So, how big are tax deductions for Tsai from (mostly questionable) losses on Barclays Center operating company? My guess: very big.

Within the FY 2021 annual report for the Barclays Center operating company there are signs of a huge tax deduction for billionaire Joe Tsai, owner of the Brooklyn Nets and that operating company, Brooklyn Events Center. 

(We haven't seen his tax returns, which surely are prepared by sophisticated accounts and lawyers, so my speculation is based on extrapolating from other coverage of such issues.)

As I wrote, with revenues of $35.9 million and operating expenses of $58.9 million, the arena suffered a net operating loss of $23 million--and that's before having to pay another $19.4 million in interest on construction bonds, part of a larger payments in lieu of taxes (PILOTs) package.

In a non-pandemic, "normal" year (at least, as forecasted), the arena cash flow would be in the black, and offer enough cushion to not only pay off the bonds but deliver a profit. (That's a modified view of EBITDA, or earnings before interest, taxes, depreciation, and amortization, since arena revenues are supposed to not just exceed expenses, but also cover PILOTs.)

But we shouldn't ignore the significant value, totaling more than $70.5 million of depreciation (how much of a tangible asset's value has been used up) and amortization (similar to depreciation, but for intangible assets), thus ensuring accounting losses.

Just focusing on depreciation and amortization for the moment, my calculation/speculation is that such ethereal deductions save Tsai $26.2 million. This is legal, but, as described below, questionable policy.

Assuming Tsai's making money on his various income streams and investments, he could avoid paying the highest federal tax rate of 37% on $70.5 million of his income, or $26.1 million. (I'm not counting the top California income tax rate of 13.3% or the New York tax rate of 8.82%, because I'm not sure which would apply, if at all, to Tsai, a California resident who earns money in New York, and elsewhere.)

That allows a nice cushion for charity, such as the $5 million a year, over 10 years, the Joe & Clara Tsai Foundation has pledged to the Social Justice Fund in Brooklyn, which is unveiling an art installation tomorrow at the SeatGeek Plaza. (Separately, there are significant tax strategies for charitable contributions, which lessen the cost to the donor.)

Of course, the losses on the arena, for this year at least, go well beyond the somewhat ethereal depreciation and amortization to include interest expense and the red ink of  net operating income. So the arena company's report claims nearly $113 million in losses. At 37%, that's nearly $42 million.

The curious case of goodwill

Nearly $51 million of amortization was cited this year, bringing the value of the arena attributed to goodwill to $416,860,766, from $467,645,834 in the previous report. 

What's goodwill? From the report:

Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the Acquisition Date.

In other words, it seems to refer to the premium paid, which now many not have been a premium, given the rise in value of the team/arena company, as Forbes recently assessed.

@AYReport Bigger tax benfit on Tsai's $3.2b purchase ($2.3b for team, $900m for arena operating company) is he gets to amortize amount of purchase price allocated to intangibles. https://t.co/6SwFhxmMjl

— Mike Ozanian (@MikeOzanian) October 1, 2021

As I wrote last year, the $467.6 million figure for Goodwill represents a tripling of the value attributed to the similarly ethereal "Intangibles" previously claimed as assets, when the arena company was owned by Mikhail Prokhorov. From the report:

The Company recognized $50,785,068 of amortization expense related to goodwill during the year ended June 30, 2021. The Company expects to recognize amortization expense related to goodwill of approximately $50,785,068 in each of the next five fiscal years.

What about tax savings?

The document hints at tax savings for the ownership: 

The Company is a single-member limited liability company. From a federal income tax perspective, there is no substantive difference between a single-member limited liability company that is treated as a disregarded entity and a division that is included in the member’s consolidated tax return.

The company is defined thusly:

Brooklyn Events Center, LLC (the “Company”), a Delaware limited liability company, is wholly owned by Brooklyn Arena, LLC (“Brooklyn Arena”), which is wholly owned by B-Cubed Arena, LLC (“B-Cubed Arena”)

That goes back to Tsai. The document states: 

Therefore, no provision or benefit for federal, state, and local income taxes has been reflected in the financial statements since such income taxes, if any, are the responsibility of the member.

And we don't see Tsai's income tax report. (Of course, if he'd like to make it public, which is not required, that would end the speculation.)

What ProPublica learned

In July, I wrote about ProPublica's 7/8/21 article, The Billionaire Playbook: How Sports Owners Use Their Teams to Avoid Millions in Taxes. While it didn't mention the Brooklyn Nets or their arena, it seems relevant.

The article cited the benefits of amortization to Los Angeles Clippers owner Steve Ballmer:

Ballmer pays such a low rate, in part, because of a provision of the U.S. tax code. When someone buys a business, they’re often able to deduct almost the entire sale price against their income during the ensuing years. That allows them to pay less in taxes. The underlying logic is that the purchase price was composed of assets — buildings, equipment, patents and more — that degrade over time and should be counted as expenses.

But in few industries is that tax treatment more detached from economic reality than in professional sports. Teams’ most valuable assets, such as TV deals and player contracts, are virtually guaranteed to regenerate because sports franchises are essentially monopolies. There’s little risk that players will stop playing for Ballmer’s Clippers or that TV stations will stop airing their games. But Ballmer still gets to deduct the value of those assets over time, almost $2 billion in all, from his taxable income.

Thanks to some "obtained" IRS records, ProPublica reports that, while the Clippers have generally been profitable, the team "reported $700 million in losses for tax purposes in recent years."

Indeed, the Nets are likely to be (and be more) profitable, thanks to not only ticket sales and sponsorships, but league-wide deals, fueling the rising tide in values noted by Forbes.

Is Tsai counting amortization of the Nets' value? Likely, since "ProPublica reviewed tax information for dozens of team owners across the four largest American pro sports leagues," and reported similar results. 

ProPublica noted that, "when owners sell their teams, they have to pay back the taxes they avoided by using amortization," but that deferral can serve as interest-free loan that can otherwise reap profits--or, if passed on to heirs, avoid taxes completely.

What about the arena? I have to think amoritzation and depreciation work the same way. And while the physical building does get wear and tear, the arena company has the ability to generate new sponsorships, such as SeatGeek Plaza, and--I'd bet--a new, or renegotiated, naming rights deal.

So the arena, in tandem with the Nets, likely becomes more valuable. Except for tax purposes.