Private equity is entering the owner’s box: Tax considerations from both ends of the field

  • Blog
  • 5 minute read
  • January 27, 2025

Brian Rebhun

Financial Services Tax Managing Partner, PwC US

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Claudio DeVellis

Partner, New York, PwC US

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With the historic vote by the NFL teams in August 2024, private equity (PE) was officially given a seat in the owner’s box — although with restrictions. The NFL is the most recent professional sports league to allow PE ownership, a trend that started in the United States with MLB in 2019. Many PE firms have owned and operated professional European soccer clubs for years. As a new area for investment, PE funds and investors should be aware of the unique tax issues and structuring challenges they may face as minority owners.

Why invest? Diversified revenue streams

Owning an interest in a sports franchise can serve as a prestige asset –– or may even fulfill a childhood dream. But from an investing perspective, it may offer PE firms lucrative financial and tax benefits. What was once simply a team, stadium and ticket sales is now a complex sports franchise that encompasses a diverse group of tangible and intangible assets and revenue streams.  

  • Stadiums are morphing: Teams are developing entertainment districts around the stadiums. New retail, restaurants, hotels and theatres not only provide regular revenue and additional real estate investment opportunities, but also key tax benefits such as depreciation deductions and state and local tax credits and incentives. Such districts provide opportunities to engage new fans or more deeply with existing fans, while also providing more jobs in the local community, further ingratiating the team into the local market. This goodwill can be beneficial when teams look for tax benefits or public investment in the future.

  • Broadcast revenue, sponsorships and licensing fees create reliable and resilient revenue: Often spanning several years, these intangible assets provide steady, recession resistant revenue streams for investors. From a tax perspective, intangible assets may be amortized over 15 years, which can decrease taxable income for the organization if properly structured.  

  • Ticket revenue can be augmented by other stadium events: While all teams want sell-out crowds, some years are “rebuilding years” and ticket sales may lag. The diverse revenue streams not related to ticket sales may be offset by losses generated from other segments of the business. Teams that own their stadiums are often able to host concerts, other sporting events, private events, and so on in their stadium — all contributing meaningful ticketing revenues even when games are not selling as well.

Adjusting the (tax) playbook 

Unlike traditional sports franchise owners, which focus on revenue-driven valuations and asset growth, PE firms prioritize cash flow and profitability (EBITDA). Most sports leagues also limit the allowed leverage related to the sports franchise operations and investor capital, contrasting with the typical PE firm leverage model. Aligning these investment objectives may be tricky but may also result in stronger value and tax implications in the short and long term.  

When considering an acquisition, either as a direct investor or a PE fund, here are some tax considerations that should be analyzed and communicated to potential investors.

  • Passive losses and step-up basis: When properly structured, acquiring a minority interest in an entity may provide for a step-up in tax basis, resulting in significant tax benefits in the form of depreciation and amortization deductions. However, unless there’s taxable income, these deductions are likely to result in passive losses for minority investors. Investors may receive cash distributions without current taxable income but would have passive loss carryforwards. Consequently, unless the fund investor has sufficient other passive income to utilize the passive losses, these tax attributes may not provide current year tax benefits.  

  • State tax considerations: In addition to the increased state compliance obligations that may affect the fund and its investors due to the nature of professional sports travel schedules, investors must also be aware that states may not align their treatment of certain tax considerations with the federal treatment. These differences may impact the tax liability at the state and local levels from state to state. For example, New York City, which imposes an Unincorporated Business Tax (UBT), has issued guidance stating that they will not respect the 15-year amortization expense taken at the partnership level and claims it to be a partner level deduction. That means a beneficial federal deduction will not provide a similar tax benefit for purposes of the UBT liability that may be owed.  

  • Effectively connected income (ECI) of foreign investors: Generally, when private equity funds invest in passthrough companies, the current income and subsequent sale of the interest in the portfolio company is ECI to non-US investors. With proper planning it may be possible to decrease the risk of ECI by utilizing a blocker corporation, which is typically respected by the IRS because it conducts business activity by holding fund investments. Consequently, funds should be aware that there are several ways to use blocker entities, so proper structuring is key to attain the tax impact sought by foreign investors, specifically as a result it may be difficult to sell the blocker corporations upon exit.

"For PE, the opportunity goes beyond media rights and game-day sales — it's about creating long-term, resilient value."

Going into overtime

In addition to these tax considerations, PE firms may need to rethink their exit strategies. A private equity firm may hold an investment for three to five years, but investments in sports teams may send these investments into overtime. Providing long-term growth and reliable, diversified revenue, a PE firm may rethink its traditional investment strategy and look at sports investing as a capital vehicle with a focus on long-term growth and adjust its exit strategy accordingly. It’s possible that we may see more continuation funds or GP led secondaries for some PE investors that want to remain invested in a team for a longer time horizon.

Whether tax losses or revenue are generated, PE firms should make investors aware of the limited cash flows that are typical to sports investments that may be significantly different from their other investments.

The play is under review

Owners and potential investors alike should be aware that the IRS in January 2024 announced its Sports Industry Losses compliance campaign. As explained by the IRS, the campaign “is designed to identify partnerships within the sports industry that report significant tax losses and determine if the income and deductions driving the losses are reported in compliance with the applicable sections of the Internal Revenue Code.” What started in January 2017 with the identification of 13 initial campaigns to address significant compliance and resource challenges has grown into more than 45 separate campaigns, several of which target high-income individuals such as high-income non-filers, business aircraft and the sale of partnership interests.

IRS shifting compliance focus onto high-earners, partnerships and large corporations

Audits by the IRS are not new, but these campaigns provide a reminder to team owners and investors that sometimes the best offense may be a great defense. Common areas for review may include the timing of deductions related to complex player contracts, minority sales and the appropriate character of gain, and the character of league level items as ordinary or capital, among others. Here are some key steps to handling future scrutiny or audits:  

  • Prepare “audit ready” files. Proper documentation and organized system, leveraging technology for detailed data and analysis, is the benchmark. 

  • Ensure proper substantiation of data. Whether it’s a transfer pricing study or tax opinion letters, providing the basis for tax positions should be obtained in the regular course of business for complex tax considerations.

  • Review industry and emerging trends. Whether this is done in-house or by leveraging conversations with tax and business advisors, a well-positioned business facing an audit has their ear to the ground to anticipate possible areas of focus.

  • Establish the protocols for communication. The introduction of PE into the owner’s box brings a broader group of stakeholders whose interest should be considered when dealing with federal and state audit procedures (i.e., whether a partnership elects to “push-out” any adjustments to the partners or to pay any resulting tax liability at the entity level). It will be important to consult a tax professional.    

Private equity has officially entered the owner’s suite of professional sports, bringing significant changes to sports franchise ownership. This shift goes beyond prestige and emotional ties as firms focus on creating long-term value through diversified revenue streams, tax benefits and profitability. While offering opportunities for succession planning and capital growth, this trend also comes with increased IRS scrutiny, making it crucial for owners and investors to stay audit-ready and proactive in managing compliance challenges.

Learn more about PwC's Private Equity Tax Services

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