Tax reform and America's favorite pastime
This tax season is in full swing, but tax professionals are already reviewing the recent tax reform changes to get ready for next year. And they aren't the only ones. As reported in Accounting Today,1 Major League Baseball and other sports leagues are also affected by the Tax Cuts and Jobs Act.
We're all familiar with like-kind exchanges, usually involving the sale and purchase of real estate. In sports, trading one player for another was also considered a like-kind exchange, but under new tax law the trade could be viewed as swapping one business asset (player contract) for another. If player trades are no longer tax-free exchanges, teams would recognize a taxable gain or loss with each trade they make.
Without guidance from the IRS, it's too early to tell how teams will react, but early Fangraphs2 analysis suggests that sports teams might be more inclined to sign free agents instead of making player-for-player trades.
Trades aren't the only thing affected by the TCJA, either. The best baseball players make millions of dollars per season, but they're still limited to a $10,000 state income tax deduction on the federal return just like the rest of us. And they can no longer deduct their union dues or agent commissions. The former is only about $80 per day, but the latter amounts to a much bigger hit (5% commission on a $300 million contract adds up quickly).
That said, swapping my tax deductions with theirs (including the income that comes with it, of course) is still a trade I'd want to make.