How to Address Tax Implications for Name, Image, Likeness (NIL) Deals and Collectives

The June 2021 Supreme Court decision in NCAA v. Alston, 141 S. Ct. 2141 (2021) allows student athletes to profit from various uses of their name, image, and likeness (NIL). This ruling created an entirely new market schools and students are learning to navigate.

As a result, NIL collectives were created as separate entities from colleges and universities to help facilitate deals for student athletes. Many NIL collectives applied for and received tax exemption under IRC Section 501(c)(3) or were created under an existing 501(c)(3) entity, creating a broader question of if they served an exempt purpose.

With the rapid rise in student athlete NIL deals and NIL collectives, as well as a recent IRS memorandum, colleges and universities need to be aware of the associated tax implications. Below are NIL-related tax areas schools should consider for themselves and their students.

IRS Advice on NIL Collectives

In General Legal Advice Memorandum AM 2023-004 from June 2023, the IRS deemed that many NIL collectives don’t further an exempt purpose to qualify for 501(c)(3) status, arguing that:

  • The benefit to private interests is qualitatively and quantitatively more than incidental.
  • The primary purpose of making NIL deals serves the private interests of student athletes, not the general public.
  • Private benefit of student athletes isn’t a byproduct of an NIL, but a fundamental part of an NIL collective’s activities since compensating student athletes for their NIL is core to the collective’s existence.
  • Benefits of NIL collectives are directed to a limited noncharitable class, and student-athletes aren’t a recognized charitable class and aren’t selected based on need.
  • When an organization serves public and private interests, private benefit must be incidental to the overriding public interest.

Thus, the IRS concluded that private benefit isn’t incidental to the NIL’s activities, resulting in a substantial nonexempt purpose that precludes tax exemption under 501(c)(3). This has led to some NIL collectives closing due to expected IRS scrutiny.

Tax Implications for Colleges and Universities

Protect Tax Exempt Status and Mission

Colleges and universities can risk their own tax-exempt status if they are participating in activities that provide more than an incidental benefit to the private interests of student athletes and they aren’t abiding by NCAA policies regarding NIL deals.

Here’s an overview of the NCAA’s policies:

  • Schools can’t create a marketplace for matching students with NIL opportunities or enter deals on behalf of an athlete.
  • Schools can inform student athletes about available NIL deals.
  • Schools can promote a student’s NIL activity when there’s no cost to that promotion, such as sharing a social media post.
  • Schools can promote a student athlete’s NIL activities on the school’s paid platforms if it requires the student athlete to pay the so-called going rate charged to other advertisers on those platforms.
  • Students aren’t permitted to promote their NIL activities during required school athletic events.
  • School employees aren’t permitted to work for or own NIL collectives.
  • Schools can’t make donations or cash payments to NIL collectives.

Schools can provide tickets to NIL collectives as long as they’re provided under the same terms as other sponsorships. Report NIL Donations and Grants Correctly

In addition to the NCAA policy that schools can’t make donations to collectives, the IRS memo from June 2023 indicates that the IRS also doesn’t consider donations or grants to NIL collectives as charitable donations as they don’t generally serve an exempt purpose to qualify under 501(c)(3).

Schedule I of Form 990 for grants and donations paid to organizations requires disclosure of the name, EIN, and the charitable purpose for each grantee, which could raise a flag to the IRS if a noncharitable NIL collective is reported.

Educate Student Athletes

Tax-exempt colleges and universities exist for the express purpose of educating students within and beyond the classroom. For student athletes, this includes providing avenues that teach them how to navigate NIL contracts effectively, including the legal, tax, personal brand, and financial aid implications of these deals.

Schools can develop relationships with alumni, local CPAs, and attorneys who can provide educational sessions for student athletes to learn:

  • Tax implications and how to structure NIL deals to cover their federal and state tax liabilities
  • Legal implications so they aren’t taken advantage of with language in contracts they may not notice, like exclusive clauses that limit other NIL contracts
  • The impact on their personal brand based on the NIL deals they accept

Schools can also direct students to free resources like the IRS Taxpayer Advocate Service and Volunteer Income Tax Assistance (VITA) program.

Tax Implications for Students

With more money paid to student athletes via NIL contracts, students can be surprised by unexpected tax repercussions if they aren’t aware of these tax impacts:

Independent Contractor Status

Students are considered independent contractors under a NIL contract and will receive a 1099-NEC, creating self-employment (SE) income where they must pay both the employee and employer portion of tax.

Self-Employment (SE) Tax

SE tax consists of Social Security and Medicare taxes at the rate of 15.3%, the sum of a 12.4% for Social Security and 2.9% for Medicare. SE tax deduction can be taken that’s 50% of the SE tax paid for the tax year.

Expenses Tracking

Expenses related to fulfilling a NIL contract can offset a student’s NIL-generated income and should be tracked. These include airfare, hotel, food, and other reasonable expenses.

Estimated Tax Payments

No tax withholding is required by those paying out the NIL deals, so students must track their tax burden and may need to pay estimated tax payments to the IRS.

Noncash Compensation Recording

Noncash compensation, like merchandise or gift cards, is still taxable.

Students can negotiate some cash as part of the deal since tax will still be due on the fair market value of noncash compensation.

Tax Filing Requirements

If a student athlete makes at least $400 in NIL activities, they must file a tax return, even if no tax is due. A college athlete will have to pay federal taxes if they make more than $13,850 if single or more than $27,700 if married.

State Tax Implications

Students need to track where NIL contract services are performed. A student athlete may owe state tax to a state where they earn income from NIL activities.

They should consult a CPA before accepting a NIL contract to understand state filing impacts and to help meet state filing requirements after performing the contract services.

Financial Aid Impacts

Students should contact Student Financial Aid office for impacts of NIL contracts on the FAFSA.

We’re Here to Help

For more information about the new memorandum or NIL tax impacts to schools or students, contact your Moss Adams professional.

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