A Curveball for the Sports Industry
As seen in US News on February 20, 2018
BUSINESSES GENERALLY have applauded the recent Tax Cuts and Jobs Act because of its corporate tax cuts. But the new tax law also completely eliminates deductions for business entertainment expenses, which could have an unanticipated impact on one key sector: sports.
Before the tax bill, companies could deduct 50 percent of a variety of business entertainment expenses, such as client meals, event tickets, charitable event tickets and membership fees. Under the new law, no deduction is allowed for any activity generally considered to be entertainment, amusement or recreation. No deduction is permitted related to a facility used in connection with entertainment, amusement or recreation. Deductions are also disallowed for membership dues with respect to any club organized for business, pleasure, recreation or other social purpose.
For companies, that means no more deductions for client entertainment expenses such as that stadium suite or corporate sky box. No more deductions for client outings with tickets to the big game. The Joint Committee on Taxation estimates the change will bring in $23.5 billion in tax revenue over the next decade. But for team and stadium owners, the deduction elimination could lead to a significant revenue loss.
Team owners have built stadiums on the assumption of a certain amount of revenue per seat, with pricing for corporate suites and the “best” seats based on historical spending models. With the loss of deductions for business entertainment, companies will scrutinize their budgets carefully and look to spend their dollars wisely. Does that stadium suite really need to be renewed? Should this year’s big client event be Yankees tickets, or is a fancy restaurant dinner a more cost-effective outing? When the sporting event is suddenly much more expensive as compared to other entertainment options, the result will be less spending on sports entertainment.
As a result, to maximize revenue, owners may have to offer better prices for the expensive seats. As a fan, you may benefit short-term, but the likely effect is that overall revenue will be reduced. And one longer-term consequence could be there will be less to spend on players, staff and the overall sports experience.
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