[Dead Spin] How (And Why) An NBA Team Makes A $7M Profit Look Like a $28M Loss

What you're talking about is nothing exclusive to tax and it doesn't create any sort of benefit. The fact that it's reported as two separate expenses is completely irrelevant. The single transaction contains two components, and those two components must be presented separately on the financials. That is the only reason you're getting two deductions.

Run an amortization table with 150,000 for the principle, 5% interest, 30 annual payments. Your company would make a mortgage payment will be $9,757.72. In the first year, your interest expense is $7,500. Assuming you use straight line, your depreciation for 30 years is $5,000, giving you a total expense for the first year of $12,500. At first glance it looks like you've double dipped and created a bigger loss. But run the entire table, and you'll see that the total expense doesn't change. As interest decreases, you're recording less expense for the real estate purchase, and in subsequent years you actually incur additional tax liability.

Here's the amortization table: https://spreadsheets.google.com/spr...ZGtGS2JEWEU4NXc&single=true&gid=0&output=html

There's no extra benefit, thus, you've not double dipped on any part of the transaction.

 

Stop thinking GAAP and think big picture. The extra benefit is the ability to turn a profit into a loss (the only reason I mentioned this as it relates to what some owners are doing), for tax purposes. The reason that they are getting two deductions has nothing to do with financials, as tons of real estate investors don't even have financial statements. The reason is to spur investment, which is supposedely a good thing for the country. It gives folks an extra incentive to invest.

You are correct that you are not double dipping technically, as you are recording two seperate expenses. But the part that you are missing is that taking depreciation allows you to take another expense deduction for something that you really haven't "expensed", as far as paid for. Besides depreciation, the main underlying theme for taking a tax expense is that you have shelled out cash, or promised to shell out cash if you are on the accrual method. If you are getting audited the first thing they will do is say prove to me that you paid for the things you expensed. THERE MUST BE SOME CASH OUTLAY!! Depreciation can be an "expense" where you haven't actually paid anything, if what you are buying is financed. Taking a depreciation deduction allows you to get two deductions for the same piece of property, if it's financed. You get a deduction for the cash you pay and another for cash you didn't pay (the depreciation part). That's the double dip...same transaction (buying property), but two deductions instead of one. That's akin to me giving my church money and getting two deductions for it, or making payroll and getting two deductions for it.

The main point is depreciation, a non-cash expense, allows you to take positive cash flow and turn it into a loss. That's why some argue that it should be eliminated as a tax write-off:

 

Are you suggesting they should Enron the contract? lol

 

Do you think Dwight Howard's contract with 1 year left would net as much in a trade as Dwight Howard with 4 years left? Could it be with 4 years left the contract is more valuable?

 

Icehouse, as an accountant you know that all interest is deductible. If a business gets a workin capital loan to help pay it's employees, it will have to pay interest on that loan, too and get to expense the interest. It doesn't mean the business is double-dipping and getting to count employee costs more than actual.

It's the same with the real estate example you provided.

Perhaps what you're arguing is that just because something isn't profitable doesn't mean it isn't gaining value. Which is certainly true in some cases. Heck, Amazon was enormously unprofitable for years yet kept becoming a more valuable company each of those years.

Whatever the case, the idea that real estate investors are taking advantage of some kind of tax loophole doesn't seem right to me.

With regards to RDA, it sounds fishy, but I'd agree with those saying there is likely more to the story.

 

Ok. That epinions article you quoted and the bolded statement above shows me you don't understand why depreciation exists. Depreciation is HOW you expense capital acquisitions. Whether you finance them or pay for them in cash is irrelevant. Also, you do not have to have cash outlay in order to have an expense for accrual taxpayers (which the NBA franchises are accrual). That's why accounts payable exists. The same goes for accounts receivable.

In my example above, if I had paid for the property using $150,000 in cash and not financed it, you know what I would expense on the return? $5,000.

The whole reason we have depreciation is because of the matching principle in accounting. The matching principle states: our efforts (expenses) should offset the rewards (revenue) in the period that those revenues are earned. It does not matter how I buy any capital asset, whether I pay cash up front or the day before the asset is retired. I must take a portion of whatever amount I paid for it, and use it to offset the revenue I've earned in each period for which that capital asset helped me generate revenue.

 

The value and the revenues are completely tied together. That's how you value an asset like this. Usually with a multiplier of some sort depending on what industry you're in. (2 x revenues = value for example in some industries).

 

ooops.

 

They are already Enroning the contract, just in the way that it benefits them.

 

The interest deduction isn't the shady one. It's the depreciation deduction. For example, you and I can't depreciate the houses that we live in. Again, the point of the example was to highlight something else that allows an owner to turn profit into a loss, similar to what some NBA owners can do.

I'm arguing that most deductions require a cash outlay. Depreciation does not. This deduction that owners seem to get for contract value or whatever does not. Both are non cash expenses that can skew true profitability.

It is a tax loophole, but it exists to spur investment. I understand why it's allowed. But that doesn't change the fact that it allows me to say I lost $$ when I really made $$.

 

Dude, you aren't the only accountant here and I understand why depreciation exists. Maybe you don't understand that whether or not depreciation should be allowed has always been a heavily debated topic, because it allows businesses to benefit from something that individuals can't even though individuals also have property acquisitions. The fact is it's a non cash expense and you typically have to shell out cash to deduct an expense. The only reason I mentioned financing is because the financing aspect is what's allowing you to get the double deduction for the same property acquisition. *Even when you are on the accrual method you have to shell out that cash in a certain time period to be able to deduct it. THERE IS NO CASH OUTLAY FOR DEPRECIATION. And as far as the example that I provided goes, most real estate investors (individuals who own a rent house or two) don't keep financials (no need to unless you need a loan or something), don't use GAAP (no need to if you aren't public) and are on the cash method. I emphasize this because you keep throwing out all these journal entry examples which really aren't relevant because the average REI isn't making any entries. You are trying to use book accounting in a situation where it doesn't apply, unless the taxpayer has to use it. Find the average owner of real estate and ask him to walk you through his monthly journal entries. LOL

Lastly, the matching principle of depreciation applies for book income. I am talking about tax income, where you can basically ignore the matching principle and accelerate your depreciation to increase your losses. The matching principle has nothing to do with why the IRS allows individual investors, most whom don't use GAAP, to take a depreciation deduction.

As my college teacher once told me, you are stuck in the textbook and ignoring reality.

 

Agreed. But most franchises aren't losing $$ every year. And the ones that are still increase in value and have more suitors than teams available so I can't conclude that an NBA team is a bad investment even under the current system. Sterling has clearly shown us that you can make $$ every yr by simply controlling what you spend $$ on, and I don't think it's a coincidence that a lot of the teams losing $$ have some pretty horrible contracts on the books, that they decided to hand out.

 

And yet the team still had willing buyers and even if they weren't moving to Brooklyn, would still have at least 2 cities (Anaheim and Seattle) willing to let them relocate there (probably with a new publicly funded arena and other benefits).

 

This is America. If you think anyone would allow the government to run the books of nba franchises then you are insane, good sir.

 

The owners need to stop looking at the NBA as a business

 

Absolutely 100% wrong. If you're an individual, and you work as a sole proprietor (meaning you file a schedule C, E, or F), you can claim depreciation on things such as your personal residence and personal auto. To claim depreciation on your residence, you'll file Form 8829 if you have an office in home, and personal auto depreciation can be claimed on 4562. The amount you claim will be subject to the exclusionary rules regarding percent of business use, but you certainly can depreciate your property.

Do you want to know why you and I cannot depreciate our houses as individuals who are not sole proprietors? Because for us, it's our primary residence and subject to exclusionary rules. The IRS says that if you sell your primary residence and made money on it (say, I bought for $150,000 and sold for $250,000), the gain is excludable (up to an amount) and is not subject to tax. Basic concept of tax law: if the income is excludable, the expenses are non-deductible.

For cash basis tax payers, yes, expenses are incurred when cash is spent, and revenue recognized when cash is received. You are wrong on you're assertion that you can only deduct an expense for accrual taxpayers if it's paid within a certain time. As long as there is an obligation to pay, and the expense is considered deductible (M&E is subject to 50% reduction, Charitable is a passthrough item for S-Corps and Partnerships and thus nondeductible, legal fines are also nondeductible) the expense can be deducted.

I'm not using "book" accounting. I'm using accounting. Period. Tax law doesn't rewrite the entire accounting profession. I think you are the one who is ignoring reality, so lets step through a transaction and see how it actually works.

Back up to my example where I've financed a property that costs $150,000. In the first year, I make CASH PAYMENTS totaling $9,757.72. I can deduct the interest portion of those payments as interest expense in the amount of $7,500.00. I CANNOT DEDUCT THE REMAINING $2,257.72 OF THE CASH PAYMENTS MADE because this amount represents the principle portion of my payment. Principle cannot be deducted because it represents the actual capital asset that you are buying. You recover this principle amount through... depreciation. Without depreciation, I lose $2,257.72 of actual cash expenses in the first year. Since interest expense goes down over time, more and more of my CASH payments each year are allocated to principle. Without depreciation, I'm losing out on actual CASH expenses that I am actually paying CASH for.

I am a cash basis tax payer. I file a Schedule E for my 1040. I buy a condo for $150,000 dollars and expect to rent it out for the next 30 years. By your logic, I should be able to expense that since it was a cash transaction, but I cannot record an expense for $150,000. Instead, I must capitalize and depreciate it over 27.5 years (MACRS requires all residential property be depreciated over 27.5, so my estimated useful life of the property is irrelevant).

I don't know what your professional credentials are, but I can safely assume that you are probably not a tax accountant? I work as a tax accountant for a CPA firm here in Houston. I deal with a wide variety of clientele... from small businesses with gross receipts from 30k to several million, individuals with income from $50k to $2 million, and large partnerships with gross receipts in excess of $80 million. I don't say this to sound arrogant or to come off as a thinly veiled "stfu I know more than you." I say this in hopes that it gives some professional credibility to what I am trying to explain.

Depreciation is not some magic tax loophole that lets you double dip or create imaginary losses. It isn't a discriminatory tax law. If this explanation isn't sufficient, I'm not sure what else to tell you at this point.

 

where are you finding these cheap condos man ?!?!?!? hook a brtother up !!! :grin:

 

Well, the flaw here is... depreciation is not an expense... its the DEPRECIATION of an asset.

so regardless of if a player is doing well or not.. the value of the contract lowers the closer it gets to being over... hence the need for the line item.

And as far as the example of a house... well a house doesn't depreciate.. it is always improving it's value... so of course you can't diminish the amount that its worth

 

Amazing post, so the sports franchises are not just toys of billionaires but really make business sense as:
1) Tax Shelter
2) Anchor for real estate interests/related businesses
3) Tool to improve their profiles/influence in the community

 

You are throwing a lot of meaningless info in there that has nothing to do with my point, so I'll only rebut the necessary parts.

Yes, as a sole proprietor, meaning you are in business for yourself. This makes it a business expense, similar to the investor involved in a real estate business. If you aren't in a business can you depreciate your assets? I thought it was clear that when I said "individual" I wasnt referring to someone who owns a business, but instead a person with a job that owns some property. This is what the debate revolves around. The expense is allowed to encourage business. It has nothing to do with GAAP or the matching rule, which is a point that you kept trying to make.

Actually I'm not. The period is usually 2.5 months for related parties and either 8.5 or 10.5 months for a non related party (going off memory). The obligation to pay has to be there, but you can't wait until forever to pay that obligation. This prevents folks from creating expenses to reduce income. What the deduction really revolves around is when the party receiving the $$ picks up that payment as income.

How about this. Tell one of your clients to go ahead and deduct an accrued expense that you don't pay within a yr and see if the IRS allows that deduction in that year.

Then why do companies have book to tax differences? As I've mentioned before, the avg dude with 2 rent houses isn't using legit accounting at all. They dont even know what GAAP is. They aren't making journal entries. They record $$ received, less expenses and at the end of the year they take a depreciation deduction to pay LESS in taxes or record a loss, even though they made more. And enhancing the deduction for tax reasons is a clear difference from book accounting. And as far as their "accounting" goes, tax accounting is all that matters (paying Uncle Sam). Look up the phrase book to tax difference, or schedules like a M1, M2 or M3 since you say you aren't using book accounting.

I don't think I've argued any of that, aside from the tax loophole. And even then I've noted why the govt allows the loophole (to spur investment, and not for any reason that you've mentioned). Depreciation is a non cash expense that allows you to turn a profit into a loss, for tax purposes. This is a fact, and was the only point that I was trying to make. With the many pages that you have typed, you still haven't addressed that main point. Most deductions require you to pay something. Depreciation does not. It's a non cash expense, yet you get to deduct it (something that you usually have to shell out cash for).