Billionaire Owners Use Teams To Avoid Taxes Shocking No One
Robert Faturechi, Justin Elliot, and Ellis Simani of ProPublica delved into tax information for dozens of billionaire owners across the four largest American pro sports leagues. This is a trigger warning for those with hostilities towards billionaires or concerns with income inequalities.
Billionaires Paying Less Than Millionaires…and Thousandaires?
Los Angeles Clippers owner and former CEO of Microsoft Steve Ballmer reported making $656 million to the IRS in 2018. His federal income tax rate was just 12%. LeBron James reported $124 million with a tax rate was of 35.9%. More curiously, Adelaide Avila, a concession stand worker at Staples Center had a rate of 14.1% — higher than Ballmer’s even though his income was almost 15,000 times greater than hers.
There is a provision of the U.S. tax code allowing for someone who buys a business to deduct almost the entire sale price against their income during the ensuing years allowing them to pay less in taxes. The underlying logic is that the purchase price was composed of assets — buildings, equipment, patents and more — that degrade over time and should be counted as expenses.
This tax treatment in professional sports is detached from economic reality. Teams’ most valuable assets, such as TV deals and player contracts, are virtually guaranteed to regenerate because sports franchises are essentially monopolies.
This means when owners profit from the teams they purchased, they can — legally — inform the IRS that they are losing money, thus saving vast sums on their taxes. If the teams are unprofitable in a given year, they can tell the IRS their losing vastly more.
Billionaire Owners Underreport Income
Owners frequently report incomes for their teams that are millions below their real-world earnings, according to the tax records, previously leaked team financial records and interviews with experts. The answer given by one owner shows the underlying problem.
We’re a nation of laws. U.S. Congress passes them. In the case of tax laws, the IRS applies and enforces the regulations, which are absolute. Owners simply and fully comply with those very IRS regulations.
Billionaire Owners Turn Profits Into Losses
When teams exhaust amortization write-offs, they regularly report millions in profits. Once amortization write-offs begin anew, those same teams swing from a large taxable profit to tax losses in the hundreds of millions. While it’s often not known whether these teams had real-world profits in the years they are taken over, there’s no evidence that anything significant about the real-world revenue and expenses change.
Team “Losses” Reduce Billionaire Owners Personal Tax Bills
Billionaire owners can save tens to hundreds of millions of dollars on their personal taxes. The response generally refers to key revenue streams of these owners used to pay rent, to employ hundreds of people, provide entertainment and instill pride in the community.
The standard practice is new owners deduct player salaries as a regular expense. The gimmick is a second deduction: amortizing the value of contracts for players already signed to the team. The value a new owner assigns to those contracts when the team is bought can be used to offset taxes on team profits, as well as any other income the owner might have.
More Than Just Player Contracts
Tax law now allows new owners of teams to write off television media deals and league franchise rights. Before the rules around amortization were loosened in the 1990s and 2000s, the IRS often insisted that assets could only be amortized if they had a real, finite lifespan and actually lost value over time. Not so much any more.
What About Back Taxes?
Even if owners ultimately repay the taxes they skipped, deferring payment of those taxes for years, sometimes decades, essentially amounts to an interest-free loan from taxpayers. An owner could reap huge gains by investing that money. More significantly, if owners die while holding their stake, as many do, the tax savings may never be repaid. And their heirs can generally restart the amortization cycle anew.
Generally, billionaires are paying shockingly little to the government by avoiding the types of income that can be taxed. Some of the richest people on the planet use pro sports teams to further lower their tax bills upending the conventional wisdom about how taxation works in America. Massive reductions on personal tax bills billionaire owners glean from their teams come on top of the much-criticized subsidies the teams get from local governments for new stadiums and further deplete federal coffers that fund everything from the military to medical research to food stamps and other safety net programs.