To buy the Carolina Panthers, David Tepper is paying a whopping $2.275 billion, a record price for an NFL franchise. But there's a silver lining: Tax write-offs will allow the hedge fund manager to recoup hundreds of millions of dollars over several years.
Thanks to a provision in the tax code that dates back to 2004, Tepper can write off roughly $120 million a year of his purchase for the next 15 years, according to New York-based tax expert Bob Willens of Robert Willens LLC. Given the total tax savings, Willens said, the effective price of the franchise is actually about $1.7 billion.
"This is going to work out really well for him," Willens said of Tepper.
That $120 million a year tax savings pertains to the intangible assets of the franchise, such as player contracts and media deals, Willens said. Tepper can write off even more in tangible assets during his first year of ownership.
So how does this work? Without getting too wonky, the basic premise is that professional sports teams have the ability to write off significant sums by treating intangible assets (like player contracts) as tangible ones (like factory equipment) that depreciate over time.
A company (or sports franchise) can take the decrease in value of that tangible asset over a certain period of time as an economic loss in its accounting, as attorney Stephen Keeney wrote in an article in the Spring 2016 Baseball Research Journal.
"It used to be that pro sports franchises were excluded from the 15-year amortization rule. The rule was changed to allow pro sports entrepreneurs to take advantage of the intangibles," Willens said.
This week, Bloomberg reported that the Republican tax overhaul, signed by President Donald Trump in December, tweaks some provisions of the tax law that affect professional sports franchises, providing an added windfall for wealthy individuals buying teams. Thanks to "quirky" new rules, teams can generate paper losses that erase the tax bills on an owner’s other business interests, Bloomberg reports.
Willens described another perk of the tax overhaul.
"Although I think it's unlikely, if Tepper does have a loss from operating the team in a given tax year, under a new provision enacted in the Tax Act, that loss would not be able to offset his income from his other ventures. Instead, the loss would be carried over and deducted against income from the venture itself in future years," Willens said.
The significant tax write-offs that team owners can make are contributing to the skyrocketing franchise values across different leagues, Willens said.
The last NFL team to go up for sale was the Buffalo Bills in 2014, which Terry and Kim Pegula bought for $1.4 billion, a record at the time. Before that, the Cleveland Browns sold for $987 million in 2012, and the Jacksonville Jaguars sold for $760 million in 2011.
This isn't the first time Tepper's saved millions in taxes in his business ventures.
In 2016, Tepper relocated the corporate headquarters and tax residency of Appaloosa Management from New Jersey to Miami. People close to Tepper have said he wanted to be closer to his mother and sister. But Florida has no income tax, and the move may wind up saving Tepper's hedge fund hundreds of millions of dollars a year, experts have said.
"He didn’t get to be that rich by leaving stones unturned," Willens said of Tepper, who has an estimated net worth of about $11 billion, according to Forbes. (Tepper paid $2.2 billion in cash for the team upfront without minority partners, although he can add some at a later date if he wants.)
A spokesman for Tepper declined to comment.
While Tepper is getting a tax benefit from his purchase, the Panthers outgoing owner — team founder Jerry Richardson — will face a significant tax bill from the millions he is making on the sale. That's because he will be taxed on the capital gains incurred since the team’s founding in the 1990s.
"Look at all the taxes North Carolina is collecting from Mr. Richardson," Willens said.