It’s not often that the worlds of Accounting and Professional Sports make it into the news within the same story. Last week, the Internal Revenue Service changed that paradigm when it announced an adjustment in legal guidance for team owners, labeled Revenue Procedure 2019-18. The new measure aims to make accounting for player contracts and trades easier for their respective teams by streamlining the valuations process.
Here are the details:
Historically, it’s been quite difficult for sports franchises to accurately account for the value of their player and personnel contracts. The issue lies within the fact that many of these individuals have their worth fluctuate from day to day as their in-game performance changes. To put it into perspective, an owner may have drafted a player valued at $50 million, but then they hit a slump for the season. This leads to a dramatic fall in their market price, much like stock performance on Wall Street. Conversely, an initially low-value player may be on a hot streak and see their valuation go up. Previously, organizations were expected to pay taxes on these contracts, but didn’t have a clear path that could alleviate some of the confusion surrounding fluctuating value. That’s where the new guidelines come in.
You can see how fluctuations in game-time execution can lead to a headache when said players hit the trading block. Does your franchise pay taxes on the initial value of the contract, or is there a different route they should go? The IRS now asserts that professional teams do not have to assign a monetary value to their player contracts until the moment the player or staff member is traded to a different organization. That way, taxation will only apply to the market value of the individual at the moment they change hands in ownership. Safe harbor essentially protects teams during the complicated trade negotiation period, and only recognizes capital gains or losses if cash is exchanged. Up until that point, the contracts in question can be accounted as having a zero value.
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