Changes in the tax law might make professional sports teams less apt to wheel and deal because of the bottom line.
The cost of making a trade is one of the biggest considerations for teams looking to acquire, swap or unload players. Players come with contracts attached to them, and it’s the cost of moving those contracts in trades which should now become the focus of increased attention by teams.
Massive changes to the tax law in the United States of America, applying to all professional sports teams within the borders of the nation, will have many effects that will continue to be unveiled as time passes. One such effect has become clear, and it might prevent future trades.
According to Accounting Today reporter Michael Cohn, an important revision in how the federal tax code defines 1031 exchanges should be of note to professional sports teams.
Prior to the revision, player contracts qualified as 1031 exchanges, which were not taxed commodities. The scope of 1031 exchanges is now limited to certain real estate deals. That makes gains made by dealing player contracts taxable. That change might prompt teams to act differently in several ways.
The first, but perhaps least likely, possibility is that teams might make fewer trades to avoid the tax. What’s more likely is that teams will send “cash considerations” to cover for tax penalties created by the exchanges of player contracts, very similar to how teams have frequently sent cash to account for portions of player salaries in the past. Another possibility is that teams will lobby Congress to adjust the tax code to allow player contracts to fall in the 1031 exchange category again.
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This change is probably not going to stop the annual cavalcade of player contract exchanges in MLB, the NBA, the NFL and the NHL. It is something else for those responsible for making those decisions to consider, however. Accountants for these teams are about to get a lot busier.