Tax ramifications for a new owner

[Docwaukee]

Something important for consideration.  Whoever buys the team gets to depreciate the Trout, Rendon and potential Ohtani contracts.  

[ten ocho recon scout]

15 minutes ago, Docwaukee said:

Something important for consideration.  Whoever buys the team gets to depreciate the Trout, Rendon and potential Ohtani contracts.  

Saw IP say that. What does that mean exactly? 

[Angelsfan1984]

I assume those are included in the salary which is part of the overall purchase price when considering the valuation. 
 

I have no idea if that’s right, but it’s lots of words and those are cool. 

[Inside Pitch]

1 hour ago, ten ocho recon scout said:

Saw IP say that. What does that mean exactly? 

It means they can get over!

https://sabr.org/journal/article/the-roster-depreciation-allowance-how-major-league-baseball-teams-turn-profits-into-losses/

[ten ocho recon scout]

1 hour ago, Inside Pitch said:

It means they can get over!

https://sabr.org/journal/article/the-roster-depreciation-allowance-how-major-league-baseball-teams-turn-profits-into-losses/

So basically we can sign Ohtani to a megadeal, and the new owner doesn't get a penalty from it?

Interesting...

[gotbeer]

1 hour ago, Inside Pitch said:

It means they can get over!

https://sabr.org/journal/article/the-roster-depreciation-allowance-how-major-league-baseball-teams-turn-profits-into-losses/

So if I'm reading it right.  Say the team sells for $2.2 billion.  Which is current valuation.  (since Cot's only lists the next 5 years easily, as an example only using this figure)  $588 million in contracts owed.  But they can say the players are instead worth $1.5 billion.  And instead of depreciating/expensing the $118 million a year in actual contracts.  Depreciate/expense $300 million a year.  And if say they were breaking even at $118 million a year in actual contracts, they would take a loss of $182 million on the books.

So in the Trump world of finance.  This would be ideal to someone still making money.  But then sheltering/protecting their money so the taxman don't commeth.  And really only paying the taxes on the backend when they sell the team.  

[Docwaukee]

this could save the franchise.  Aside from just the obvious of changing philosophically, it could basically give them several years to spend like drunken sailors while they revamp the infrastructure.  

So you could cover old mistakes with lots of new money and keep Ohtani.  It's not the best way to run a team unless you can spend A LOT.  

The amount of money they could put into the roster in the short term could be huge.  

All the while creating a more sustainable infrastructure for the long term.  

Basically what the mets did recently or what the dogs did early on.  

I would bet good money that Eppler has convinced Cohen to spend a shit ton on development.  

[cals]

@yk9001?

[yk9001]

That is a well written article for a pretty complicated maneuver.  Here is their hypothetical example.  Even though the article is only six years old, just add a zero onto everything

Now, let’s use the same hypothetical for the current RDA. A purchaser or group of purchasers buys a sports franchise for $150 million, with $100 million of that being for the franchise and player contract rights.48 Under the 100/15 rule, the franchise can depreciate $100 million over fifteen years, or about $6.67 million per year. That means that $6.67 million of revenues per year are not taxed. Assuming a tax rate of 35 percent, the franchise owners gain approximately $2.33 million in taxes, which they would have had to pay the IRS without the RDA. Multiplied by fifteen years, that equals about $35 million in tax savings.

These examples have two caveats. One is that, in the examples above, if an owner buys a team for $150 million he will almost certainly allocate far more than $100 million to the franchise and player rights ($100 million is only 67 percent of $150 million, but remember Bud Selig allocated 94 percent to player rights alone). Thus, the tax advantages to the owners under the current rules would be even greater than the example illustrates. The last ten times a major sports franchise (NHL, NFL, NBA, or MLB) was sold, the prices ranged from $170 million to $2.15 billion, with five of those ten between $200 and $600 million.49 So, if a team were purchased for $400 million and the owners allocated $376 million to player rights and other depreciable intangibles ($376 million is 94% of the purchase price, which Bud Selig got away with), they could depreciate just under $25.1 million per year, which at a 35 percent tax rate would be savings of $8.77 million per year to the owners.

 

 

Nobody here need to get into the weeds on any of this stuff.  Just know that its a great deal for owners, almost a 'double dipping' of expenses that lasts for 15 years. 

[Taylor]

It's hilarious how these obscenely rich people can get ridiculous tax breaks while the middle class continues to shrink. 

[BTH]

9 hours ago, Docwaukee said:

The amount of money they could put into the roster in the short term could be huge.  

All the while creating a more sustainable infrastructure for the long term.  

Basically what the mets did recently or what the dogs did early on.  

100%
 

They need to follow the Dodgers/Mets model here.

Spend like crazy in free agency to supplement the current roster while building up your infrastructure so that in a few years, your farm system allows sustainability.

If the right owner comes in and they make the proper moves, the Angels could turn themselves into a behemoth. And that’s before factoring in a potential new stadium development site that could bring in even more money long-term.

[Chuck]

This is a great discussion, @Docwaukee!! I had no idea. Thank you for bringing this to our attention. 

[Blarg]

27 minutes ago, Taylor said:

It's hilarious how these obscenely rich people can get ridiculous tax breaks while the middle class continues to shrink. 

Makes you want to be obscenely rich instead just plodding along in life paying for evything in taxation that you created by choosing poorly at the ballot box. 

[Chuck]

37 minutes ago, Taylor said:

It's hilarious how these obscenely rich people can get ridiculous tax breaks while the middle class continues to shrink. 

 

8 minutes ago, Blarg said:

Makes you want to be obscenely rich instead just plodding along in life paying for evything in taxation that you created by choosing poorly at the ballot box. 

Okay guys, there's a forum specifically to discuss these issues. Let's stay on point here as it relates to the Angels new owner. 

[Blarg]

The new owner is going to be obscenely rich and not care about beer prices. 

[Dtwncbad]

18 hours ago, Docwaukee said:

Something important for consideration.  Whoever buys the team gets to depreciate the Trout, Rendon and potential Ohtani contracts.  

Not the actual contracts.   They can depreciation a huge portion of the purchase price of the franchise over 15 years.

This is a pretty big deal in helping a new owner have better free cash flow so it is a good discussion point.

But there is a lot to misunderstand in terms of acquiring these big contracts as an asset or liability.

They are already expenses.  Real cash expenses that have to be paid by the new owner.

The bottom line is the franchise would be worth more and would have better cash flow if Trout was making $1 per year.  It isn’t “good” for the new owner to have huge contracts attached to players.

 

 

 

[gotbeer]

10 minutes ago, Dtwncbad said:

Not the actual contracts.   They can depreciation a huge portion of the purchase price of the franchise over 15 years.

This is a pretty big deal in helping a new owner have better free cash flow so it is a good discussion point.

But there is a lot to misunderstand in terms of acquiring these big contracts as an asset or liability.

They are already expenses.  Real cash expenses that have to be paid by the new owner.

The bottom line is the franchise would be worth more and would have better cash flow if Trout was making $1 per year.  It isn’t “good” for the new owner to have huge contracts attached to players.

 

 

 

Yes, this is true also.  Which is why usually in team sales, you see teams unloading contracts, and not adding big ones.  Because Trouts $400 million owed (I don't know what he is still owed, just putting the number out), is a liability for the team.  And why they probably won't add another $500 million in Ohtani.  So while a team may sell for $2.2 billion.  Behind it all, he'll get $1.8 billion or less after liabilities are deducted.  Kind of like if you are selling your house.  You may sell your house for $1 million.  But if you owe $900k in mortgage, you will only get $100k.  Which is why now is the time for Moreno to sell.  Before he sinks a lot into a stadium that will marginally increase the team value.  I.e. spending $100k on a new pool, that will only increase the selling price by $5k.  

[Second Base]

12 hours ago, Docwaukee said:

this could save the franchise.  Aside from just the obvious of changing philosophically, it could basically give them several years to spend like drunken sailors while they revamp the infrastructure.  

So you could cover old mistakes with lots of new money and keep Ohtani.  It's not the best way to run a team unless you can spend A LOT.  

The amount of money they could put into the roster in the short term could be huge.  

All the while creating a more sustainable infrastructure for the long term.  

Basically what the mets did recently or what the dogs did early on.  

I would bet good money that Eppler has convinced Cohen to spend a shit ton on development.  

You're absolutely right. Now the predominant question would be how to allocate those funds. Ohtani is already gone by the time of the sale. Probably a metric ton of it on development. 

[Chuck]

1 hour ago, Blarg said:

The new owner is going to be obscenely rich and not care about beer prices. 

Honestly I wouldn't care, even if I was local. 

I usually go to a bar close to the stadium and meet some folks there prior to the game for a few drinks/beers. Then I walk or Uber/Lyft over and once I get to the stadium I get one beer and a bottled water before I sit down and I'm good for the rest of the game. 

Beers are pretty expensive at every sports or concert venue. You just gotta be smart and prefunk before the game! 

[Dtwncbad]

40 minutes ago, gotbeer said:

Yes, this is true also.  Which is why usually in team sales, you see teams unloading contracts, and not adding big ones.  Because Trouts $400 million owed (I don't know what he is still owed, just putting the number out), is a liability for the team.  And why they probably won't add another $500 million in Ohtani.  So while a team may sell for $2.2 billion.  Behind it all, he'll get $1.8 billion or less after liabilities are deducted.  Kind of like if you are selling your house.  You may sell your house for $1 million.  But if you owe $900k in mortgage, you will only get $100k.  Which is why now is the time for Moreno to sell.  Before he sinks a lot into a stadium that will marginally increase the team value.  I.e. spending $100k on a new pool, that will only increase the selling price by $5k.  

Yes.  The player contracts do matter because a potential owner is calculating the level of “equity” or “inequity” in the financial obligation they are acquiring.

Trout at $1 per year is a massive asset while Trout at $99m a year is not.

The buyer is going to pay a higher price for a franchise the more “equity” there is in the group of contracts they acquire.

The higher the price they pay, the higher the amount they can depreciate over the first 15 years of their ownership.

So it seems like there is a misunderstanding.  A new doesn’t “get to” depreciate the big contracts (as if big contracts help the new owner).

They “get to” depreciate a portion of the purchase price of the team, where the overall level of “equity” or “inequity” in the contracts they acquire have an effect on the purchase price.

[Lazorko Saves]

Ah yes, the old "depreciation allows businesses to magically turn profits into losses" myth.  So dumb.

Economic illiteracy is killing us.

Every dollar expensed to depreciation on these kind of non-physical assets becomes a dollar that will be taxed as profit when the business is sold.  It's not some magic wand that gets businesses out of paying taxes on profits.

[ten ocho recon scout]

58 minutes ago, Chuckster70 said:

Honestly I wouldn't care, even if I was local. 

I usually go to a bar close to the stadium and meet some folks there prior to the game for a few drinks/beers. Then I walk or Uber/Lyft over and once I get to the stadium I get one beer and a bottled water before I sit down and I'm good for the rest of the game. 

Beers are pretty expensive at every sports or concert venue. You just gotta be smart and prefunk before the game! 

So it occurred to me recently I could save a ton of money canceling cable, because I only have it for the Angels, and really haven't watched in the past few years. Covid obviously played a part, but in the past decade I've probably seen less than 50 games combined on my TV at home.

Along the same lines...

I also  figured out about 2 years ago that when I go to games, I always buy the cheapest ticket, then spend the game at one of the bars inside the stadium and watch the game on TV while drinking 80 dollar Coors lights. 

The game that's going on right behind me.

When I step back and think about it..... I've spent probably a hundred million dollars on watching Angel games on TV, and Coors lights, over the years. Instead of simply going to a regular bar, paying regular beer prices, etc etc.

I was always good at history, and art. Not math. And common sense.

[Lazorko Saves]

12 minutes ago, ten ocho recon scout said:

I've spent probably a hundred million dollars on watching Angel games on TV, and Coors lights

"The Coors Brewing Company thanks you for your support."

[ettin]

4 hours ago, Chuckster70 said:

Honestly I wouldn't care, even if I was local. 

I usually go to a bar close to the stadium and meet some folks there prior to the game for a few drinks/beers. Then I walk or Uber/Lyft over and once I get to the stadium I get one beer and a bottled water before I sit down and I'm good for the rest of the game. 

Beers are pretty expensive at every sports or concert venue. You just gotta be smart and prefunk before the game! 

This reminds me of the good 'ol days when we'd sit outside the club sharing some alcohol we bought at the store and then went inside and downed a bunch of super cheap drink specials (Kamikazi's and what-not).

[Jeff Fletcher]

I actually reached out to the author of this story to ask him about the Angels. 

My question was: could the new Angels owner get some tax benefits that would allow more spending that the previous owner wouldn’t get. 

His very long answer was: not really. 

Essentially, if I understand him, he said that a new owner would be able to shield more revenue from being taxed than an owner beyond his 15-year limit. But in practice it wouldn’t matter much because they already adjust the numbers to pay very little tax on their revenue.