Earlier this year, the IRS launched its 'Sports Industry Losses' campaign, aimed at investigating reported tax losses of entities involved in professional sports teams. While this move may be welcomed by the American Treasury, it could pose significant concerns for owners of clubs in Major League Soccer (MLS), the United Soccer League (USL), and the National Women's Soccer League (NWSL).
The campaign is part of the IRS' broader efforts to enhance enforcement and collections through its Large Business and International Division, as outlined in the provisions of the 2023 Inflation Reduction Act. Though American soccer has made notable progress in recent years, it generally remains a challenging business operation when it comes to day-to-day profitability. While some MLS clubs have shown profitability according to Forbes' analysis, historically it has not been the case for most teams. For much of the league's history, MLS clubs have consistently incurred losses running into millions of dollars each year. To sustain operations, the league office has relied on substantial financial contributions from clubs or hefty expansion fees, causing some to even liken the structure to a Ponzi scheme. MLS club revenues typically range between $25 and $100 million, with about a third of the clubs falling below the $47 million revenue threshold required to qualify as a small business by the U.S. Small Business Administration. In comparison, most NFL clubs report net profits of $100 to $200 million annually, with revenues reaching between $500 million and $1 billion. Even all NHL clubs demonstrate profitability with revenues in the range of $150 to $280 million.
Similar financial realities persist in other leagues like the USL and the NWSL. Although the USL operates multiple leagues beneath the MLS and has successfully adopted a model reminiscent of minor league baseball teams, the individual clubs generally struggle to generate significant revenues from ticket sales, sponsorships, or broadcast deals. Consequently, most clubs operate at a loss despite the overall growth in professional soccer teams across the United States. The NWSL faces similar challenges; while recent stability and growth have attracted prominent investors and new clubs, team revenues usually do not surpass operating costs.
Given these financial circumstances, American soccer clubs typically rely on wealthy owners who perceive two main advantages from their ownership: short-term tax losses and long-term growth in enterprise value. The former benefit, which attracts the attention of the IRS, is particularly intriguing to many individuals who own or have ownership stakes in soccer clubs. They are often willing to incur substantial annual losses on their clubs, as these losses can potentially offset taxable gains from their profitable ventures in other industries. Notably, several MLS clubs are owned by individuals who also own NFL clubs. For instance, Arthur Blank owns Atlanta United in MLS and the Atlanta Falcons in the NFL, while David Tepper owns Charlotte FC in MLS and the Carolina Panthers in the NFL. Similar cross-ownership exists with Kroenke Sports & Entertainment (owners of the Colorado Rapids in MLS and the Los Angeles Rams in the NFL), Jimmy Haslam (owners of the Columbus Crew in MLS and the Cleveland Browns in the NFL), the Hunt family (owners of FC Dallas in MLS and the Kansas City Chiefs in the NFL), Robert Kraft (owners of the New England Revolution in MLS and the New England Patriots in the NFL), and the Wilf family (owners of Orlando City SC in MLS and the Minnesota Vikings in the NFL). The losses incurred by the MLS clubs consequently reduce the owners' taxable income when combined with their gains from the NFL clubs.
To operate at a loss, clubs often rely on owners' resources or secure loans from financial institutions, such as Goldman Sachs. The banks are often willing to extend funding due to the exponential growth in franchise valuations, particularly when new stadiums are involved. Sports franchises are considered rare assets, and when available for sale, they often command premium prices that surpass prior valuations and seemingly irrational figures based on the club's revenues. This dynamic is especially true for American soccer franchises. However, the clubs' debt service only further contributes to their losses, effectively reducing the owners' taxable income. Ultimately, the principal can be refinanced by another lender or repaid in full upon the club's sale.
In light of the recent IRS campaign, there is a likelihood that this business model will face scrutiny. It is probable that the IRS, along with the public, may perceive it as objectionable that wealthy owners of prominent professional sports teams pay little to no income tax. The focus of the IRS investigation would likely involve evaluating revenue accounting practices and the nature of deductions taken, especially those related to stadium depreciation. If the IRS finds any inappropriate accounting or tax practices, they have the authority to initiate legal proceedings against professional sports organizations and their owners, potentially leading to substantial costs. Moreover, increased scrutiny may dampen ownership interest and investment in these leagues. The long-term consequences of the IRS' campaign are yet to be seen, but it is reasonable to assume that some American soccer club owners are presently feeling anxious about the potential outcomes.
