When you think of up-and-coming business opportunities, you likely don’t think of student athletes. As a result of recent court cases, athletes have gained the ability to receive a financial profit anytime their “name, image, and likeness” (or “NIL”) is used. For college and even high school athletes, NIL deals are becoming more and more common—whether that’s for major brands like Nike and Under Armour, in the world of video games, or through their own social media following. A groundbreaking court case in 2021 gives these students licensing rights, challenging the previous policy set by the NCAA. Since this turn of events, more and more school alumni and major donors are forming what are known as “NIL collectives” in order to compensate student athletes in ways that still comply with the NCAA’s rules.
What exactly is an NIL collective? The collective is an organization that pools funds—typically donations from fans of a school’s sports team—so they can secure NIL deals for student athletes. These deals can include sponsorships or activities, such as showing up at a grand opening or visiting the kids in a Children’s Hospital. NIL collectives began to spring up after that pivotal court case in 2021, and by 2023 most of the “Power Four” schools (the most prominent NCAA Division I football conferences) had NIL collectives. To take one example, the University of Tennessee’s “Volunteer Club” reportedly distributed over $4 million to 130 of that school’s athletes. So in terms of market size, though there may be a lower number of schools involved, these collectives can include a sizable number of athletes.
Where does the tax planning opportunity come in? NIL collectives can be set up as non-profit or for-profit organizations. The legal requirements for each are very different, as are their tax planning needs. Read on to learn how to advise a client who is currently operating or looking to set up an NIL collective.
More likely than not, the founders of a new NIL collective will start out hoping to establish a nonprofit. This would mean the entity does not have to pay taxes on any money received from donors, and the donors could qualify for a tax deduction for their contribution.
Here is the potential complication in setting up a nonprofit NIL collective: to qualify as tax-exempt, the collective must be organized and operated primarily for charitable purposes. The law even lists acceptable categories of activities: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, and preventing cruelty to children or animals. So clearly, your client cannot establish a nonprofit on the basis that they raise funds or because they want to sidestep taxes. That does not count as a tax-exempt purpose. The NIL collective must primarily engage in activities that support public interests, not private interests.
How can you meet these qualifications? Typically, nonprofit NIL collectives focus on promoting and supporting other 501(c)(3) charitable organizations. The collective will identify and facilitate opportunities for student athletes that will ultimately benefit the partner charities through increased visibility for events or increased fundraising. This can include social media posts, attendance at fundraising events, or autographing items to be sold by the charity. The collective then pays the student athlete for their participation. In this situation, the compensation for the student must be incidental to the primary purpose of supporting the charity.
To qualify as a tax-exempt NIL collective, you will simply file Form 1023 with the IRS within the first 27 months of forming the organization. The good news is that if your application is approved, the IRS will set the effective date retroactive back to the date that you started operations. The newer the organization is, the simpler that application will be since you will have to report on the history of the organization to-date.
Unfortunately, one of the reasons a nonprofit NIL collective may contact a tax planner is if their tax-exempt status is rescinded or denied. These collectives are sometimes not fully prepared to meet the legal requirements for a charitable organization and find themselves scrambling to lower their tax bill and get their tax return ready in time because they are now considered a fully taxable entity. Nonprofits are also still responsible for payroll taxes and may need assistance finding tax credits to help mitigate that cost.
The For-Profit NIL Collective
If the collective does not qualify as tax-exempt, then what we have is simply a business entity that centers on income generated through the student athlete’s NIL deals. For a for-profit collective, a major part of tax planning is going to be entity selection. To determine which entity type will yield the most tax savings, we need to ask:
● Who are the different parties involved in this collective?
● Why was it founded?
● What are their long-term goals?
One trend we have noticed among taxable collectives is that these entities can benefit from operating more like endowments than businesses. This makes sense since the collective’s job is often to collect funds to help the team succeed, whether that’s from fans, boosters, or local businesses. Those dollars may not necessarily go directly to student athletes but instead may be invested in ways that allow the overall fund to grow and create more opportunities for future seasons.
Given this trend, a clever tax planning strategy for collectives can be to look for investment-type strategies that provide tax advantages. For instance, think of oil and gas tax credits or solar tax credits. If the collective can qualify for these types of tax credits and pass them on to boosters or donors, this could greatly help them raise funds. For this to work, the collective does need to be structured as a pass-through entity. Since there is more than one owner, the collective cannot be a sole proprietorship, so you would be choosing among a partnership, an LLC, or an S corp, depending on which offers the best overall tax opportunities. Again, this opens up the option to take advantage of all kinds of pass-through tax benefits as the collective works on growing its “nest egg” and using that to pay players and sponsor the athletic team’s needs.
Summary
NIL collectives are a fairly new type of entity with unique needs and revenue streams. To understand how to best support this type of client, you will need to familiarize yourself with who is involved in the organization, how they make money, and how they intend to use their profits. Though NIL collectives can be set up as nonprofits, not all of them will meet the qualifications and these entities can especially benefit from the help of a tax planner to maximize their tax savings and ensure as much of their income as possible goes toward the team they support.
To learn more about tax savings opportunities for NIL collectives and other niche industries, sign up to become a Certified Tax Planner today.
