View Full Version : The Amortization of Player Contracts - If you care.

08-23-2002, 10:01 AM
Let's say a player signs a 5 year deal at $3 million per year - and gets a $2 million signing bonus.

The club who signed him has an amortizable value of $2 million which they are forced to amortize over the next five years at $400,000 per year. The $3 million per year salary will be expensed as incurred. The amortization is actually a conservative recognition of write off due to the fact that the club had to pay the $$ up front and wait five years to fully realize the tax benefit of the expense.

There is no tax windfall through the amortization of contracts in signing players.

08-23-2002, 11:02 AM
Exactly. It's not like the Sox are amortizing an intangible asset, such as goodwill, or getting a tax benefit on depreciation of a fixed asset like machinery. The money spent on players' contracts is cash money out the door, and the only "benefit" they get is being able to deduct this as a legitimate business expense, with the timing on the expense to match up with the benefit of the expense (i.e. 1/5th of the bonus for each year of service).

08-23-2002, 08:31 PM
In addition to what you've noted above, there are tax incentives when buying a team to put a high percentage of the franchise's book value into your players' contracts. The new owner essentially gets to depreciate the value of the franchise at the marginal tax rate. In essence, the government subsidizes the purchase price with tax breaks.

It was Bill Veeck who originally revealed this trick in Veeck as in Wreck. He was quoted by Andrew Zimbalist in his book Baseball and Billions , and (IIRC) John Helyar in Lords of the Realm. The tax laws have been tightened to prevent an owner from writing off as much as back in Veeck's day, but that trick is still available in a diluted form.

BTW, I didn't think your financial analysis of the Sox was stupid at all. I wish more of MLB's finances were out in the public domain so the pleas of poverty by the owners were more believable.