Sports fans know that team loyalties run deep. Committed supporters of college and even high school sports teams now have even more opportunities to make major investments in up-and-coming athletes. In 2021, student athletes were granted licensing rights for the first time, allowing them to earn income on the use of their “name, image, and likeness” (or “NIL”). Since the courts approved this new policy, NIL deals for student athletes have created a growing industry. Popular athletic brands, video games, and local businesses see this as an opportunity to get a small-time “celebrity” endorsement at a more affordable cost.
If you are an active supporter of an athletic team or personally know a student athlete, you may have heard of the rise of a new type of organization: the NIL collective. NIL collectives are typically established by school alumni and major donors as a way to provide compensation to student athletes. The collective pools funds that then help athletes get NIL deals, such as sponsorships or appearances. Since the court decision in 2021, most “Power Four” schools (the most prominent NCAA Division I football conferences) have launched NIL collectives.
For those who are either interested in starting an NIL collective or have launched one but are still figuring out how to run it effectively, a strategic but often-overlooked next step is to develop a tax plan. Whether your NIL collective qualifies as a nonprofit or is set up as a for-profit organization, working with a Certified Tax Planner is the best way to ensure that most of your funds go to student athletes and less goes to the IRS.
Non-Profit NIL Collectives: Gunning for That Tax Exemption
For new NIL collectives, qualifying as a nonprofit sounds like a best-case scenario. The organization would be exempt from income tax, meaning that all earnings could go toward the team. Nonprofits can also offer special incentives for donors—a tax deduction in exchange for their charitable contributions.
However, meeting the requirements for a nonprofit can prove tricky for most NIL collectives. To earn that tax-exempt status, the collective must be organized and operated primarily for charitable purposes—that’s how the law puts it. This means that you cannot establish a nonprofit simply because you don’t want to pay taxes on the funds you’ve raised. Your organization must be able to prove that its main activities fall under the list of acceptable purposes provided by the IRS: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competitions, and preventing cruelty to children or animals.
In short, to be a nonprofit, your organization must focus on supporting public interests, not private interests. The main way collectives do this is by promoting and supporting other charities. You can start by identifying existing 501(c)(3) organizations that your student athletes can partner with by promoting their fundraisers or increasing visibility for their events. Athletes can also provide value through social media posts or autographing items that can be sold by the charity. The NIL collective would then pay the student for their contribution. Of course, for this setup to be legitimate, the purpose cannot primarily be to compensate the athletes—the purpose must be to support other charitable causes.
Why might an NIL collective that is aiming for nonprofit status want to work with a tax planner? First, since the goal is to qualify for tax exemption, who better to talk to than an expert on the ins and outs of tax law? Second, your organization will still need to file the appropriate forms and collect supporting documentation to show that you are truly functioning as a nonprofit. A Certified Tax Planner can help with this and make sure you understand how the approval process works and how the timeline impacts future tax returns. Third, even though nonprofits can gain an exemption from federal income tax, they are still responsible for other taxes, such as payroll taxes. A tax planner can help you identify tax credits to offset those unavoidable costs.
Lastly, in the event that the IRS does not approve that tax-exemption request for your collective, you may find yourself unprepared to pay that tax bill and file the needed forms. A tax planner can help you prepare in advance for both outcomes and have a tax strategy already in place should the IRS determine that you are considered a for-profit organization. Even if you don’t get that tax exemption, there are still many ways to lower your tax bill.
What happens if your organization does not qualify for a tax exemption? In this case, the IRS is simply treating your NIL collective like any other business—and businesses of all kinds can find ways to lower their tax bills if they just know where to look. A big part of your tax strategy will have to do with deciding what type of business entity to form. Should your collective be an LLC? An S corporation? A C corporation? This will depend on a number of factors, including who is involved in operating the collective, why you founded it, and what your long-term goals are. A Certified Tax Planner can take this information and make a recommendation on what the most tax-advantaged entity type will be for you.
For instance, one tax strategy that might work is to treat your collective more like an endowment than a business. Like an endowment, an NIL collective raises a pool of funds from fans, boosters, and local businesses toward the growth and success of the team. Collectives may focus on providing benefits to current athletes, or they might invest those funds and focus on increasing opportunities for the future. With the help of a tax planner, you can identify investment-related strategies that come with tax benefits. This might include securing transferable tax credits that can be passed onto donors to encourage their ongoing support. Adopting a tax strategy like this will dictate what type of entity you choose, so again, working with a tax professional is key to ensure your NIL collective is set up to receive the most tax advantages possible.
Summary
Setting up an NIL collective can be an effective way to support student athletes and ensure the future success of the team as a whole. This unique type of organization comes with unique needs—including determining if you can qualify for a tax exemption or, if not, how to minimize your tax bill as much as possible. The entity type you choose will determine which tax strategies you can apply and will ultimately affect the amount of income that actually goes to the athletes.
To maximize funds for your NIL collective whether you are a nonprofit or for-profit organization, get connected with a Certified Tax Planner today.
