How Sporting Franchises Help Billionaires to Plan Their Taxes

Over the years, the sporting business has quietly metamorphosized into a big business. The amount of money changing hands in the sports business today would have been considered unthinkable even a few years ago.

It is common for franchises to be valued in billions of dollars. Star players also make millions of dollars while playing in the league.

There is one thing that hasn’t changed through the years. The amount of income shown by sporting franchises as taxable incomes has almost stayed constant. The sporting franchises pay so less in taxes that many critics have stated that the billionaire owners of sporting teams pay the smallest percentage of their income in taxes.

The millionaire players also pay a significantly small percentage of their income in taxes. It is the lower echelons of stadium workers and other administrative staff working in these sporting franchises that end up paying the largest chunk of taxes.

In this article, we will have a closer look at some of the reasons why sporting franchises try to understate their income and pay lower income taxes. We will also have a closer look at some of the common methods that are deployed by sporting franchises in order to evade taxes.

Why do Sporting Franchises Understate Their Income?

Sporting franchises understate their income for two primary reasons:

  1. The first reason is obvious. When sporting franchises understate their incomes, they are able to lower their taxable incomes. As a result, they pay low taxes and are able to retain a larger share of their wealth

  2. The second reason is that sporting franchises use these claims of abysmally low incomes in order to negotiate a lower wage with the athletes. The owners of the sporting franchise persuade the athletes to take a lower salary by claiming that the business is not making large sums of money. Hence, they are unable to pay higher wages to the athletes.

The main reason that sporting franchises are able to understate their income is that most of these franchises are structured as private corporations. Hence, they are under no compulsion to reveal their financial data to the public at large.

How do Sporting Franchises Understate Their Income?

There are several complex creative accounting practices that billionaire owners of sporting franchises around the world use in order to understate their income. The details about the most prominent ones have been explained below:

  1. Tax Shield of Purchase Price: The most common accounting loophole used by the owners of sporting franchises is using the purchase price of the sporting franchise as a tax shield. Tax authorities around the world allow franchise owners to amortize a certain percentage of their acquisition price.

    For instance, in the United States, the acquisition price of a sporting franchise can be written off over a period of 15 years. The taxation authorities believe that the vast majority of the value of the franchise is made up of intangible assets such as player contracts as well as broadcast rights and hence allow them to be amortized over time.

    In fact, intangible assets such as brand value are also allowed to be amortized! The end result is that the expenses start appearing very high in relation to the income. Hence, even if the franchise has a high income, it ends up showing a loss to the taxation authorities. This loss does not exist in reality since the entire valuation has been written off over 15 years.

    However, the value of the franchise will not be zero after 15 years, instead, it will have grown several times! Hence, owners of sporting franchises are able to claim depreciation over assets that never actually depreciate in value.

    Also, since the franchise is structured as a private corporation, these losses flow to their personal income statement and they are able to offset their high income in other businesses using these tax laws. In fact, these losses can even be rolled over for a few years in order to offset profits that happen in different years.

  2. Owner Fees: Another common method in which owners lower the income of the sporting franchise is by paying themselves a consultation fee or any other kind of management fee. This is not done to reduce the taxes since the government would end up taxing the income in the hands of the owner. Instead, this is done to artificially increase the operating expense and lower the profits so that they can bargain for lower wages with the athletes.

  3. Paying Group Companies: Not only do the owners pay themselves in order to lower the profits, but they also end up in some of their group companies.

    It is common for the franchise owners to use their own group companies which provide services to the franchise. These services may or may not be required by the franchises. Since the sporting franchise is not a listed company, they do not have to extensively report related party transactions to the tax authorities.

  4. Reallocation of Earnings: Lastly, it has also been observed that sporting franchises deliberately combine the income of a couple of related businesses. For instance, the sporting franchise may also own a part of the stadium.

    The accounting for both these businesses is combined so that the earnings can be reallocated between the highly profitable business and not so profitable business.

It needs to be understood that over a period of time, the government as well as the athletes have become more vigilant. However, the owners of these franchises continue to come up with creative accounting schemes that help them lower their earnings on paper and avoid paying taxes.

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