The Internal Revenue Code can often offer substantial tax benefits for those who acquire sports franchises. This is because the full cost of the purchase, which can typically be considerable, can be expensed over a certain period, enabling the reporting of significant tax losses.
Despite the recent ProPublica exposé highlighting the tax losses claimed by deep-pocketed owners in the sports industry, taxing deals in this sector have not abated. A quintessential example is the recent acquisition of the Baltimore Orioles by a consortium spearheaded by David Rubinstein of Carlyle Group Inc., valued exorbitantly at $1.725 billion.
In light of the escalating value of sports franchises and the subsequent benefits that investors can glean in terms of considerable tax losses, the IRS announced a new campaign this year to target losses in the sports industry. Consequently, scrutinization of acquirers is anticipated to surge, though the canny acquirer can still identify several potential deductions that conform to guidelines.
All new owners can depreciate the value of tangible assets acquired, such as sports facilities, stadiums, equipment, and vehicles. For this year, owners can also profit from bonus depreciation, allowing them to deduct up to 60% of the value of qualifying assets.
Interest expenses linked to debt finance for the franchise acquisition can also be deducted. However, an individual partner’s tax code might restrict the interest they can deduct. Another vast major source of tax losses are usually triggered based on the amortization of intangible assets. After the introduction of the American Jobs Creation Act of 2004, acquired intangible assets could be written off through a 15 year amortization process.
Franchise rights and television rights constitute the majority of the remaining purchase price due to local monopolies held by most sports franchises. Goodwill or the difference between the purchase price and the underlying asset’s fair market value can generate considerable deductions.
With the impending increase in IRS scrutiny, partnerships and their partners should be prepared to properly document the purchase price and retain records so they can justify any reported losses and ensure that deductions are correctly taken under IRC requirements.
The full article is available on Bloomberg Tax.