The Creative Accounting Behind NBA Team ‘Losses’

The NBA lockout is officially here.  

Billionaire owners are crying poverty, claiming they can’t make ends meet because player salaries are flying out of control, and thus taking away the game we love so dearly.  Never mind that many of the owners claims can be dismissed with a simple “well, you wouldn’t be in this situation if you hired competent people who made better decisions.”  The simple fact is that some of these guys may not be losing as much money as they’d like you to think. 

Deadspin pulled back the curtain a bit on the creative accounting behind owning a sports franchise.  They obtained financial documents for the New Jersey Nets from 2003-2006.  In 2004, the Nets showed a nearly $28 million loss.

That $27.6 million net loss looks bad, but, as you’ll see, it’s an illusion — a trick of accounting, one practiced by every sports franchise with the full blessing of American tax law and one we should keep in mind whenever an owner pleads poverty.

“Anyone who quotes profits of a baseball club is missing the point,” Paul Beeston once said (at the time he was a Blue Jays vice president). “Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me.” 

So how did they do it?

The first thing to do is toss out that $25 million loss, says Rodney Fort, a sports economist at the University of Michigan. That’s not a real loss. That’s house money. The Nets didn’t have to write any checks for $25 million. What that $25 million represents is the amount by which Nets owners reduced their tax obligation under something called a roster depreciation allowance, or RDA.

Bear with me now. The RDA dates back to 1959, and was maybe Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset.

The piece continues with the explanation of how teams write off the “depreciation”of their team.  But basically the tax law allows teams, every year, to plug in a number that represents the wasting away of its players… even though there is no such thing.  There are other write-offs allowed as well.  It’s no different than writing off the interest you paid on your mortgage every year.  And we all know how much we all try to find every little thing to write off our personal taxes.  This, while on a much, MUCH, larger scale, is no different.

Before I continue, let’s be clear here:  This is not to say every NBA team that reports a loss actually made money.  I’m sure there are NBA teams that report losses that are losing money.  Maybe some are in bad shape.  But there is no doubt that every team is using every possible accounting trick available to cut down what they show for profits or turn gains into paper losses.  And since these are the official financial documents, these are the numbers the owners use in their negotiations. 

Of course, the players aren’t stupid.  They know the tricks too.  So it’s not like NBA owners will dupe the union with their reported losses.  But their public stance is the current system is so broken that its continuation would lead to the league’s financial ruin.  What this report shows is the league’s numbers can be made to look worse than the really are.  And just like anything from any side in this fight over billions of dollars, there is usually a difference between what is said publicly and reality.  Take everything you hear during this lockout with a grain of salt.