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

No they're not, the contract is worth less value the closer is gets to expiry, they're just accounting for that.

After Enron, you sure as hell don't want to go appreciating an asset based on some arbitrary value of your own choosing.

 

Do you think this applies only to sports teams? GE managed to pull an effective tax rate of -61% over the past 3 years through such measures (yes i really do mean negative)

 

Every privately held company would want to do these things, for publicly listed companies, there's the other matter of trying to boost share prices - so they'd want to show profitability

 

It is an expense. It's right there in the expenses section of an 1120. Just one of the rare ones that you don't have to pay cash for.

 

That's why you are stupid. Without understanding how the accounting principles can be manipulated, how can you know about the "real" money?

Tell me how you can know of the real money that these NBA teams are generating with your "finance" knowledge.....

 

It seems like a semantics argument at this point.

 

You did pay cash (or assumed debt) for it when you bought it. In this case, the Owner buys the team, and then gets to depreciate a portion of his purchase. If you bought a company with goodwill, would you object to amortizing it?

 

Just like you did for your house. But you can't deduct that depreciation without having some type of business, right?

I'm not arguing that I'm opposed to allowing a depreciation expense. I'm just noting that you can use this deduction to flip income to a loss even though you are making $$. It's not the only example in the code but it is a valid one.

 

Because book depreciation methods often differ from tax depreciation. Many companies use straight line depreciation for their assets because it's the simplest method. However, MACRS by default is double declining balance. You also have mandated usable life under MACRS whereas book usable life is an estimate. Take a computer for example: under book depreciation, you may decide it's useful life is only 3 years. Under MACRS, it's depreciable life is 5 years. If you're not eligible for §179 deduction, you have to depreciate the asset over 5 years on your tax return. In this case, book to tax difference in depreciation creates additional tax liability as your taxable income is higher than your book income.

Take residential real property. A company may finance it for 15 years, but under MACRS they can only depreciate it over 27.5 years, and must use straight line. Another instance where you can have additional tax liability because of depreciation.

I'll stop here. I'm not changing your mind, and you're not changing my mind. This is getting to be pointless.

 

Personal expenses don't compare to business expenses. I don't think the owners are getting depreciation expense for their homes. Do you think a business should not be allowed to deduct depreciation on real property?

 

So it sounds like you clearly understand the difference between book accounting and tax accounting, at least as far as depreciation is concerned.

Im not trying to change your mind. But I will continue to note that nothing you have stated about my post is accurate. This started with me giving another example of something you can use to show a loss that doesn't exist....depreciation. Nothing you stated disputes this. And your reasoning (GAAP, etc) is not the reason the IRS allows this.

 

I'm not arguing that a business shouldn't get a depreciation deduction. I'm arguing that this can allow a business to flip income to a loss, even though they have made $$. Do you disagree?

 

No. If you want to make that argument, than you would say they made a huge loss when they bought the asset. They have to make money to have the cash flows in order to pay the debt. Their Net Worth may be increasing, and they receive the tax benefit sooner, but they have to sell the team to get the actual cash they need to pay those debt payments.

I agree with you that they may have positive cash flow, even though they show a loss on the books, but I think that a lot of teams have suffered from negative cash flows.

 

I think you have my argument twisted up. I'm not referencing a basketball team. A poster mentioned things that could make a loss out of an income bearing situation, and I mentioned depreciation for real estate investors. Depreciation of the rental property allows them to turn a profit into a loss. I completely agree that a team can be losing $$ every year and be SOL if the team is financed and they have no cash flow to pay the debt. However, revenue sharing can remedy this just as easily as slashing player salaries. Additionally, most teams didn't appear to be losing $$ every year and one of the ones that was (Nets) still sold for a hefty amount. In other words, I still believe owning a team is a good investment even under the current system. Manage your team well....

 

I think as many have pointed out, it's not turning a profit into a loss, it's correctly booking the loss. The argument that depreciation is a non-cash event and therefore hides true financial performance flies in the face of the whole purpose of accrual accounting. There are tons of non-cab expenses. For that matter, there's multiple ways to book non-cash revenues. And then there are different ways to do it all on the tax books.

It's the accurate way to do it because it precisely does what you think is wrong - it properly allocates your revenues and expenses, even when non-cash, to show a true profit/loss picture for a given period.

There are other ways - balance sheet, cash flow statement, etc. - to see the bigger financial picture, which may be that the entity was cash flow positive while net income negative... But that doesn't make it inaccurate.

Why can't people expense similar items from our perosnal cash flows? Because that's how the tax laws are written. Again, it's not just non-cash items like depreciating my house, I can't expense the actual cash I paid for my computer, or tv, either (assuming not for business use), out of my income.

 

This isn't accurate, though. Sure, depreciation happens in different years than the actual cash outlays - but over the long haul, you're only accounting for it once. If you buy real estate for $100k and depreciate it over 10 years, you're taking a total deduction of $100k. So one year, you may actually have paid nothing and get a $10k deduction. But another year, you may have paid $20k and only get a $10k deduction. In the end, you'll have paid $100k and deducted $100k.

On the books, this may skew one year's financials - but it's not going to skew the long-term financials. As noted in the correction posted in the original article, the author now admits the whole basis for his article - Loss on Player Contracts - was completely wrong.

 

It is turning profit into a loss. You have made $$. You claim that you lost it. The government allows this to spur investment. As I told the other poster, it has nothing to do with accrual accounting as the average real estate investor is someone on the cash method and they aren't concerned with GAAP, matching rules, etc. These type of deductions exist to encourage business.

This isn't true because you are allowed to take extra depreciation, which is a clear conflict of the purpose of the matching principle. It allows you to increase your allocation in a certain period. Again, this has nothing to do with GAAP or proper accounting.

The tax laws are written that way to encourage investment, not because of "proper accounting".

 

So what if I buy an asset via financing (I'm only making interest payments, so I get a deduction for that), fully depreciate it in the 1st year, and then sell it in the next year? And in the case of real estate, I roll my proceeds over into another real estate venture. Does this not allow me to create a huge loss when one isn't actually there?

 

The only way your payments for a financed asset are interest only are when you have negative amortization. A business who finances some property will generally be paying interest and principle. Interest is deductible, but principle is not. See the loan amortization table I provided on page 4.

Then you have no basis in the asset and the entire proceeds you receive for the property are considered taxable income and is reported on 4797 as a capital gain.

In cases of like-kind exchange, depending on the exchange (I've done it both ways) you're required to reduce your basis by the amount of gain you've realized in the exchange, or there's no change to the above capital gain that you were forced to recognize as taxable income on disposition. If they're two separate transactions, ie... someone gave you cash for the asset you sold above, then you went and used that cash to buy a new real estate venture, then nothing happens. The proceeds from above are taxable, and there's no immediate deduction you can claim on the cost of the new property using the proceeds from the previous sale.

No, it does not.

 

No, it's not, as multiple people have pointed out through multiple examples.