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Federal Tax

The Long Read: Tax Implications of College Collectives, NIL Deals

Tim Shaw  

Tim Shaw  

More than a year after the Supreme Court ruled that student-athletes can be compensated for the use of their name, image, or likeness (NIL), new bipartisan legislation would eliminate a tax incentive for contributions to tax-exempt affiliates of colleges and universities. This article examines the emergence of, and tax considerations for, NIL agreements.

Background.

The National Collegiate Athletic Association (NCAA) historically prohibited student-athletes from profiting from NIL opportunities such as advertisements, social media sponsorships, and event appearances. In June 2021, the high court unanimously upheld the Ninth Circuit’s ruling in NCAA v. Alston (No. 20-512), which removed limits on student-athlete reimbursements and pay for certain expenses. The plaintiffs had alleged that the NCAA violated antitrust law under the Sherman Act.

Justice Neil Gorsuch, author of the court’s opinion, recognized how college sports have become increasingly more profitable. The NCAA, he wrote, “enjoys monopsony control in the relevant market—such that it is capable of depressing wages below competitive levels for student-athletes and thereby restricting the quantity of student-athlete labor.”

The Supreme Court affirmed the Ninth Circuit’s application of the “rule of reason” to assess whether the NCAA had justification under antitrust law to constrict amateur athlete benefits.

“In so doing, the Court cut against a century-old ‘no pay for play’ college sports regime, but did so with a scalpel rather than a meat cleaver,” wrote Gregory Marino, special counsel at Foley & Lardner LLP. “Still, the Alston decision—and its sharply worded concurring opinion—conclusively propels the NCAA into a new reality, where the status quo of NCAA-mandated restrictions on student-athlete compensation will be no more.”

Since Alston, groups of college boosters—third-party entities that promote an athletic program’s interests—have formed what are known as NIL collectives. Baker Tilly partner Larry Mohr defined NIL collectives as entities “affiliated with, yet independent from, a college or university that generates funding to support NIL opportunities for student-athletes.”

Student-athletes who enter into NIL agreements with these collectives can potentially earn upwards of millions of dollars, depending on the sport and market. The deals can vary in structure and can include upfront amounts, monthly payments, and other incentives. To encourage donations to collectives, many apply for, and easily receive, tax-exempt status from the IRS, allowing a tax writeoff for chartable contributions.

Proposed legislation.

On September 28, Senators John Thune, a South Dakota Republican. and Ben Cardin, Democrat of Maryland, introduced legislation aimed at NIL collectives. Thune and Cardin are members of the Senate Finance subcommittee on taxation and IRS oversight, with Thune serving as its ranking member.

Titled the Athlete Opportunity and Taxpayer Integrity Act, the bill would bar individuals and organizations from claiming tax deductions for donations used by collectives for NIL payouts to student-athletes.

“College athletes have the ability to benefit from opportunities related to their own [NIL], but outside organizations and collectives should not be able to write contributions off their taxes that are used to compensate athletes,” Thune said in a statement. “This common-sense legislation would prohibit these entities from inappropriately using NIL agreements to reduce their own tax obligations. These basic taxpayer guardrails would protect athletes, strengthen NIL, and uphold the responsible stewardship of taxpayer dollars.”

Despite previous attempts at federal NIL legislation, no proposal has crossed the goal line, and it’s unclear whether the Thune-Cardin bill will advance. Although the legislation is bipartisan, the next Congress’ appetite for NIL reform won’t become evident until after the November midterm elections.

Frank Messina, the University of Alabama at Birmingham’s faculty athletics representative and a CPA, told Checkpoint he doesn’t believe the bill would discourage collectives from seeking tax-exempt status, explaining they should be viewed as passthroughs from a tax perspective.

“They are simply collecting the funds and passing them through to the student-athletes, similar to a charity,” said Messina, who has worked in college sports for over 20 years. “The proposed bill seems to simply want to create tax laws that will show the rules for a determination of tax-exempt status or not. The big question is: Will these funds given to student-athletes be ‘scholarships’ for college, or will they be considered income for services and taxed?”

“Ideally, getting actual funds into the hands of student-athletes who compete should be the ultimate goal,” he said.

Tax considerations for student-athletes.

Messina, along with Marena Messina, a visiting instructor at the Birmingham campus, authored an income tax primer for student-athletes in the Journal of Athlete Development and Experience. They explained that all services performed for NIL work is taxable and must be reported on Form 1040. Student-athletes with NIL income less than the standard deduction won’t have a federal tax liability. However, liability is affected by whether the player can be claimed as a dependent and receives financial support.

When that is the case, the full standard deduction cannot be claimed, as “the tax rules only allow a standard deduction that is essentially equal to earned college athlete NIL income plus an additional $350 up to the basic standard deduction amount based on filing status,” the authors wrote. “When the college athlete is a dependent of someone else, then this limited amount of the deduction will be lower compared to the normal standard deduction allowed.”

Importantly, since student-athletes aren’t considered employees of a collective, their school, or the NCAA, they may be on the hook for self-employment tax as independent contractors. As such, student-athletes should complete a Form W-9 before conducting NIL activities. By January 31 in the year following NIL work, student-athletes should receive a Form 1099-NEC, Nonemployee Compensation, if the total earnings exceed $600. Additional information returns should be provided for cash receipts from peer-to-peer platforms such as Venmo or PayPal.

Student-athletes may also need to make quarterly estimated tax payments or incur penalties, as taxes aren’t withheld as they are in an employee’s paycheck. The self-employment Social Security and Medicare rate is 15.3%. Ron Brown, president and co-founder of R.L. Brown Wealth Management and Athlete Essentials, advised student-athletes to pay at least $1,000 in estimated taxes each quarter.

“To avoid penalties for paying too little or too late, one can either pay 90% of this year’s current estimated tax bill, or aim for the full amount of last year’s tax,” Brown said. “If an individual is making more in the current year than in the former, it is recommended to pay 100% of the current year’s estimated bill.”

Student-athletes may be eligible for certain credits, depending on income, filing status, and other life situations. These include the earned income tax credit, the child tax credit, and the American Opportunity tax credit, which be claimed for qualified education expenses for up to four years and $2,500, with as much as 40% potentially refundable.

NIL agreements may have ramifications on a student’s financial aid. In a November 8, 2021, guidance letter, the Department of Education clarified that NIL compensation isn’t considered estimated financial assistance (EFA) for Free Application for Federal Student Aid (FAFSA) purposes.

“When a student receives a resource because of postsecondary enrollment, it generally counts as EFA only if it is not considered wages according to federal or state rules, or if it is considered wages that are derived from employment that is based on financial need,” explained Annmarie Weisman, deputy assistant education secretary for policy, planning, and innovation. “If the award is considered wages and is not based on need, then it is not EFA and is instead considered income to be reported on the FAFSA in the applicable base year.”

Messina said he has observed that, after speaking with college and university athletic directors and student-athletes, only the “biggest promoted athletes” currently receive sufficient tax assistance. “The vast, vast majority” of student-athletes lack the help needed to navigate the tax code, he told Checkpoint.

“University athletic departments should play a major role in informing those student-athletes about the requirement of paying taxes in society and exactly how to do it,” Messina said. “Basic financial literacy for all college students is greatly needed, and more and more universities are adding that to their curriculums.”

Interim NIL policy.

Following its Supreme Court loss, the NCAA promptly issued an interim NIL policy setting initial ground rules for how current and prospective student-athletes could begin engaging in NIL opportunities.

Under the policy, which took effect in July 2021—it will remain in place until enactment of federal legislation or the adoption of new NCAA rules—student-athletes’ eligibility for intercollegiate spots are no longer affected by NIL activity. The policy generally defers to state laws and requires student-athletes to know their state’s and institution’s specific NIL rules. As of July this year, 29 states have NIL laws, 24 of which have laws currently in effect.

Student-athletes can also use a professional services provider, which a subsequent FAQ defined as a third party, such as “an agent, tax adviser, marketing consultant, attorney, brand management company, or anyone who is employed or associated with such persons.” NIL activities do not have to be reported to the school. The policy also disallows NIL payouts from being performance-based.

Collectives as recruitment.

A common critique of collectives is that they serve only to court the nation’s top high school prospects and potential college transfers to commit to the collective’s affiliated school. Despite explicitly barring NIL compensation from being contingent upon enrollment as part of the recruiting process, the NCAA was compelled to release  additional guidance in May to crack down on the emergence of collectives exploiting the new NIL landscape.

The guidance updates the definitions of a booster, and also a collective. “Specifically, the guidance defines a booster as any third-party entity that promotes an athletics program, assists with recruiting or assists with providing benefits to recruits, enrolled student-athletes or their family members,” read a NCAA press release. “The definition could include ‘collectives’ set up to funnel name, image and likeness deals to prospective student-athletes or enrolled student-athletes who might be considering transferring.”

While the guidance doesn’t make any concrete changes to the interim guidance, the move followed a meeting by the Division I board of directors to curtail practices that are in clear violation of the NCAA’s recruitment rules. The NCAA sought to make clear that NIL agreements can occur only once a student has enrolled in a school, and that “pay for play” arrangements are strictly prohibited.

“The new guidance establishes a common set of expectations for the Division I institutions moving forward, and the board expects all Division I institutions to follow our recruiting rules and operate within these reasonable expectations,” said Jere Morehead, University of Georgia president and chair of the Division I board.

Calls for governance.

There is only so much the NCAA can do outside of federal intervention, as argued by its own top official. NCAA President Mark Emmert testified in September 2021 before a House of Representatives Energy and Commerce subcommittee that states have engaged in a “race to the bottom” to create competitive advantages over each other to entice recruits.

Calling the various state NIL policies a legal patchwork, Emmert said the line between college and professional sports has become so thin, inequities have emerged among NIL earnings. He agreed that many student-athletes “are likely not aware of the potential tax implications of these arrangements and may find themselves saddled with unanticipated tax bills they may be unable to pay.”

“Other students who receive Pell Grants or other student aid tied to need could unknowingly lose their eligibility for financial assistance because of the income they now receive from NIL,” Emmert testified, calling on Congress to partner with the NCAA in creating a single federal NIL framework.

Lawmakers have also corresponded with college athletic organizations outside the NCAA in support of corralling NIL rules. In August, former college football coach and current Republican Alabama Senator Tommy Tuberville, along with Senator Joe Manchin, a Democrat from West Virginia,  solicited input from Amy Perko, CEO of the Knight Commission on Intercollegiate Athletics. The senators wrote that there has been a “lack of meaningful leadership and a lack of clarity” regarding NILs as a result of Alston.

Perko responded in an August 29 email outlining the Knight Commission’s guiding NIL principles. Among these is the need for independent oversight outside of NCAA staff or the association’s member schools, ideally led by current and former college athletes. Further, there should be uniformity in federal law to correct inconsistent state rules, according to Perko.

Student-athletes should be required to be educated on their NIL rights and given access to information, she wrote. “College athletes, most of whom will not be represented by counsel when they enter NIL deals, are vulnerable to abuse, exploitation or incompetence by third parties that could have significant impact on their financial aid, immigration status, taxes, and intellectual property rights.”

 

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