By: David Waldstein
Tyler Graffeo, the president of Interstate Truck Center, generated a lot of business while entertaining clients in luxury suites at Royals baseball and Chiefs football games in Kansas City, Mo., the past three years.
But on Jan. 1, something changed that helped push Graffeo to give up at least one of those suites. Built into the Tax Cuts and Jobs Act, which went into effect this year, was a provision stripping out the 50 percent deduction for business entertainment expenses from the tax code.
Until this year, the $200,000 spent on the seats in a suite at the Royals’ Kauffman Stadium effectively cost the business $100,000, and a concern like Interstate Truck Center saw the expense as an investment in happy clients. The team, of course, funneled that money toward its profit margin, general expenses and player payroll.
Now, corporate fans like Graffeo have to use a different calculus before making another significant commitment to season tickets. But the Tax Cuts and Jobs Act also lowered the corporate tax rate to 21 percent from 35 percent. Do those savings outweigh the increased expense of not being able to write off half the cost of buying tickets?How businesses answer that question is likely to determine whether sports teams will be among those that pay a price for the end of the deduction. If so, Major League Baseball, which has seen its teams’ attendance drop by a little more than 5 percent from the same period last year, could be at the leading edge of it, since a full-season ticket package involves committing to 81 games.
“This is going to have an impact,” said Lance Christensen, a certified public accountant and tax practice leader at Margolin Winer & Evens in Garden City, N.Y.Christensen is alerting his clients to the increased real cost of tickets and said firms would use an array of factors to calculate the costs and benefits of the tickets and other entertainment options like theater and golf outings. Those include the reduction in the corporate tax rate, but also the state of the economy and the specific business, and the fate of the teams they pay to see.
“When things start turning with your particular industry or company, or the economy in general, one of the first things companies look at is these types of entertainment expenses,” Christensen added.
Graffeo, the truck center executive in Kansas City, said that even with the new law, his company would keep the suite at the football games because the Chiefs are good and his clients want to attend those games. The last-place Royals, not as much, so Graffeo plans to give up that suite.“I would have renewed if they were a good team,” he said. “But I’m not going to pay the extra money to take people to watch garbage.”
Kansas City, which won the World Series in 2015, is one of the 21 M.L.B. teams (out of 30) with an attendance drop this year compared to the same period last year.
The Royals are losing roughly seven of every 10 games this season. Team officials did not respond to requests for comment.
Sports teams have reason to be concerned about changes that might affect corporate spending on entertainment. Business purchases make up a significant portion of season-ticket sales for most teams. For Major League Baseball, the average is about 30 percent corporate ownership of season tickets. That does not include the accounts of ticket brokers, who resell their tickets to corporate and noncorporate fans. The rates of corporate sales for baseball range from about 15 to 50 percent, according to a baseball executive who asked not to be identified because he was not permitted to speak publicly about such matters.
If businesses, including the smaller ones, begin recalculating the value of entertaining clients at games, it could conceivably drive down demand for tickets and luxury suites, revenue and perhaps even players’ salaries.
A full understanding of the effects of the tax overhaul remains elusive for now, and for the time being, there is no sense of urgency within baseball. The subject did come up at a recent meeting of ticket sales executives in San Diego, but not at the recent Major League Baseball owners’ meetings, according to the baseball executive.
He said the leagues were adopting a wait-and-see approach and noted that if specific teams were to lose ticket sales because they were bad, that was a part of a familiar sports business cycle, and not necessarily a function of the new law.In fact, Major League Baseball and the other leagues are more focused on the confusing “like-kind exchanges” portion of the same legislation, which seeks to place a taxable value on traded players’ contracts and may result in teams having to pay a tax on certain trades.
A better picture from the loss of the 50 percent entertainment deduction may not emerge until at least next spring, when businesses prepare their taxes. The full impact may not be felt for years, or until there is an economic downturn.
Ryan Ellis, an enrolled agent and tax lobbyist in Arlington, Va., said it was still too early to determine how companies would react. He noted that the ultimate results of a new law were sometimes counterintuitive. The field of behavioral economics is founded on the idea that people make decisions based on calculations that often have nothing to do with market-driven logic.
In the early 1980s, reduced write-offs for charitable contributions caused many charities to fret.
“But donations actually doubled during that period because people made their contributions based on other factors,” Ellis explained. “If you are a business that derives value from taking people to Yankee games, you probably will still take them to Yankee games.”
According to Todd Lindenbaum, founder and chief executive of SuiteHop, an online luxury suite marketplace, the loss of the tax deduction goes into a basket of factors that are changing the way people consume tickets. Ever since the advent of ticket brokers and secondary markets, individuals and companies have less incentive to commit to season tickets, instead opting for the à la carte approach for specific games.
“It’s another thing that kind of pushes people in the direction of being more ad hoc and doing things on demand,” he said. “This movement has been going on since people realized that they can buy tickets to any games they want to go to, that games are never really sold out.”
Still, sports must compete with other entertainment options, and some of those remain tax deductible. Christensen, the accountant, pointed out that companies could still use the deduction for business meetings at fancy restaurants.
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