How one tax law affects baseball teams and fans

Mrs. James teaches piano (also works at two other jobs, but piano is her oldest and favorite one). Since that means she runs her own company (along with an old friend), that means a heckuva lotta tax forms to fill out. Around a $400 bill every year, and this from an honest accountant she trusted.

Since I briefly worked for H&R Block, once we got married, I told her I’d do the things. Which involves keeping up with revisions in tax law. (Side note: H&R Block are thieving swine. If you must pay someone to do your taxes, hire a CPA.)

And I noticed a little change this year which is definitely affecting baseball teams. (The law was passed in 2017, but it began taking effect in 2018, so it’s first showing up on the 2019 returns.)

It’s called the “entertainment expense deduction.” And it’s partly why your ticket prices are so high. The 2017 tax laws removed it. The full outcome of this has yet to be determined, but there will be one.

What is the “entertainment expense deduction”?

Good question! Basically, you could call it the Mad Men rule. Offices are boring. So if you’re meeting with a current or potential client/associate to talk business, they’ll be much happier in a social setting, like a restaurant or sporting event. Companies are allowed to deduct a percentage of these costs from their taxable income. This has been the law for decades. (Gangsters entertain clients this way, too, yet tend not to report their deductions to the IRS. Plus sometimes they murder the people they’re entertaining.)

But when corporate profits (and salaries) started skyrocketing in the 1980s, some executive types started drifting away from sporting events as a preferred entertainment venue. Too many unwashed masses (like me).

So, this has to do with luxury suites, right?

You are correct. The first luxury suites were in the Astrodome, yet they didn’t really start taking off until the new-stadium boom began. Sports teams figured out that they could woo business types for insanely expensive tickets, but only if they had a private seating area. And simply ripping out some old seats to add a few “skyboxes” didn’t cut it. (That’s what the Metrodome had.)

Nope, luxury-suite types don’t want to even look at you schlubs. That’s why every luxury suite section has its own escalators you aren’t allowed on, and most new stadiums even have their own private entrance for those ticket holders. And it’s why every almost every team in almost every sport has a new building now.

How does that affect my ticket prices? I don’t sit in those areas.

Three ways. The first and simplest is that many teams have to pay at least some of the new stadium expense, so they’d just as soon you paid it if you’re willing. The second is that luxury-box levels mean fewer regular seats. Scarcity increases price.

A third, subtler way has to do with how those luxury seats are deductible as a business expense. By law, when you’re deducting sports tickets, you are only supposed to deduct the average price of a ticket at that facility.

So raising the average ticket price makes those luxury suites more appealing to business buyers. If you’ve ever sat a game with the stadium near-empty, and wondered “why don’t they just lower ticket prices? They’d get concession money,” well, this is a large reason. There are others, such as “if we drastically lower prices for crummy seasons, everyone will be annoyed when we raise them for good seasons,” but this is a biggie.

Why did they eliminate this deduction? Aren’t Republicans business-friendly?

As a rule, yes, and baseball (like most sports leagues, if not most individual owners) donates equally to both parties. It’s easy to imagine that President Trump — who has made no secret about his penchant for revenge — may be frustrated by failed attempts to buy NFL or MLB teams in the past (the Twins, incidentally).

However, this law seems to be the fevered brainchild of recently retired Senator Tom Coburn, whose politics are generally of a sort I will not mention here, since you know how to use Wikipedia if you’re curious. He’s long had it out for sports subsidies (while being perfectly fine with subsidies for all kinds of other things). Perhaps, being from Oklahoma, he likes college football and nothing else.

(That last link, from a paper which leans hard to starboard, also guessed that the law may have to do with recent controversies surrounding the political opinions of NFL players. I highly doubt this. Changing a part of the tax law virtually nobody knows about isn’t a very effective way of stirring up voters.)

A Fortune/Bloomberg article says the primary customers of luxury boxes are “law, investment, accounting and lobbying firms.” Well, every politician has lobbyists they like and lobbyists they don’t. It’s entirely possible Coburn found out that a lobbyist he hates loves luxury box seating and decided to say “blank you.” Wars have started on less.

And, as Stableford Capital observed, “business entertainment expenses are difficult for the Internal Revenue Service to enforce.” Maybe they supported Coburn’s idea because they’re sick of companies cheating.

How will this affect sports teams?

Tough to tell. The Fortune article cited Ed Sturm, an entertainment tax lawyer, who said the outcome “remains to be seen.” While lobbysist Ryan Ellis said he’d switch entirely to restaurants. (The meal expense deduction has not been changed.) James Dornbrook at the Kansas City Business Journal suggested that teams could fawn even more over their richest customers “to ensure the businesses and their clients are getting the royal treatment.”

Might it also be having an impact on payroll spending? I have no way to confirm this, but January 2018 was when we first started noticing that baseball teams were suddenly all spending way less than before.

Y. David Scharf, a hotel and hospitality business lawyer, wrote that “there is currently no calculus to determine” how this will affect teams in the long run. He added, “if your team cuts your favorite player because his salary is too expensive, maybe it’s because his game has slipped. But maybe it’s also because Uncle Sam’s new tax policy has thrown an unexpected curve ball.”

Worth considering, at least.

I’m jealous if your spouse got to deduct Twins tickets in the past.

I would be, too. She never has. But she usually has one strategy-planning meal a year with her co-owner of the piano business. They each deducted $14. Which, in our tax bracket, saved us approximately $1.

Lord, I hate reading about taxes. They’re such a pain to fill out.

I agree, but thanks for reading this far! And FYI, one reason they are such a pain is that paid tax preparers like TurboTax or H&R Block want them that way. Like I said, H&R Block are just a gang of crooks. That’s only the company executives, though. The average Block tax preparer in a storefront office is some halfway decent person down on their luck. How do you think I got hired there?