Much has recently been said of the tax breaks received by the National Football League. While they do receive certain tax breaks, many of these breaks are also available to other businesses. Granted, they do tend to be on a larger scale.

There is however, one area in which sports franchises do get significant tax breaks. Below are three aspects to tax breaks received by the NFL and other professional sports:

1. Tax-exempt status of the league office
2. Amortization of the purchase price of the franchise
3. State and local financing of sports stadiums.

Tax Exempt Status

There are 32 different classifications of tax-exempt organizations recognized by the IRS. By far the most commonly known is 501(c)(3): organizations which are comprised of Religious, Educational, Charitable, Scientific, Literary organizations.

Professional sports leagues fall into the 501(c)(6) category which are defined as business leagues, Chambers of Commerce and the like.

The NFL was tax exempt until 2015 when it voluntarily gave up that status. The NHL, PGA, and LPGA remain tax-exempt. However, it should be noted that the league office is the organization that is tax exempt. The individual teams or players are taxable entities.

Obviously, the league offices generate a relatively small amount of revenue, so the tax-exempt status is not that big of a deal. In giving up its tax- exempt status the NFL gained two notable benefits.

The Form 990 that is required of tax-organizations is an extremely detailed, complex document. They now file an 1120, corporation or similar return.

Secondly, as a tax-exempt organization the salaries of top executives must be reported on the tax form. This is not required if the organization is a for-profit entity.

Amortization

When a sports franchise is purchased, the assets acquired are, to a large extent, intangible assets. Consider what is being purchased – a team name, membership in a sports league, player contracts. Very little in terms of tangible assets such as office furniture and equipment are being acquired. In some cases, the purchase of a stadium is included.

Under current tax law, all or most of these are depreciable or amortizable assets. This means that the cost of the intangibles can be written off over a 15-year period.

To put this in perspective, if a team is purchased for $2 billion, most of that can be written off over 15 years. Assuming a conservative allocation of $1.5 billion to the intangibles, the owner annually takes $100 million off of taxable income from the amortization alone.

Of course, the down side to this is that depreciation and amortization reduce the owner’s basis in the asset, so if the franchise is sold after 15 years, the selling price is largely pure profit.

Subsidies

Stadium subsidies and the issuance of tax-free bonds is a third area of professional tax breaks. Cities and states grant concessions to sports teams to build stadiums and infrastructure, all in the name of economic development.

The economic development argument is somewhat suspect, but there is no question that having a successful professional sports franchise is a feather in any city’s cap. So the subsidies continue.

These subsidies take several forms, from property tax recession, to paying for at least part of the infrastructure or the stadium costs, to the issuance of tax free municipal bonds to finance the construction.

This aspect of the tax breaks received by the NFL and other sports franchises is state and local in nature, so Congress is limited in what they can do to limit these tax subsidies. However, there is an aspect of these that does affect Federal taxes.

When states and municipalities issue bonds, the interest received by the bondholders is not subject to federal taxation, so the bonds can be issued at a lower interest rate.

A Brookings Institution study showed that Federal taxpayers have subsidized the construction of stadiums at a cost of over $3.2 billion since 2000. Another study showed that the NFL alone has raked in about $7 billion of taxpayer money to build and renovate stadiums.

Tax concessions at the state and local level are not uncommon. Cities offer tax incentives for companies to locate in their municipality.

However, it is not common for a local government to finance the buildings housing the company. In this respect, sports franchises are close to being unique.

Have a question? Contact John Stancil

Your comments are welcome! Should they kneel for tax breaks?