The recent Tax Cuts and Jobs Act passed by Congress has already had sweeping effects on nearly every industry, including the market for tickets and luxury suites at sporting events and concerts. Prior to the new tax code, companies used to be able to write off 50% of all “entertainment, amusement, or recreation” expenses, such as treating clients to golf outings or entertainment events in a luxury box. With the new legislation, the cost of luxury suites are technically no longer tax deductible. (This may prompt some companies to categorize these expenses as an advertising expense or some other fully-deductible line item; however, that posture comes with some degree of tax audit peril. Most companies shy away from this risk and will indeed categorize their luxury suite expense as entertainment.)
Essentially, from an economic standpoint, the price for a company to own a luxury suite has risen, despite venues making no changes to their pricing. As written by Bloomberg Politics, “Luxury boxes at stadiums and arenas — along with theater and concert tickets — will be more costly for firms that use them to woo clients.” Firms must now search for solutions to maintain the level of client satisfaction that has driven positive results to their bottom line for years, while also being wary of the increased price of their luxury suite – this is where the secondary market comes into play.
With the post-tax price of a luxury suite increasing, businesses will look to minimize their luxury suite expense as much as possible and return to the prices they were comfortable paying before the tax legislation was passed. The easiest way to do so is by exploring the secondary market for luxury suites. Through exchange platforms such as Suite Experience Group, firms that are no longer as comfortable paying high lease prices for luxury suites can sell individual game suites to buyers in the marketplace. By participating in the secondary market, businesses are able to recoup some of their original investment. According to one corporate suiteholder who asked to remain anonymous, “We are strongly considering cancelling our suite lease at the end of this year and simply purchasing events on an as-needed game-by-game basis moving forward.”
Financial Impact on Corporate Suiteholders
Allan Ratafia, Managing Partner of Ratafia and Company, CPA’s and Build Your Firm Inc, presents a basic example to demonstrate how the new legislation will impact the secondary market. Assume Firm A has $100,000 in revenues, a luxury suite expense of $80,000 (assume this is the firm’s only expense), and the corporate tax rate is 40%. Under the old tax legislation, 50% of the $80,000 entertainment expense was tax deductible, meaning $40,000 can be deducted from Firm A’s revenues. This would leave $60,000 in taxable income, and with a 40% tax rate, Firm A would have to pay $24,000 in income taxes. Now with the new tax legislation, 0% of the entertainment expense can be deducted from Firm A’s revenues, resulting in $100,000 of taxable income. Firm A would now have to pay 40% of $100,000, meaning $40,000 must be paid in income taxes. Firm A would pay $16,000 more in taxes, effectively increasing the cost of its luxury suite by 20% to $96,000 ($80,000 + $16,000).
Mr. Ratafia, who has been practicing as a tax accountant and financial advisor since 1988, argues that some firms will look to recover that increase by allocating and selling a set number of games in the secondary market. “I just might not give my clients as many games. If I have 8 home NFL games, I may only treat my clients to 6 of the games, and I will look to recover the costs of the other 2 games to compensate for the tax increase under the new rules. If we’re going with the same numbers as before, selling 25% of my tickets would bring back $20,000 in cash to my company, making up for the steeper income taxes, $16,000 above, I now have to pay.”
Effect on Teams and Venues
In addition to the current impact of the tax reform, which suggests firms will look to resell their suites at a greater rate, the potential impact on teams in the near future must not be ignored. When companies decide whether or not they should renew their suite leases in the coming years, executives may have more hesitation to do so than in years past. While some companies will still renew their leases, many will determine that luxury suites – now bearing an additional cost – are no longer worth the investment to their firm.
Teams and venues that derive significant revenue from luxury suites essentially have two levers to offset the tax impact on their leaseholders: significantly lower prices for luxury suites, or encourage the usage of secondary markets to sell the suite for underutilized events. Firms will be more willing to renew their luxury suite leases if they are made aware of the potential to resell the suite for individual events. The ability to recoup a portion of this investment is an attractive feature for leaseholders and will also play a role in how much, if any, teams and venues will actually re-price their suite tickets. The secondary market can ease the concerns of leaseholders and incentivize them to renew their luxury suite leases with teams.
The secondary market for luxury suites is more important now than ever before. Teams have an opportunity to encourage the use of the secondary market by their leaseholders or risk losing those suiteholders who aren’t willing to pay the steeper costs. While each suiteholder will react differently to the new tax rules, suiteholders can shift from defense to offense by using the secondary market to offset the higher cost of the lease.