Presentation on theme: "Additional Profit Analysis. San Antonio Spurs Case In the chapter there are income statements for the SA Spurs for 2 years in the mid 1990’s. Note the."— Presentation transcript:
Additional Profit Analysis
San Antonio Spurs Case In the chapter there are income statements for the SA Spurs for 2 years in the mid 1990’s. Note the large dollar amount for team salaries and the net for each year. Here the author adds some ideas that add to what we see on the income statement. There is an indication that there is more than what is seen on the income statement.
More to the story 1) Owning a sports team opens up other business opportunities that may not be available to other business owners. The sports owner has other businesses and these businesses benefit because the owner uses the sport to generate business in other areas. 2) Costs on the income statement can be misleading. Family members of the owner, or even the owner, may get a salary that is not in line with going rates at other firms. Some team expenses may be direct revenue to other owner business. 3) Cross ownership of business may lead to a lower total tax for the businesses combined because losses in one help the other pay less tax.
More to the story 4) Some business forms (subchapter S corp. and partnerships) are pass through in that any gain or loss at the firm level is actually reported on the personal income tax of the owner of the firm. 5) You might notice that player salaries are an expense in the current year. As such, the revenue of the team is reduced by the expense before calculating taxes. At the time the Spurs were purchased in the mid 1990’s half of the purchase price was considered the player roster and could be depreciated over up to 5 years. With a purchase price of $75 million, $37.5 million could be depreciated. The Spurs used only a 3.5 year schedule, so each year it could take off its revenue another $10.7 (a straight line method of 37.5/3.5) million before it calculated taxes. What this means to a new owner is that the roster is both an expense that is subtracted from revenue and a portion is depreciation also subtracted from revenue, making tax owed even less.
Some examples Note in tables 4.8 and 4.9 pages 118 and 119 that Net Operating Revenue before depreciation = Revenues minus costs expenses. In table 4.10 the author wants to demonstrate the tax benefits of the pass through corporation and the roster depreciation for the owners of the team. In the 1993/1994 the team had net operating revenue of $4.9. Depreciation of other items (not player roster) was 3.5 and so for tax purposes income to be taxed is 1.4 and at the 35% tax bracket the tax would be 1.4(.35)=.49 or.5 million. The net operating revenue is then 1.4 -.5 =.9 million
Example continued Using the same numbers, if roster depreciation is included, the 4.9 minus total depreciation of 3.5 and 10.7 means the net operating revenue after depreciation is 4.9 – 3.5 – 10.7 = -9.3 With this loss, the 9.3 million can be carried over to the personal income level and can reduce other incomes for the owner at the personal level. With a 35% tax bracket, the saving will be 9.3(.35) = 3.2 million.