchase price because the buyer may be able to claim tax relief. Maybe they split it.”
Make no mistake, team values in North America’s top four sports leagues have more than tripled the past decade because of skyrocketing media rights values. But the bonus depreciation has helped goose prices, at least a little, especially as private equity investors increasingly buy into sports teams. Weinstein adds, “Any tax savings that they can show on this spreadsheet, through depreciation and bonus depreciation, is helpful to go to their investment committee and get approval to increase the bid.”
Bonus depreciation was never specifically for team owners. The concept has been around in some form since it was conceived after the terrorist attacks of 9/11 to spur general business investment by allowing companies to write off 30% of new equipment immediately, with the remaining 70% depreciated as normal over the applicable multi-year period. In 2017, the Tax and Jobs Act expanded bonus depreciation to 100%. The act mandates that starting in 2023, the immediate write-off falls to 80% and reduces by 20% a year until it goes away completely after 2026, according to Tax Foundation data.
Come 2027 sports team owners will still be able to depreciate assets against their taxes, it will just be over a longer period of time. “Does this going away move the needle with buyers? I don’t know if it does,” said Kuh. “But they’re not unaware of it.”